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Compensation for Business Owners in Indonesia: Director Fees, Dividends, and Salaries
As a business owner in Indonesia, determining how to compensate yourself is a critical financial decision. Whether you opt for a salary, director’s fees, dividends or loans, each option has unique implications for taxes, the company’s finances and your long-term financial strategy. A well-planned approach can help you optimize tax efficiency and ensure compliance with Indonesian regulations. This guide explores the various compensation options available to business owners in Indonesia to help you make informed decisions.
Understanding Your Compensation Options
In Indonesia, business owners have several ways to compensate themselves, each with its own benefits and considerations:
1. Salary
A salary is a common method of compensation for business owners in Indonesia. Key factors to consider include:
- Mandatory Social Security Contributions (BPJS): Salaries are subject to BPJS Ketenagakerjaan (employment security) and BPJS Kesehatan (health security) contributions. These contributions are shared between the employer and employee, increasing costs for the company but providing long-term benefits.
- Taxation: Salaries are subject to individual income tax (Pajak Penghasilan Pasal 21 or PPh 21), which is progressive, ranging from 5% to 35%.
- Flexibility: Salaries can be adjusted based on business performance, and bonuses can be included to manage cash flow effectively.
2. Director’s Fees
For business owners who also serve as directors, director’s fees are another option:
- Taxation: Director’s fees are treated as personal income and are subject to PPh 21.
- Formalities: Declaring director’s fees may require formal board resolutions and compliance with corporate governance rules, which can involve additional administrative steps.
- No BPJS Contributions: Director’s fees are typically not subject to BPJS contributions, reducing overall costs.
3. Dividends
Dividends are a popular choice for business owners, especially for profitable companies. Consider the following:
- Taxation: Dividends distributed to Indonesian residents are subject to a final income tax of 10% under current regulations. However, this rate may vary depending on tax treaties for non-residents.
- Corporate Taxation: Dividends are paid out of after-tax profits. Indonesia’s corporate income tax rate is 22% (as of 2025).
- Profit Requirement: To declare dividends, the company must have sufficient retained earnings. Dividends cannot be paid if the company has accumulated losses.
- Formalities: Declaring dividends requires shareholder approval and compliance with corporate formalities, which may involve legal and administrative costs.
4. Loans/Advances
Some business owners choose to take loans or advances from their companies. While this can provide immediate liquidity, it comes with certain implications:
- Tax Implications: Loans taken by shareholders or directors may be reclassified as dividends or salaries if not properly documented, leading to additional tax liabilities.
- Repayment Obligation: Loans must be repaid to the company, and failure to do so may lead to regulatory scrutiny.
- Interest Considerations: Interest-free or below-market-rate loans may be treated as taxable benefits.
Key Considerations When Deciding on Compensation
When determining the best way to compensate yourself, consider the following:
- Corporate Tax Rates: Indonesia’s corporate tax rate is 22%, with potential reductions for qualifying small and medium enterprises.
- Personal Tax Rates: Individual income tax rates are progressive, ranging from 5% to 35%, with tax deductions available for dependents and other expenses.
- Regulatory Compliance: Ensure compliance with Indonesia’s labour and tax regulations, including BPJS contributions and corporate governance requirements.
- Profitability: Dividends depend on the company’s profitability and retained earnings, while salaries and director’s fees can be paid regardless of profit levels.
- Cash Flow Management: Choose a combination of compensation methods that aligns with your personal financial needs and the company’s cash flow.
Illustrative Example: Comparing Compensation Options
Let’s consider an example of a company with IDR 4 billion in profits. To determine the most tax-efficient way to take IDR 1 billion out of the company, we need to compare the tax implications of different options. The primary methods include:
- Director’s Fee or Salary
- Dividend Payment
- Combination of Salary and Dividend
Key Tax Rates:
- Corporate Tax: 22%
- Personal Income Tax (PPh 21): Progressive rates (5%, 15%, 25%, 30%, 35%)
- Dividend Tax: 10% (if dividends are distributed to individual shareholders, subject to conditions).
Scenario 1: Director’s Fee or Salary
If you take the entire IDR 1 billion as a salary or director’s fee:
- Corporate Tax: Profits are reduced by the salary.
New taxable profit = 4,000,000,000 − 1,000,000,000 = 3,000,000,000
Corporate tax = 3,000,000,000 × 22% = 660,000,000 - Personal Tax:
Taxable income = 1,000,000,000
Progressive tax: 60,000,000 × 5% + 190,000,000 × 15% + 250,000,000 × 25% + 500,000,000 × 30% = 195,500,000
- Total Tax: 660,000,000 + 195,500,000 = 855,500,000
Scenario 2: Dividend Payment
If you take the entire IDR 1 billion as a dividend:
- Corporate Tax: No deduction for dividends.
Corporate tax = 4,000,000,000 × 22% = 880,000,000 - Dividend Tax:
Taxable dividend = 1,000,000,000
Dividend tax = 1,000,000,000 × 10% = 100,000,000 - Total Tax: 880,000,000 + 100,000,000 = 980,000,000
Scenario 3: Combination of Salary and Dividend
If you split the IDR 1 billion into a salary of IDR 500 million and a dividend of IDR 500 million:
- Corporate Tax:
New taxable profit = 4,000,000,000 − 500,000,000 = 3,500,000,000
Corporate tax = 3,500,000,000 × 22% = 770,000,000
- Personal Tax on Salary:
Taxable income = 500,000,000
Progressive tax:
60,000,000 × 5% + 190,000,000 × 15% + 250,000,000 × 25% = 93,500,000 - Dividend Tax:
Dividend tax = 500,000,000 × 10% = 50,000,000 - Total Tax: 770,000,000 + 93,500,000 + 50,000,000 = 913,500,000
Comparison of Total Taxes
Method | Corporate Tax (IDR) | Personal Tax (IDR) | Total Tax (IDR) |
Salary Only | 660,000,000 | 195,500,000 | 855,500,000 |
Dividend Only | 880,000,000 | 100,000,000 | 980,000,000 |
Combination (50/50) | 770,000,000 | 143,500,000 | 913,500,000 |
The most tax-efficient way to take out IDR 1 billion is through salary only, resulting in a total tax of IDR 855.5 million. This example illustrates one potential approach, but actual tax efficiency may vary depending on individual circumstances and other factors.
Conclusion
Compensating yourself as a business owner in Indonesia requires careful consideration of both personal and corporate tax implications. Whether you choose a salary, director’s fees, dividends, or loans, each option has unique advantages and challenges. By understanding the implications of each compensation method, you can make informed decisions that optimize tax savings and support the financial health of your business.
If you need assistance navigating these options and optimizing your compensation strategy, please feel free to contact us.