Hong Kong has signed an agreement with Indonesia for the avoidance of double taxation and the prevention of fiscal evasion with respect to income taxes. 

Financial Secretary John Tsang signed the deal with Indonesian Minister of Finance Sri Mulyani Indrawati in Jakarta today.

This is the eighth comprehensive agreement for the avoidance of double taxation concluded by Hong Kong. It will eliminate double taxation instances encountered by Hong Kong and Indonesian investors, and bring about tax savings and certainty in tax liabilities in connection with cross-border economic activities.

It will also help foster closer economic and trade links between the two places, and provide added incentives for Indonesian enterprises to do business or invest in Hong Kong, and vice versa.

Agreement details

Profits of Indonesian companies doing business through a permanent establishment, such as a branch, in Hong Kong are fully taxed in both places. Under the agreement, double taxation is avoided in that any Hong Kong tax paid by Indonesian companies shall be allowed as a deduction from the tax payable in respect of the same income in Indonesia. 

The income received by a Hong Kong resident from non-Indonesian employment exercised in Indonesia will be exempted from Indonesian income tax if his aggregate stay in any relevant 12-month period does not exceed 183 days, and vice versa.

Hong Kong residents receiving dividends from Indonesia not attributable to a permanent establishment there are subject to an Indonesian withholding tax, which is currently at 20%. Under the agreement, this will be reduced to 10%.

If the recipient is a company holding at least 25% of the share capital of the paying company, the withholding tax rate will be further reduced to 5%.

Hong Kong residents receiving royalties from Indonesia are subject to a current withholding tax of 20% in Indonesia. Under the agreement, the royalties withholding tax will be capped at 5%. The Indonesian interest withholding tax on Hong Kong residents will be reduced from the current rate of 20% to 10%.

Transport sector

Both sides also agree to allow Hong Kong airlines operating flights to Indonesia to be taxed at Hong Kong's corporation tax rate, which is lower than Indonesia's. Profits from international shipping transport earned by Hong Kong residents that arise in Indonesia, which are currently subject to tax there, will enjoy a 50% reduction in tax under the agreement.