Family Office: Between Investment Magnet and Tax Erosion Risk

The government has recently accommodated the establishment of a financial centre through Article 248 of Law 4/2026. One of the plans being developed within this financial centre is to accommodate the establishment of family offices, including their tax incentives. In its development, the family office has sparked discussion. On one hand, this facility is expected to attract funds and economic activity to Indonesia. On the other hand, if provided without proper design and limitations, Indonesia’s tax base risks being eroded. Considering that tax incentives in Indonesia have reached IDR 400.1 trillion (DJSEF, 2024), the provision of facilities for family offices needs to be thoroughly assessed by weighing the benefits and risks.

The establishment of family offices is driven by the growing population of ultra-wealthy individuals in Asia, which is estimated to grow by 38.3% during the 2023–2028 period. Meanwhile, global family office assets under management reach approximately US$11.7 trillion. If family offices are developed in Indonesia, the hope is that a portion of these funds will enter the country and have a positive impact on the economy through investment and the creation of a multiplier effect. From a taxation perspective, the existence of family offices can indirectly broaden the tax base through asset formalisation. Data from JP Morgan (2024) shows that globally, family businesses using family offices manage average assets of around US$864.6 million. The majority of these global family office users are ultra-high-net-worth individuals who control approximately US$45 trillion, or 10.6% of total global wealth.

Currently, the largest proportion of family offices is in the European Union, with a share of 65%, while the country with the highest number is Germany at 28% (Asset Global, 2023). In Germany, family offices pay up to EUR 46.8 billion in income tax annually, or 41.7% of total tax revenue. This also proves that family offices can play a significant role in tax revenue if managed properly. In the Indonesian context, a PwC Family Business Survey in 2021 stated that 72% of businesses in Indonesia are family businesses. Meanwhile, around 19% of family offices are based in Asia (Global Family Office Compensation Benchmark Report, 2023). This data shows an opportunity for Indonesia to attract family office activity in Asia while providing a platform for domestic family businesses to obtain operational ease and more structured asset management.

However, behind these potential benefits, challenges can arise if the design of tax incentives is not properly structured. Misdirected incentives risk creating preferential tax facilities that open up space for tax avoidance practices. Kovermann (2019) stated that agency conflict in family businesses is related to the tendency for tax avoidance. Majority shareholders with significant control can make decisions that benefit the family but potentially reduce the interests of minority shareholders. Furthermore, owners of family businesses who prioritise limited socioemotional wealth (SEW), such as ignoring reputation, tend to view tax aggressiveness as a way to increase wealth quickly (Bauweraerts, 2024). Research from the International Journal of Entrepreneurial Behavior (2023) also shows that tax avoidance practices in family businesses can occur through various mechanisms, including thin capitalisation. This risk of tax avoidance can also increase if the family business has political connections. For example, cases of tax avoidance with political connection backgrounds are prevalent in China. Inappropriate tax incentives for family businesses also trigger higher tax avoidance mechanisms through the exploitation of regulatory loopholes. For instance, inheritance tax incentives for family businesses in Spain actually increased tax aggressiveness.

Therefore, the provision of tax incentives for family offices requires adequate regulation. Without it, these facilities could potentially be used to shift assets into certain schemes to obtain more favourable tax treatment. To avoid the risk of tax base erosion, tax incentives should be granted selectively and linked to clear economic contributions. The United Kingdom, for example, applies a strict General Anti-Avoidance Rule (GAAR), including for family businesses. The UK tax authority prohibits the use of shell schemes that lack substantial purpose for tax avoidance. In assessing the reasonableness of a transaction, the UK uses a double reasonableness test approach. During the 2014–2018 period, the implementation of GAAR in the UK successfully secured state revenue of £235 million. Indonesia can consider strengthening anti-avoidance rules as part of the family office policy design. Additionally, incentives provided in the derivative regulations of the P2SK Law should be directed towards real economic activities that contribute to the economy and research. Singapore, through its 13O and 13U schemes, requires a minimum investment threshold of SGD 5 million and SGD 50 million to obtain incentives. This policy aims to ensure that incoming funds provide benefits to the domestic economy. Thus, determining the location of the financial centre is also an important factor. The chosen area should have economic development potential so that the existence of family offices can have a broader impact.