On 19 June 2017, the Directorate General of Taxes of Indonesia (DGT) issued the long-awaited revised regulation on claiming benefits under Indonesian tax treaties (i.e. Regulation No.PER-10/PJ/2017) (Regulation 10/2017), which will apply from 1 August 2017.
Major changes brought about by Regulation 10/2017 include: (i) removal of the “subject to tax” requirement; (ii) the strengthened anti-treaty abuse rules and (iii) the revised Certificate of Domicile forms prescribed by the DGT (i.e. revised Forms DGT-1 and DGT-2).
We applaud the HKSAR Government’s continued efforts in liaising with Indonesia on the “subject to tax requirement” issue. While removal of the “subject to tax” requirement in the Indonesian domestic anti-treaty abuse rules will eliminate a major hurdle for Hong Kong tax residents to apply the HK-Indonesia tax treaty, they should not lose sight on the more stringent substance requirement and enhanced beneficial ownership (BO) test introduced by Regulation 10/2017. This is particularly true when the Hong Kong tax resident company is acting as an intermediary for investing into Indonesia (e.g. a Chinese company investing into Indonesia through a Hong Kong company). In addition, Hong Kong resident companies should keep an eye on the interpretation and application of the new substance requirement and BO test by the Indonesian tax authority in practice as that will be crucial to a successful treaty benefit claim.