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Despite making improvements in the World Bank’s Ease of Doing Business ranking, Indonesia continues to be a challenging environment for foreign investors. The disharmony between the regulations issued by the central government and those at the regional level is often a major barrier for businesses.

Investors should assess their specific needs carefully before deciding which corporate structure to operate from. Using a reliable local advisor is recommended for first-time investors in the country, as they find it easier to remain compliant with applicable regulations.

There are two legal options for foreign investors looking to set up in the country: a foreign investment company (PT PMA) or representative office (RO).

Foreign investment company

Establishing a foreign investment company or PT PMA, is the preferred structure for companies looking to have a legal presence in the country. Foreign investors will need to have a minimum paid-up capital equivalent of 10 billion rupiah (US$696,000), an increase from the previous 2.5 billion rupiah (US$174,135), as the government aims to attract more high-value investments into the country.

Prior to setting up, applicants should study the new Positive Investment List (PIL) to see which business sectors are unavailable or restricted for foreign ownership. The general principle under the positive investment list is that a business sector is open to 100 percent foreign investment unless it is subjected to a specific type of limitation. The regulation presents one of the greatest liberalizations in foreign ownership limitations in Indonesia since the negative investment list was first introduced in the 1980s.

Important sectors that had previous foreign ownership restrictions, which have now been lifted include, among others:

  • Telecommunications;
  • Transportation;
  • Energy; and
  • Distribution. 

There are several advantages of PT PMAs, including: 

  • Special financial and non-financial incentives, particularly in pioneer industries;
  • Incentives for setting up in special economic zones (SEZs);
  • Foreign investors can own as little as one percent and as much as 100 percent of the company (depending on the industry);
  • Able to participate in government sponsored business tenders in the country;
  • Ease of processing for business licenses;
  • Ease of processing for work permits;
  • Lower tax and import duties;
  • Simple organization structure (requiring only one director, one commissioner, and two shareholders); and
  • Ability to sponsor foreign executives.

What are the set-up requirements for a foreign investment company?

According to the Investment Coordinating Board Regulation No. 4 of 2021 (BKPM Reg 4/2021), investors looking to incorporate a PT PMA need to adhere to the following requirements:

  • A minimum paid up capital of 10 billion rupiah (US$696,000);
  • Appointment of two shareholders (these can be foreign individuals or corporations - the percentage of local involvement will depend on the foreign ownership limitation based on the PIL);
  • The appointment of at least one commissioner and a director (these can be held by foreign individuals); and
  • The director will be responsible for running the day-to-day activities of the company.

Set up process for a PT PMA

  1. Reserve a company name with the Ministry of Law and Human Rights (which should not be similar to the name of other companies or contain vulgar language), Further the company name shall consist of 3 words and can be in English;
  2. Determine the industrial business classification code (KBLI), based on the intended business activities;
  3. Establish a legal entity with the company’s activities stated in the Deed of Establishment (this must be done with a local notary and the Deed of Establishment will have to be ratified by the Ministry of Law and Human Rights);
  4. Obtain a taxpayer identification number from the local tax office and domicile letter from the district government (businesses establishing in Jakarta do not require a domicile letter);
  5. Obtain a tax registration certificate through the tax office where the business is domiciled;
  6. Obtain a Single Business Number (NIB) by applying through the Online Single Submission (OSS) system. The NIB applies as the company’s import identification number, customs ID, and registration certificate. Further, the NIB will also automatically register your company under the government’s health and social security scheme; and
  7. Some companies may need to apply for additional business licenses (such as for mining and fintech). Business licenses will now be issued based on the assessment of ‘business risk level’ determined by the scale of hazards a business can potentially create.

Risk based business licensing for a PTMA

To determine the risk level, the government will conduct a risk analysis of each application before deciding on issuing a business license. This will comprise of:

  • Identifying the relevant business activity;
  • Assessing the hazard level;
  • Assessing the potential occurrence of hazards;
  • Determining the risk level and business scale rating; and
  • Determining the type of business license.

Based on the aforementioned risk analysis, the businesses activities undertaken by the applicant company will be classified into one of the following risk-level types:

  • Low-risk businesses;
  • Medium-low risk businesses;
  • Medium-high risk businesses; and
  • High-risk businesses.

[tips title="Important Tip"]Based on this risk-based approach, the lower the business risk, the simpler the business licensing requirements will be.[/tips]

What sectors are impacted?

The government will undertake the risk-analysis for business activities in the following sectors:

  • Maritime affairs and fisheries;
  • Agriculture;
  • The environment and forestry;
  • Energy and mineral resources;
  • Nuclear energy;
  • Industry;
  • Trading;
  • Public works and housing;
  • Transport;
  • Health, medicine, and food;
  • Education and culture;
  • Tourism;
  • Religious affairs;
  • Post, telecommunications, broadcasting, and electronic system, and transactions;
  • Defense; and
  • Employment. 

