When Is a Foreign Technology Company Considered to Be Doing Business in Indonesia?

Foreign technology companies may be considered to be conducting business in Indonesia where their activities indicate a business or economic presence in Indonesia, whether physical or digital. This may be assessed under Indonesian tax, electronic commerce, telecommunications, investment, and electronic contract regulations.

The relevant indicators differ depending on the regulatory framework. These may include the existence of a business premises in Indonesia, the provision of services in Indonesia, Indonesian sales or users, internet traffic, an Indonesian investment structure, or contractual arrangements involving Indonesian users.

1. Tax Perspective: Permanent Establishment and Significant Economic Presence

a. Permanent Establishment under PMK 35/PMK.03/2019

A foreign technology company may be considered to be conducting business in Indonesia if it satisfies the requirements for a Permanent Establishment (Bentuk Usaha Tetap or “BUT”).

Under Minister of Finance Regulation No. 35/PMK.03/2019, a BUT exists where there is a business place in Indonesia that is used by a foreign entity to conduct business or carry out activities.

The business place may include a management location, branch, representative office, office, factory, warehouse, or certain computers, electronic agents, or automated equipment used for business through the internet, as further regulated under Article 5 of the regulation.

The business place must generally be permanent, meaning that it is used continuously and located in a particular geographical location. It must also be used by the foreign company to conduct business or carry out activities in Indonesia.

A BUT may also arise even without a permanent business place in certain circumstances. These include:

• construction, installation, or assembly projects;
• services provided by employees or other persons for more than 60 days within a 12-month period in Indonesia;
• activities conducted through a dependent agent; and
• certain activities of agents or employees of foreign insurance companies.

Accordingly, from a tax perspective, a foreign technology company may be regarded as having a business presence in Indonesia where it maintains relevant infrastructure or facilities in Indonesia, provides services in Indonesia for more than the applicable period, or operates through a dependent agent.

b. Significant Economic Presence in Electronic Commerce

The Indonesian tax framework also recognizes significant economic presence in the context of electronic commerce.

Law No. 2 of 2020 provides that offshore traders, offshore service providers, and/or offshore PPMSEs that satisfy the requirements for significant economic presence may be subject to income tax or electronic transaction tax.

The indicators of significant economic presence include:

• the consolidated gross turnover of the business group;
• sales in Indonesia; and/or
• the number of active digital users in Indonesia.

Where the relevant requirements are satisfied, an offshore business may be treated as a BUT for tax purposes. Where it cannot be treated as a BUT under an applicable tax treaty, the law provides for the imposition of electronic transaction tax on certain transactions involving goods or services supplied from outside Indonesia through electronic commerce.

Therefore, from a tax perspective, an offshore technology company may have an Indonesian business presence based on either its physical business activities or its economic activities involving the Indonesian market.

2. Private PSE: Providing Digital Services to Users in Indonesia

The regulation of private electronic system operators (Penyelenggara Sistem Elektronik or “PSE”) uses the concepts of providing services in Indonesia and conducting business in Indonesia as relevant indicators.

Under the regulation on private PSEs, foreign PSEs established under the laws of another country or domiciled outside Indonesia are subject to registration requirements where they:

1. provide services in Indonesia;
2. conduct business in Indonesia; and/or
3. have an electronic system that is used and/or offered in Indonesia.

This framework is relevant to foreign technology companies operating websites, applications, platforms, software, or other electronic systems accessible to Indonesian users.

Accordingly, a foreign technology company may fall within the Indonesian PSE framework where its digital services are used by users in Indonesia or where its electronic system is offered to the Indonesian market.

The existence of an Indonesian regulatory presence for PSE purposes does not necessarily mean that the company has established an Indonesian legal entity. The PSE framework specifically applies to certain foreign PSEs operating from outside Indonesia.

3. Telecommunications and OTT: Significant Presence Through the Internet

For technology companies conducting activities through the internet, including certain OTT and content platform businesses, Indonesian telecommunications regulations also recognize the concept of significant presence.

