ARTICLE 11

Dividends

This Article governs the taxation by a Contracting State of dividends paid by a company which is a resident of that State to a resident of the other Contracting State. It also governs the application of branch taxes imposed in addition to the tax on profits.

Dividends may be taxed in both Contracting States, in the country of source and the country of residence. However, the tax imposed by the country of source may not exceed 15 percent of the gross amount of the dividends when the beneficial owner is a resident of the other Contracting State. In the absence of the Convention, the U.S. tax rate would be 30 percent and the Indonesian rate 20 percent.

The limitation of tax at source does not apply with respect to the U.S. taxation of U.S. citizens resident in Indonesia. (See paragraph 3 of Article 28 (General Rules of Taxation).)

This limitation of tax at source also does not apply if the shares giving rise to the dividends are effectively connected with a permanent establishment or fixed base which the owner of the dividends has in the Contracting State where the dividends have their source. In such a case the dividends are taxable to the permanent establishment or fixed base in accordance with Article 8 (Business Profits) or Article 15 (Independent Personal Services), as appropriate.

Paragraph 4 authorizes the Contracting States to impose a branch profits tax, in addition to the corporate tax, on the profits of a permanent establishment in that State of a resident of the other State. The tax base is defined by each Contracting State in accordance with its law, but is net of the corporate tax imposed by that State on the profits of the permanent establishment. In the United States, the tax base is the "dividend equivalent amount" as defined in Code section 884(b). Paragraph 4 also authorizes the Contracting States to impose a tax on interest payments allocable to a permanent establishment of a resident of the other Contracting State. As explained in the accompanying protocol, the reference to interest payments “allocable” to the permanent establishment means, for purposes of U.S. law, any excess of interest deducted by the U.S. permanent establishment of a resident of Indonesia over the interest paid by such permanent establishment. The abbreviated form of this provision with respect to branch taxes reflects the timing of the negotiations. The Convention was initialed prior to the enactment of the Tax Reform Act of 1986. To minimize subsequent changes, the pre-existing provision designed to permit Indonesia's branch profits tax was modified to provide also for the U.S. branch taxes. The additional taxes are limited to a rate of not more than 15 percent, reciprocally, except as provided in paragraph 5. In the absence of the Convention, the U.S. tax would be imposed at 30 percent and the Indonesian tax at 20 percent.

Paragraph 5 provides that the 15 percent maximum rate specified in paragraph 4 does not

apply with respect to contracts between the Indonesian government or an entity thereof and a U.S. resident concerning Indonesian oil, gas or other mineral products. At present, Indonesia imposes its statutory rate of 20 percent in such cases.