What are the requirements to obtain a business license?

The requirements vary depending on the risk level of the business with those in the high-risk categories requiring more permits and licenses.

The first stage of the process is obtaining a business registration number (Nomor Induk Berusaha – NIB) through the OSS system. To register for an NIB, businesses will need to provide the following information:

  • Taxpayer number (Nomor Pokok Wajib Pajak– NPWP);
  • Business activity code according to the KBLI;
  • Business profile;
  • The capital structure of the business; and
  • The proposed location of the business.

Furthermore, the OSS system will be linked to all relevant ministries, such as the Ministry of Finance, the Ministry of Home Affairs, and the Ministry of Law and Human Rights.

Low-risk business activities

Low-risk business activities are only required to obtain an NIB to commence their operations. In addition to serving as the formal identity of the business, the NIB also serves as a company’s import identification number, as well as the number for registering with the national social insurance program.

Medium-low risk business activities

Business activities in this category must obtain a NIB and Certificate of Standards before beginning operations. A Certificate of Standards is a statement of the fulfillment of certain business or product standards, which must be filled in through the OSS system.

The NIB allows the business to conduct activities from ‘preparation to the ‘commercial stage’.

The preparation stage includes:

  • The procurement of tools or facilities;
  • Land acquisition;
  • Recruitment of manpower;
  • Feasibility studies;
  • Financing operations for the construction phase.

The commercial-stage includes:

  • The production of goods/services;
  • Distribution of goods/services;
  • Marketing of goods/services; and
  • Other commercial activities.

Medium-high risk business activities

For medium-high risk business activities, companies will need to obtain a NIB and Certificate of Standards. However, the certificate will need to be verified by the central or regional government.

[tips title="Important Tip"]A company with a NIB and an ‘unverified’ Certificate of Standards are only permitted to conduct activities deemed in the preparation stage of operations.[/tips]

Once the central or regional government is satisfied the business has fulfilled the specific business standards, they will issue the ‘verified’ certificate and the company can begin the commercial stage of operations.

High-risk business activities

High-risk business activities will require a NIB and a license to operate. The license will be issued once the business has fulfilled certain conditions and verifications set out by the central or regional government, which may include an environmental impact analysis.

The NIB, however, allows the business to conduct activities in the preparation stage of operations.

Depending on the products or services being provided, businesses may have to obtain other supporting licenses to conduct commercial activities regardless of what risk level their activities are classified as.

An illustration of the licensing requirements can be seen below.

The design of the positive investment list

The government has classified business fields into four categories.

1. Priority sectors – 245 business lines open for foreign investment;

2. Business fields that stipulate specific requirements or limitations — 46 business lines open;

3. Businesses fields open to large enterprises, including foreign investors, but are subject to a compulsory partnership with cooperatives and micro, small, and medium-sized enterprises (MSMEs); and

4. Business fields that are fully open to foreign investment.

Businesses open to 100 percent foreign investment

The following business fields are open to 100 percent foreign investment.

  • Oil and gas construction;
  • Onshore upstream oil installation;
  • Onshore and offshore distribution pipelines;
  • Onshore and offshore oil and gas drilling service;
  • Oil and gas well maintenance service;
  • Electricity generation;
  • Construction of electricity installation;
  • Geothermal electricity generation;
  • Supermarkets (with areas less than 1,200 sqm);
  • Department store (with areas between 400 – 2,000 sqm);
  • Ports;
  • Airport and airport supporting services;
  • Maritime cargo handling;
  • Telecommunications;
  • E-commerce;
  • Pharmaceutical industry; and
  • Hospitals.

Priority sectors

To classify as a priority sector, business enterprises must meet the following criteria:

  • Must be labor intensive;
  • Must be capital intensive;
  • Must be part of a national project/program;
  • Must be export-oriented;
  • Must involve a pioneer industry (renewables, oil refining, metals, etc.);
  • Must utilize advanced technologies; and
  • Must implement research and development activities.

There are 245 business fields under this category that can be found under Exhibit 1 of the positive investment list. Moreover, businesses in priority sectors are eligible for a range of fiscal and non-fiscal incentives.

Fiscal incentives include a 50 percent corporate income tax reduction for investments between 100 billion rupiah (US$6.9 million) and 500 billion rupiah (US$34.8 million) for a period of five years and 100 CIT reduction for investments over 500 billion rupiah (US$34.8 million) for a period between five and 20 years.

