U.S. income tax treaty with Indonesia

The U.S. has an income tax convention with Indonesia. The IRS Indonesia page lists the treaty documents, and the relevant convention articles include provisions that address U.S. citizens.

Treaty documents and protocols

The convention was signed at Jakarta on July 11, 1988, together with a protocol and an exchange of notes. A second protocol, signed July 24, 1996, amended the withholding rates on dividends, interest and royalties. The IRS lists the 1988 treaty and its technical explanation, and the convention PDF it links includes both protocols and the notes.^[1]^[2]

IRS Table 3 shows a general effective date of January 1, 1990 for the convention and February 1, 1997 for the protocol.

Convention structure

The convention contains 31 numbered articles. Their titles, in sequence, are Personal Scope; Taxes Covered; General Definitions; Fiscal Residence; Permanent Establishment; Income from Immovable (Real) Property; Source of Income; Business Profits; Shipping and Air Transport; Related Persons; Dividends; Interest; Royalties; Capital Gains; Independent Personal Services; Dependent Personal Services; Artistes and Athletes; Government Service; Students and Trainees; Teachers and Researchers; Private Pensions and Annuities; Social Security Payments; Relief from Double Taxation; Non-discrimination; Mutual Agreement Procedure; Exchange of Information; Diplomatic and Consular Officers; General Rules of Taxation; Assistance in Collection; Entry into Force; and Termination.^[2]

Dividends, interest and royalties

Article 11 lets both countries tax dividends. Under paragraph 2 as replaced by the 1996 protocol, the source country may not tax dividends above 10 percent of the gross amount when the beneficial owner is a company that directly owns at least 25 percent of the voting stock of the payer. In all other cases the ceiling is 15 percent. The original 1988 text set 15 percent for all dividends. Paragraph 4, as replaced, allows a branch-level additional tax of up to 10 percent.^[2]^[6]

Article 12 lets both countries tax interest. As replaced by the 1996 protocol, paragraph 2 caps source-country tax on interest beneficially owned by a resident of the other country at 10 percent of the gross amount; the 1988 text said 15 percent. Paragraph 3, as replaced, makes interest taxable only in the other country when it is derived by that country's government or political subdivisions, its central bank, or a financial institution owned or controlled by that government. The cap does not apply when the interest is effectively connected with a permanent establishment or fixed base, and for interest between related persons only the amount that would have been paid between unrelated persons gets treaty treatment, with the excess taxed under each country's own law.^[2]^[6]

Article 13 lets both countries tax royalties. As replaced by the 1996 protocol, paragraph 2 caps the source-country tax at 10 percent of the gross amount of royalties described in paragraph 3. Before the protocol the cap was 15 percent for paragraph 3(a) royalties and 10 percent for paragraph 3(b) royalties. Paragraph 3(a) covers payments for the use of copyrights, patents, designs, trademarks and similar rights, and certain information about industrial, commercial or scientific experience. Paragraph 3(b) covers payments for the use of industrial, commercial or scientific equipment, with stated exclusions for certain transport equipment.

Residence and dual residence

Article 4 defines a resident of a country by reference to liability to tax there under that country's laws, based on domicile, residence, place of incorporation or management, or a similar criterion. For an individual treated as resident in both countries, the article assigns residence first to the country where the person maintains a permanent home. If a permanent home exists in both or neither, the next test is the closer personal and economic relations, described as the center of vital interests. If that cannot be determined, the article uses habitual abode. If habitual abode is in both or neither, it uses citizenship. If the individual is a citizen of both countries or neither, the countries' competent authorities settle the question by mutual agreement. The convention defines permanent home as the place where an individual dwells with family.^[2]

Exchange of information

Article 26 provides for exchange between the countries' competent authorities of information needed to carry out the convention or domestic laws concerning covered taxes, insofar as taxation under those laws is consistent with the convention. It says the exchange is not restricted by Article 1, which addresses personal scope. Information may be exchanged routinely or upon request about a particular case. On request, the other authority is to provide witness depositions and authenticated copies of original documents to the extent these can be obtained under its own laws and administrative practices. The article also addresses notification about published material concerning application of the convention and extends the article's scope to taxes of every kind imposed by either country.^[2]

Limitation on benefits

Article 28 includes a limitation on benefits for a person other than an individual that is resident in one country and seeks relief from taxation in the other. The stated general conditions include ownership of more than half of the beneficial interest by specified residents, U.S. citizens, certain companies, or the countries, and limits on using income to meet liabilities to other persons. The text provides exceptions, including for a company whose principal class of shares is substantially and regularly traded on a recognized stock exchange, or where obtaining convention benefits was not a principal purpose of the entity's establishment, acquisition, maintenance, or operations.

Saving clause and U.S. citizens

Paragraph 3 of Article 28, General Rules of Taxation, is the saving clause. It says that, except for the benefits preserved in paragraph 4, a country may tax its own citizens and residents as if the convention had not come into effect. For this purpose a former U.S. citizen whose loss of citizenship had tax avoidance as one of its principal purposes counts as a citizen for ten years after the loss. Paragraph 4 preserves specified benefits, including relief from double taxation, non-discrimination and the mutual agreement procedure.^[2]

Questions and answers

How does the convention resolve an individual's dual residence?

It applies a sequence beginning with permanent home, followed by center of vital interests and habitual abode. Citizenship is the next test, and the competent authorities settle the question if citizenship is held in both countries or neither.^[2]

What source country limits does the convention state for dividends?

After the 1996 protocol, the source country may tax dividends at up to 10 percent when the beneficial owner is a company that directly owns at least 25 percent of the payer's voting stock, and at up to 15 percent in all other cases. An exception applies where the shares are effectively connected with the recipient's permanent establishment or fixed base there.^[2]^[6]

What rates does Article 13 state for royalties?

After the 1996 protocol, Article 13 caps source-country tax on royalties at 10 percent of the gross amount for the royalties described in paragraph 3, which covers both rights such as copyrights and patents and equipment use. An exception applies for royalties effectively connected with a permanent establishment or fixed base.^[2]^[6]

What interest limit does the convention state?

Article 12, as replaced by the 1996 protocol, caps source-country tax on interest at 10 percent of the gross amount. Interest derived by the other country's government, central bank or a financial institution it owns or controls is taxable only in that other country.^[2]^[6]

Related glossary terms

Specified individual: The Form 8938 instructions use specified individual for several categories of people. U.S. citizens and resident aliens count, as do some nonresident aliens.