Minister of Communication and Informatics Regulation No. 5 of 2021 provides that business actors, whether Indonesian or foreign, conducting business activities through the internet to users in Indonesia must cooperate with Indonesian telecommunications network or service providers in accordance with the applicable requirements.

The activities covered include, among others:

• substitution of telecommunications services;
• audio and/or visual content service platforms; and
• substitution of broadcast programs and other services determined by the Minister.

Minister of Communication and Informatics Regulation No. 5 of 2021 provides quantitative criteria for significant presence. A business conducting activities through the internet to users in Indonesia may have significant presence where:

• the traffic used by the business is at least 1% of domestic traffic; and/or
• its active daily users in Indonesia reach at least 1,000,000 users during a three-month period.

The relevant traffic and user information may be obtained from internet service providers and mobile telecommunications network operators.

This means that, for businesses falling within the scope of the regulation, the scale of Indonesian users and internet traffic can be relevant in determining whether the business has a significant presence in Indonesia.

4. Foreign Investment: When an Indonesian Entity Is Required

The concept of conducting business in Indonesia is also relevant under the foreign investment framework.

Law No. 25 of 2007 on Investment defines foreign investment as investment activity conducted by foreign investors to conduct business in the territory of Indonesia, whether using wholly foreign capital or in cooperation with domestic investors.

Law No. 25 of 2007 further provides that foreign investment must be conducted in the form of a limited liability company established under Indonesian law and domiciled in Indonesia, unless otherwise provided by another law.

Accordingly, where a foreign technology company establishes an Indonesian business structure and conducts its commercial activities through that structure, the activity may fall within the foreign investment framework.

The relevant activities may include establishing an Indonesian company, investing capital in Indonesia, and conducting commercial activities through an Indonesian entity.

5. Electronic Contracts: Business Activities in Indonesia

Indonesian electronic transaction law also recognizes certain connections between foreign PSEs and Indonesia.

Law No. 11 of 2008 on Electronic Information and Transactions, as amended by Law No. 1 of 2024, provides that an international electronic contract using standard terms and entered into by a PSE is subject to Indonesian law where certain conditions are satisfied.

These include circumstances where:

• the PSE service user is from Indonesia and gives consent from or within Indonesia;
• the place of performance of the contract is in Indonesia; or
• the PSE has a place of business or conducts business activities in Indonesia.

The explanation to that regulation also addresses circumstances where a PSE conducts business activities in Indonesia, including where it has a representative office or Indonesian business entity.

The provision is relevant to foreign technology companies that enter into electronic contracts with Indonesian users. Depending on the circumstances, the company’s contractual relationship with Indonesian users may establish a connection with Indonesian law.

6. Different Regulatory Frameworks, Different Indicators

There is therefore no single test under Indonesian law for determining whether a foreign technology company is conducting business in Indonesia.

The relevant indicators depend on the applicable regulatory framework.

From a tax perspective, the focus may be on a permanent business place, services provided in Indonesia, dependent agents, or significant economic presence.

For private PSE regulation, the focus is on whether a foreign PSE provides services, conducts business, or offers or operates an electronic system in Indonesia.

For telecommunications and OTT activities, significant presence may be determined based on internet traffic and the number of active daily users in Indonesia.

For foreign investment, the focus is on whether the foreign investor is conducting business in Indonesia through an Indonesian investment structure.

For electronic contracts, the relevant connection may arise from Indonesian users, the place of performance, or the PSE’s business activities or place of business in Indonesia.

Accordingly, the fact that a company has no physical office in Indonesia does not by itself determine whether it is considered to be conducting business in Indonesia. The assessment depends on the company’s actual activities and the specific regulatory framework that applies.

This alert is part of a series examining legal and regulatory developments affecting foreign technology and digital businesses operating in or providing services to Indonesia. As different regulatory frameworks apply different criteria for determining a business presence in Indonesia, the relevant requirements should be assessed based on the nature and structure of the company’s activities. Please feel free to contact us should you wish to discuss these developments further.

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