In addition, there are tax allowances available in the form of a reduction in the taxable income of 30 percent of the total investment for six years, a special withholding tax rate on dividends of 10 percent, and tax losses carried forward for up to 10 years.

Examples of non-fiscal incentives are the provision of supporting infrastructure, simplified business licensing procedures, and the guaranteed energy supply or raw materials.

Business Fields with Specific Requirements

Business fields

Requirements

Publishing of newspapers, magazines (press)

100 percent domestic capital required for establishment, and up to 49 percent foreign capital ownership for business development and expansion

Private broadcasting agency

100 percent domestic capital required for establishment, and up to 20 percent foreign capital ownership for business development and expansion

Subscription based broadcasting agency

100 percent domestic capital required for establishment, and up to 20 percent foreign capital ownership for business development and expansion

Community radio agency

100 percent domestic capital required for establishment, and up to 20 percent foreign capital ownership for business development and expansion

Community television agency

100 percent domestic capital required for establishment, and up to 20 percent foreign capital ownership for business development and expansion

Postal services

Maximum foreign capital ownership of 49 percent

Domestic scheduled air transportation

Foreign capital ownership of 49 percent. However, domestic capital ownership needs to be the single majority

Domestic non-scheduled air transportation

Foreign capital ownership of 49 percent. However, domestic capital ownership needs to be the single majority

Air transport activities

Foreign capital ownership of 49 percent. However, domestic capital ownership needs to be the single majority

Domestic passenger liner and tramp activities

Maximum foreign capital ownership of 49 percent

Domestic sea transport for tourism

Maximum foreign capital ownership of 49 percent

Domestic liner and tramp sea freights for goods

Maximum foreign capital ownership of 49 percent

Domestic sea transportation for special goods

Maximum foreign capital ownership of 49 percent

Pioneer domestic sea transportation of goods

Maximum foreign capital ownership of 49 percent

Domestic sea transportation using public shipping

Maximum foreign capital ownership of 49 percent

Overseas liner and tramp sea freights for goods

Maximum foreign capital ownership of 49 percent

Overseas sea transportation for special goods

Maximum foreign capital ownership of 49 percent

Interprovincial sea public transport

Maximum foreign capital ownership of 49 percent

Interprovincial sea public transport (pioneering)

Maximum foreign capital ownership of 49 percent

Interprovincial city/regency public transport

Maximum foreign capital ownership of 49 percent

Interprovincial city/regency public transport (pioneering)

Maximum foreign capital ownership of 49 percent

Inter-city and regency public transport

Maximum foreign capital ownership of 49 percent

River and lake transportation with non-fixed and irregular routes

Maximum foreign capital ownership of 49 percent

River and lake transportation with non-fixed and irregular routes for tourism

Maximum foreign capital ownership of 49 percent

River and lake transportation for general goods and/or animals

Maximum foreign capital ownership of 49 percent

River and lake transportation for special goods

Maximum foreign capital ownership of 49 percent

River and lake transportation for dangerous goods

Maximum foreign capital ownership of 49 percent

Weapons equipment industry

Capital ownership based on approval from Ministry of Defense

Horticulture

Maximum foreign capital ownership of 30 percent

Traditional medical products (for humans)

100 percent Domestic capital

Fish processing industry

100 percent Domestic capital

Wood based building products

100 percent Domestic capital

Coffee processing industry

100 percent Domestic capital

Rendang industry

100 percent Domestic capital

Ship industry

  • Outriggers; and
  • Traditional vessels

100 percent Domestic capital

Traditional handicrafts

100 percent Domestic capital

Traditional cosmetics

100 percent Domestic capital

Raw materials for traditional medicine (for humans)

100 percent Domestic capital

Batik industry

100 percent Domestic capital

Crackers and chips industry

100 percent Domestic capital

Hajj and Umrah activities

100 percent Domestic capital and must be Muslim

Representative Offices

Opening an RO is the fastest and simplest way of establishing a legal entity in the country. This set up is a temporary arrangement – ROs are not allowed to engage in any commercial activities, issue invoices, sign contracts, or earn any revenue. Foreign investors, however, can own 100 percent of this business entity and don’t have to contribute the same paid-up capital required by PT PMAs.

[video file='https://cdn.jwplayer.com/videos/BD5PFLAr-RPafXtEf.mp4' image='https://resource.dezshira.com/resize/900x506/Misc/banners/web_2.jpg' title='Indonesia’s Omnibus Law And New Investment List  New Opportunities For Foreign']

The business activities of ROs are limited to – market research activities, obtaining information on potential clients, developing trade contacts, and gather information on regulations and laws. There are four types of ROs:

  • Foreign representative office (FRO);
  • Representative office for a foreign trading company (TRO);
  • Representative office for a foreign construction company (BUJKA); and
  • Representative office for a foreign electricity company (JPTLA).

