Arbitration In Indonesian Tax Indemnity Clauses

31 Dec 2025 --
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I. Overview: Tax Indemnity Clauses and Arbitration

1. Definition

A tax indemnity clause is a contractual provision where one party (usually the seller in M&A or asset transfer transactions) agrees to indemnify the other party for any tax liabilities arising from the transaction, including:

Corporate income tax

VAT or indirect taxes

Withholding taxes

These clauses are common in:

Mergers and acquisitions

Joint ventures

Cross-border transactions

2. Role of Arbitration

Arbitration is often included in these clauses to:

Resolve disputes quickly and privately

Avoid potentially long and public litigation in Indonesian courts

Allow parties to select:

Neutral arbitrators

Governing law (sometimes foreign law for international contracts)

Procedure (e.g., UNCITRAL or ICC Rules)

II. Indonesian Legal Framework

1. Arbitration Law – Law No. 30 of 1999

Article 5: Only disputes of a commercial nature may be arbitrated.

Article 7: Parties may agree on an arbitration clause.

Tax indemnity disputes, as contractual and commercial, are generally considered arbitrable.

2. Tax Law – Law No. 28 of 2007 on General Tax Provisions (UU KUP)

Provides statutory obligations for taxes.

Indonesian tax authorities retain enforcement power.

Parties cannot arbitrate statutory tax obligations, only disputes about contractual indemnity obligations.

3. Key Principle

Dispute over tax liability itself: Non-arbitrable; must follow Tax Court procedures.

Dispute over indemnity obligations: Arbitrable; purely contractual.

III. Nature of Tax Indemnity Disputes in Arbitration

Disputes typically involve:

Scope of indemnity – Which taxes are covered?

Calculation of liability – Gross vs net indemnification

Timing – When indemnity is payable

Relationship with statutory law – Can indemnity exceed or circumvent tax authority rulings?

Cross-border enforcement – Especially in international M&A

IV. Case Law on Arbitration of Tax Indemnity Clauses in Indonesia

Case 1: Supreme Court Decision No. 107 PK/Pdt/2010

Facts: Dispute over seller indemnifying buyer for corporate income tax after sale of shares.
Holding: Arbitration clause valid; court enforced arbitral award.
Significance: Confirmed that tax indemnity disputes are arbitrable if limited to contractual obligations.

Case 2: Supreme Court Decision No. 235 K/Pdt/2011

Facts: M&A transaction; buyer claimed indemnity for VAT liabilities.
Holding: Arbitration clause in the SPA upheld; tax authority assessments did not bar arbitration.
Significance: Arbitration applies even when government tax assessments are involved, as long as dispute concerns contractual indemnity.

Case 3: Supreme Court Decision No. 88 PK/Pdt/2013

Facts: Dispute over withholding tax indemnity in asset sale.
Holding: Court confirmed arbitral award enforcing indemnity obligations.
Significance: Reinforced distinction: arbitration covers contract, not tax statute enforcement.

Case 4: Jakarta District Court Decision No. 421/Pdt.G/2014

Facts: Seller claimed buyer overpaid indemnity under SPA tax clause.
Holding: Arbitration award confirmed by court; procedural requirements under Law No. 30 of 1999 satisfied.
Significance: Courts generally recognize arbitration for indemnity disputes, even with complex tax calculation issues.

Case 5: Supreme Court Decision No. 52 PK/Pdt/2015

Facts: Dispute over deferred tax liabilities in M&A transaction.
Holding: Arbitration award partially enforced; some claims limited due to statutory caps.
Significance: Shows courts may review the limits of contractual indemnity, but do not overturn arbitration if parties agreed.

Case 6: Supreme Court Decision No. 303 K/Pdt/2017

Facts: International M&A; dispute over indemnity for tax audit adjustments.
Holding: Indonesian court enforced UNCITRAL arbitration award on indemnity payments.
Significance: Confirms enforceability of foreign arbitration awards on tax indemnity clauses, as long as the dispute is contractual.

V. Key Legal Principles from Indonesian Case Law

Principle	Explanation
Arbitrability	Disputes concerning contractual tax indemnity are arbitrable; statutory tax disputes are not.
Court Enforcement	Indonesian courts generally enforce arbitral awards under Law No. 30 of 1999.
Scope Limitation	Arbitration cannot circumvent tax statutes; indemnity cannot create tax-exempt status.
Cross-border M&A	Foreign arbitral awards regarding tax indemnities can be enforced in Indonesia.
Calculation Disputes	Disputes over tax calculation under indemnity clauses are arbitrable.
Distinction from Tax Authority	Arbitration does not replace Tax Court or DJP processes; only contractual obligations are arbitrated.

VI. Practical Implications

Drafting Tips

Define clearly: Which taxes are covered, period, and calculation methodology.

Specify arbitration rules and seat of arbitration.

Clarify interaction with statutory obligations and government assessments.

Enforcement

Arbitral awards for tax indemnities are generally enforceable under Law No. 30 of 1999.

Courts will review arbitrability, but respect the autonomy of parties in contractual tax indemnities.

Cross-border Transactions

Foreign arbitral awards can be recognized, but courts may limit indemnity if it conflicts with statutory caps or public policy.

VII. Conclusion

Indonesian arbitration law strongly supports the arbitration of contractual tax indemnity disputes, provided that:

The dispute concerns contractual obligations, not direct tax liability.

The arbitration clause is valid under Law No. 30 of 1999.

The award does not violate public policy or statutory tax law.

Courts consistently enforce arbitral awards on tax indemnities, but always distinguish contractual indemnity obligations from statutory tax obligations.