Company Establishment and Foreign Direct Investment in Indonesia
(Taken from : Website "Living in Indonesia, A Site For Expatriates")
Ever since Indonesia 's independence, foreign companies have made major investments in Indonesia to develop its resources, build infrastructure, establish manufacturing facilities for export and/or provide products and services for the domestic market. The intricacies of setting up a company and making an investment in Indonesia are many. This article will serve as but a brief introduction to the topic.
Setting up Business Activities and a Company in Indonesia
To establish a business in Indonesia , if you do not require a local legal entity for the investment proposed, you could choose to appoint an Agent or Distributor, or set up a Representative Office. Many foreign investors at the early stage of entering the Indonesia market choose to set up an Agency Agreement or Representative Office, then later after the business starts to grow they will apply for a Foreign Direct Investment Company (FDI) status.
This is referred to most commonly in Indonesia by its Indonesian acronym PMA, or Penanaman Modal Asing.
A Representative Office can be established depending upon the line of business and the necessary licenses issued by the related government department. The limitation of a Representative Office is that they are not allowed to conduct direct sales and cannot issue Bills of Lading.
Representative offices are set up primarily for marketing, market research, or as buying or selling agents. The related government ministries are:
- Representative Office from Ministry of Industry & Trade - for bilateral trade
- Representative Office from Ministry of Public Work - for consultant or contractor
- Representative Office from Ministry of Mining - for mining activities
- Representative Office from Ministry of Finance - for banking
- Representative Office from Investment Board (BKPM) - regional representative
To establish a Representative Office with permission from the Ministry of Industry and Trade, the company's head office needs to issue three letters:
- Letter of Intent - stating the intention of the company to establish a representative office
- Letter of Appointment - stating the appointment of the chief representative
- Letter of Statement - stating that the Chief Representative will follow Indonesian regulations
The three letters must be stamped by a notary public and approved by the Indonesian Embassy in the home country of the firm. Upon approval, the Indonesian Embassy will issue a Letter of Notification ( Surat Keterangan). Upon completion of the four letters the process can continue to the related government ministry in Jakarta , to incorporate a fixed license for 2 years.
Other ministries require different types of letters.
Limited Liability Co or Perusahaan Terbatas (PT)
Foreign Direct Investment, most often referred to by its Indonesian abbreviation - PMA, is governed primarily by the Foreign Capital Investment Law No. 1 of 1967, amended by Law No. 11 of 1970. As a legal basis, the law is fairly accommodative to various deregulatory policies and measures to date, and those that will be taken by the government in the foreseeable future.
In addition to Investment Law No. 1/1967, PMA companies as well as other companies, in their business operations are still subject to sector/industrial policies as required by corresponding ministries.
Incorporation of PMA Company
The Investment Coordinating Board (BKPM), the government body which processes and handles FDI companies, issued an important deregulation package on PMA in May 1994 referred to as PP-20/1994. It was seen as a very significant step toward a much more conducive and attractive investment environment in Indonesia . The regulation:
- Allows 100% FDI investment in selected areas of business
- Limits foreign direct investment to 95%, with a minimum of 5% ownership by an Indonesian
- Allows FDI investment with certain conditions
- Stipulates the sectors which are closed to FDI investment
You can obtain a copy of the FDI application in English from Indonesian embassies overseas or from the Investment Coordinating Board office either from the head office in Jakarta or from regional offices in the provinces.
For those companies choosing to make a 100% foreign investment, there is a requirement that 15 years from the commencement of commercial operations, the 100% foreign shareholder must sell at least 5% of the firm to an Indonesian entity. A company which is initially 95% foreign owned is not subject to any divestment requirement.
The amount of capital to be invested in a foreign-owned company is decided by the investing parties themselves, and the BKPM approval is based on the economics and scale of the project. Foreign investment companies are basically free to choose where in Indonesia they will set up operations, with the proviso that factories must be in areas zoned for industry or in an industrial estate.
The life of foreign investment companies has been extended by allowing the renewal of the fixed operating license (IUT) for an additional 30 years. In other words, the initial licenses are valid for 3 years (SPPP BKPM), plus 2 x 30 years, for a total of 63 years.
The process of incorporation of a new foreign direct investment company:
Initial License (valid for 3 years)
Step 1. Prepare and send the application with required documentation, compiled according to the investment plan. Set up a joint venture agreement if you are making the investment with Indonesian partners.
Step 2. Obtain the Initial License (SPPP BKPM), valid for 3 years.
Step 3. Incorporation of SPPP BKPM
- Establish Articles of Association with a Public Notary detailing proof of capital investment, and send it to the Ministry of Justice for approval and issuance of State Gazette
- Registration of company address with local council (domicile)
- IRD registration (NPWP + PKP)
- Registration with the Department of Industry and Trade (TDP)
Step 4. Key expatriate positions (work permits)
Fixed Operating License (30 years)
Step 5. Prepare and send the 6-month report (LKPM) to the provincial BKPM office as well as UUG (HO) nuisance act to the regional office of BKPM
Step 6. Incorporate facilities - Master list/APIT or property ownership
Step 7. Provincial approval for Fixed Licenses (BAP)
Step 8. Fixed License (IUT) for 30 years is issued
A Limited Liability company is established either under foreign shareholders or through a joint venture with Indonesians or wholly owned by Indonesian shareholders and must be approved by the Ministry of Justice. It doesn't matter who is the owner of an Indonesian Limited Liability company, they must comply with Indonesian law and are considered an Indonesian company and the company can subsequently be changed or sold to the shareholders, foreign or Indonesian.
To get license of Change of Capital and Change of Owner the applications should be submitted to BKPM. According to BKPM, there's no charge to arrange licences.
In some situations, it may be to an investor's advantage to incorporate their firm offshore, while operations are carried out in Indonesia . The advantages and disadvantages of offshore usually focus on the facilities offered by tax havens in nations like Mauritius and the Cayman Islands . Your management consultant can assist you in making this important decision.
Taxation and Labor Law
Another important matter is the Taxation and Labor Law. It is compulsory to report taxes on a monthly basis and follow Indonesian labor law.
As you can see from this very brief introduction, the process is a complicated and lengthy one and can be a virtual mine field to those who are unfamiliar with dealing with Indonesian ministries. It is essential to acquire the advisory services of a professional investment consultant which specializes in assisting foreign companies who want to establish businesses in Indonesia .
Visas for Foreign Directors/employees
Applications for KITAS and KITAP, and other permits, should be submitted to:
Directorate General of Immigration
Jl. HR Rasuna Said Kav. 6-7
Jakarta Selatan , Indonesia
Phone : +62 21 522-030
Read also :
- Doing business in Indonesia
- More info about Visa and Documentation