 

Foreign representative office (FRO)

An FRO is ideal for investors who are still exploring opportunities in Indonesia. The FRO is limited to non-commercial activities and there are no restrictions on the employment of foreign nationals. However, if an FRO does employ foreign workers, then it is also obligated to employ Indonesian citizens.

FRO’s are limited to:

  • Acting as a liaison, coordinator, or supervisor to the foreign parent company;
  • Preparing for the incorporation of a foreign investment company in Indonesia;
  • Not participating in the management of the parent company’s branch office or subsidiary in Indonesia; and
  • Not seeking revenues from Indonesia.

[tips title="Did You Know"]The FRO must be incorporated in an office building in the capital city of any province in Indonesia. Further, FROs are classified as low-risk business entities and thus only requires a business identification number (NIB) and an FRO registration to begin operations. [/tips]

Representative office for a foreign trading company (TRO)

A TRO acts as a selling, buying, or manufacturing agent for the foreign parent company and is prohibited from engaging in any trade or sales activities. To establish a TRO, an NIB and a TRO Business License for the Trade Sector (Surat Izin Usaha Perwakilan Perusahaan Perdagangan Asing Bidang Perdagangan Melalui Sistem Elektronik – “SIUP3A Bidang PMSE”) is required.

Each TRO must have a SIUP3A, and if the TRO wants to conduct imports, then must be done through a local company holding a business license or a foreign investment company holding a general import identification number.

Foreign e-commerce organizers must establish a TRO if they fulfil the following criteria:

  • Having more than 1,000 transactions with customers within a one-year period; and/or
  • Delivered over 1,000 packages for customers within a one-year period.

Representative office for a foreign construction company (BUJKA)

A BUJKA is an RO for foreign construction companies, and unlike the KPPA and KP3A entities, a BUJKA can undertake projects in Indonesia through a joint venture with a local construction company. The BUJKA entity is required to obtain an NIB and a business entity certificate (Sertifikat Badan Usaha) (SBU).

In addition to making a join venture with a local construction firm, the BUJKA is also required to adhere to the following:

  • Fulfill all business licensing requirements;
  • Hire an Indonesian as head of the BUJKA representative office;
  • Utilizing sophisticated, efficient, and environmentally friendly technology;
  • Prioritize the use of local construction materials;
  • Employ more Indonesian workers than foreign workers in the expert level; and
  • Carry out the transfer of knowledge and technology to Indonesian workers.

The joint venture with the local construction firm must also fulfil the various technical criteria such as stating the rights, responsibilities, and obligations in a written agreement between the cooperating businesses.

Further, at least 50 percent of the cost value of any construction work undertaken by the joint venture must be done onshore, and at least 30 percent of the cost value of the project shall be borne by the BUJK entity.

Representative Office for a foreign electricity supporting services (JPTLA)

A JPTLA is a representative office for businesses in the field of electricity supporting services. The JPTLA must obtain an NIB and a business entity certificate.

The JPTLA business licensing is granted to the following activities:

  • Construction of electricity installation;
  • Consultation for electricity installation; and
  • Maintenance of electricity installation.

The JPTLA can undertake high-cost electricity supporting services with the following threshold:

  • Projects for the construction and installation of electricity infrastructure worth at least 100 billion rupiah (US$6.9 million); or
  • Projects for the consultation in the field of electricity maintenance and installation worth at least 10 billion rupiah (US$696,000).

Further, the JPTLA representative office must appoint an Indonesian citizen in charge of the office and conduct technology and knowledge transfers to Indonesian workers. The JPTLA must prioritize the utilization of domestic products as well as use high-tech and environmentally friendly technology

General set up requirements for ROs

Foreign investors looking to open an RO will need to fulfil the following requirements:

  • Register through the OSS online system;
  • The parent company’s Articles of Association legalized by a notary and the Indonesian Embassy of the parent company’s country of origin;
  • Letter of Appointment by the Indonesian Embassy located in the parent company’s country of origin;
  • Latest financial statements of the parent
  • Letter of intent legalized by a notary and the Indonesian Embassy located in the parent company’s country of origin;
  • Certificates demonstrating competency in the relevant industry or sub-sector;
  • Lease agreements;
  • Must be located in the capital of a province (unless it is a KP3A applicant); and
  • A letter that states the RO will not engage in any commercial activities in Indonesia. 

As mentioned above, those seeking to open a BUJKA or JPTLA representative office will require to obtain additional licenses.

For the latest changes to company establishment according to Indonesia's new Omnibus Law, read the articles below: 

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