Foundations, Nonprofit Organizations Not Exempt from Tax Matters

Typically, when people want to establish an organization that is not profit-oriented, they will choose a foundation as its legal entity.

For example, when setting up a school, an Islamic school, an Islamic boarding school, or other institutions focused on social or environmental missions, the commonly chosen legal form is a Foundation.

However, even though they are nonprofit and not designed to generate profit, it does not mean that foundations are free from tax matters. Several tax obligations still apply to foundations and other nonprofit organizations.

This article explains the tax aspects that foundation managers need to pay attention to, not only administrative obligations, but also substantive taxation matters.

Obligation for Foundations to Have a Tax Identification Number (TIN)

According to Law Number 16 of 2001, a Foundation is a legal entity consisting of separate assets, established to achieve certain objectives in the fields of social, religious, and humanitarian activities, and it does not have members.

A Foundation is a legal entity categorized as a Corporate Taxpayer. Therefore, as a Taxpayer, a foundation must also obtain a Tax Identification Number (TIN).

In taxation terms, foundations are treated the same as other business entities, such as limited liability companies, partnerships, cooperatives, or state-owned and regional-owned enterprises.

The TIN is an identity issued by the Directorate General of Taxes (DGT) that enables Foundations to fulfill their administrative tax obligations. Registration as a Taxpayer is carried out through self-assessment by the Foundation to the DGT.

This is regulated under Article 4 of the Law on General Provisions and Tax Procedures (KUP).

Income Tax on Foundation Earnings

Certain types of income received by a foundation are considered taxable under Income Tax.

Taxable Income of a Foundation

Several types of income received by a foundation are subject to income tax, including:

• Revenue from operational activities or business conducted by the foundation
• Passive income, such as interest from deposits, bonds, or Indonesian Treasury Bills (SBI)
• Income from renting out assets or granting usage rights over property
• Gains from the sale or transfer of asset ownership

Non-Taxable Income of a Foundation

Meanwhile, some types of income are exempt from tax, as regulated under Article 4(3) of the Income Tax Law (PPh Law), as last amended by the  Law No. 7 of 2021 on the Harmonization of Tax Regulations (HPP Law), including:

Donations or contributions, or assistance from official zakat institutions, including zakat, infaq, and sadaqah, received by zakat management bodies or agencies established and authorized by the government

• Grants
• Dividends or profit distributions from other entities domiciled in Indonesia
• Assistance or grants sourced from the government

These tax-exempt donations, contributions, or grants apply as long as they are not connected to any business, employment, ownership, or control relationship with the donor.

Income Tax on Surplus of Foundation

Just like other legal entities, foundations also typically calculate their total income against the expenses incurred. In the context of a foundation, the positive difference between total income and total expenses is referred to as surplus.

Surplus Exempt from Income Tax

According to Article 4 of the Minister of Finance Regulation (PMK) Number 68/PMK.03/2020, a foundation’s surplus may be excluded from taxable income as long as the surplus is reinvested for the development of the foundation.

Below are several criteria for income tax exemption on a foundation’s surplus:

1. Form of Investment

The reinvestment may take the form of construction or procurement of facilities and infrastructure for educational activities or research and development in Indonesia.

Procurement of facilities and equipment includes:

1. Classroom equipment
2. Educational or research and development tools
3. Sports equipment
4. Computers
5. Buses
6. Minibuses or similar vehicles for student transportation
7. Vehicles for certain staff

Construction and procurement of infrastructure include:

1. Buildings
2. Land
3. Laboratories
4. Libraries
5. Computer rooms
6. Offices
7. Student dormitories
8. Housing for teachers, lecturers, or employees

These activities must be open to any party authorized by the relevant institution.

2. Time Limit for Investment Realization

The surplus must be invested within a maximum of four years from when it was generated.

3. Allocation to an Endowment Fund

One form of allocating the surplus is through the foundation’s endowment fund. An endowment fund is perpetual and intended to ensure the sustainability of educational or research and development programs. It cannot be used to finance operational activities.

4. Submitting Report

The foundation must submit a report on the amount of surplus used for the construction or procurement of facilities and infrastructure to the Tax Office where it is registered, as an attachment to its annual corporate income tax return (SPT Tahunan Badan).

The foundation must also maintain detailed records of the surplus utilization supported by valid documents.

5. Surplus Subject to Income Tax

If the foundation’s surplus is not reinvested or is reinvested but does not meet the regulatory requirements, then the surplus must be reported as additional taxable income on the annual income tax return. The foundation must pay corporate income tax plus applicable sanctions.

Example:

Foundation A generated a surplus of IDR 1,500,000,000 in 2018.

During 2019–2022, Foundation A used IDR 1,450,000,000 of the surplus for eligible construction and procurement of facilities.

Thus, there remains IDR 50,000,000 at the end of 2022 that has not been used.

Therefore, the unused portion of the 2018 surplus (IDR 50,000,000) must be recognized as corporate taxable income as of 31 December 2022 and reported as income in the 2022 annual corporate income tax return as a negative fiscal adjustment.

VAT Provisions in Foundation Operations

In general, the services provided by a foundation fall under the category of Taxable Services (Jasa Kena Pajak/JKP), but they are granted a facility in which the Value Added Tax (VAT) is not collected.

Under Article 10 of Government Regulation (PP) Number 49 of 2022, several types of Taxable Services are exempt from VAT.

From this list of VAT-exempt services, many are commonly provided by foundations—particularly services in the fields of education, health, and other social activities.

Below is the list of Taxable Services that are exempt from VAT:

1. Medical healthcare services
2. Social services
3. Postal services using postage stamps
4. Financial services
5. Insurance services
6. Educational services
7. Non-advertising broadcasting services
8. Public transportation services on land and water, as well as domestic air transportation that forms an inseparable part of international transport services
9. Manpower services
10. Public telephone services using coins
11. Money transfer services via postal order
12. Rental services of public housing and low-cost apartments
13. Services received by the Ministry of Defense or the Indonesian National Armed Forces related to the provision of border data, topographic maps, hydrographic maps, and aerial imagery of the territory of the Republic of Indonesia for national defense purposes

These VAT-exempt services represent specific social services organized by the central government, local governments, or nonprofit organizations. (NZR/ASP/HFZ)