Indonesian legal entities are divided into two types namely non-legal business entities and legal business entities. A non-legal business entity is a business entity which has no strict distinction between the personal assets of the owner/founder and the assets of business entity. As for what is included in the business entity is a CV (limited partnership), firms and civil partnership. Meanwhile, a legal entity is a business entity that strictly border the personal assets of the owner / founder and the assets of the business entity. Included into business entity which also legal entity, namely Limited Liability Companies (PT), Foundations, Cooperatives, State Owned Enterprises (BUMN), and Local Government Owned Enterprises (BUMD).

In classification of non-legal business entities and legal business entities, it is not stated that the representative offices are included in these two groups. For this reason, this article will explain form of a representative office, types of activities can be done and the position of the representative office as an entity in Indonesia.

Representative Office is an office that is run by one or more individual foreign citizens or Indonesian citizens who are directed by a foreign company or a foreign joint venture overseas as their representative in Indonesia. There are 4 types of Representative Offices namely Foreign Company Representative Office (KPPA), Foreign Company Trade Representative Office (KP3A), Foreign Construction Service Representative Office (BUJKA), and Foreign Oil and Gas Companies Representative Office. Representative offices can only do number of activities in Indonesia, such as market research/surveys for products to be sold, preparing for the establishment of a company in Indonesia, and most importantly is not doing commercial activities or activities to get profit.

Furthermore, based on the Regulation of the Capital Investment Coordinating Board of the Republic of Indonesia Number 6 of 2018 concerning Guidelines and Procedures for Investment Licensing and Facilities (“Perka BKPM 6/2018”) regulates the activities that can be done by KPPA, including:

"KPPA activities as referred to in paragraph (1) are limited to:

• as supervisor, liaison, coordinator, and taking care of the interests of the company or its affiliated companies;
• preparing for the establishment and development of a PMA company business in Indonesia or in other countries and Indonesia;
• located in an office building in the capital of province;
• not seeking income from resources in Indonesia, including not justified in carrying out activities or engaging in an agreement / sale and purchase transaction of commercial goods or services with domestic companies or individuals; and 
• not participating in any form in the management of a company, subsidiary or branch company in Indonesia".

Nonetheless, the aforementioned is not applied to BUJKA. BUJKA can do commercial activities or a construction on condition that it collaborates with local construction service companies or business entities.

The reason why the representative office cannot carry out business activities and seek profit in Indonesia is because the representative office does not invest in Indonesia. That is different from the investment activities carried out by a Foreign Investment Company (PT PMA). In addition, representative offices are not included in the category of business entities or legal entities in Indonesia.

Even though it is not included in the of business entity category or legal entity category and does not do business activities (seeking profit) the representative office is a tax subject that is subject to the taxation regulations in Indonesia. Representative office tax liabilities are the same as corporate taxpayer obligations. Based on Article 2 paragraph 5 of Law Number 36 Year 2008 on Fourth Amendment to Law Number 7 of 1983 on Income Tax (“Law 36/2008”) and Regulation of the Minister of Finance Number 35 of 2019 on Determination of Permanent Business Forms (“PMK 35/2019”) the representative office is a permanent business entity.

Based on Article 5 of Law Number 10 of 1994 on Amendments to Law Number 7 of 1983 on Income Taxes As Amended By Law Number 7 of 1991 ("Law 10/1994") stated that the objects of permanent business entity tax are:

• income from the business or activity of the permanent establishment and from assets owned or controlled;
• head office income from a business or activity, sales of goods, or provision of services in Indonesia that is similar to that carried out by a permanent establishment in Indonesia;
• income as referred to in Article 26 which is received or obtained by the head office, as long as there is an effective relationship between the permanent establishment and the assets or activities that provide the said income.

Even though the representative office does not carry out commercial activities or does not earn income, the representative office / permanent business entity is still subject to tax on the income earned by the head office.

Thus it can be concluded that every representative office established in Indonesia is restricted by regulations and cannot do the commercial business activities (for profit) except for BUJKA which collaborates with local construction business entities. Even though it does not do the commercial activities, the representative office must still comply to tax regulations because it is categorized as a tax subject which is a permanent business entity. In addition, the tax object that is imposed to the representative office can be in the form of income earned by the head office.

This Article is generally made for the purpose of ANR Law Firm publication only and should not be treated as legal advice for your legal problem. Shall you have any further questions regarding this topic, you may contact the Advocate who authored this article at anrlawfirm@anr-lawfirm.com.

Author: Seruni Firdaus, S.H.