Doing Business in Indonesia

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.

Representative Office

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 Ministry of Trading - for trading
  • Representative Office from Investment Board (BKPM) - regional representative
Limited Liability Company 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. 25 of 2007. 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. 25/2007, 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 2010 referred to as Presidential Decree No. 39 year 2014. It was seen as a very significant step toward a much more conducive and attractive investment environment in Indonesia. Some highlights of the new 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 (Negative List)
You can obtain a copy of the FDI application sin English from Indonesian embassies overseas or from Investment Coordinating Board office - either from the head office in Jakarta or from regional offices in the provinces.

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/permanent operating license (IUT) for an additional 30 years. The process of incorporation of a new foreign direct investment company:

- Principle License will be valid for 3 years
Step 1:

a.       Obtain the standard form of the company deed; arrange for a notary electronically; obtain clearance for the Indonesian company's name at the Ministry of Law and Human Rights. The uniqueness of the company name (should use 3 words) must be checked to ensure that it has not been used by another Indonesian company, to avoid rejection by the Ministry of Justice and Human Rights of the company's deed of establishment and articles of association. Because the process must be done through a computerized processing system, the reservation and clearance must be done by a notary public (because the new computerized system for non-tax state revenue payments may be accessed only by a notary public). The reserved name will be blocked for 60 days. If the founding shareholders are confident that the same name has not been used by another Indonesian company, this procedure is not necessary. Under Article 16 of Law No. 40 of 2007, Limited Liability Companies Companies may not use names which:
  •      have been legally used by another Company or are in principle the same as the name of another Company;
  •        conflict with public order and/or morality;
  •       are the same as or similar to names of state institutions, government institutions, or international institutions, except with the permission of those concerned;
  •     are not in accordance with the purpose and objective as well as business activities or only show the purpose and objective of the Company without its own name;
  •      consist of figures or series of figures, characters or series of characters which do not form words.
  •        have the meaning as Company, legal entity, or civil association

b.      The name of the Company must be preceded by the phrase “Perseroan Terbatas” (Limited Liability Company) or the abbreviation “PT”.

c.       In the case of a Public Company (Perseroan Terbuka), apart from the provisions referred to in paragraph (2) being applicable, the abbreviation “Tbk” shall be added at the end of the Company’s name.

d.      Further provisions regarding the procedures for the use of Company names shall be stipulated by Government Regulation.

The Ministry of Law and Human Rights may reject a name application reservation if the requested name is, among others, the same as or resembles the name of other companies.
Government Regulation No. 43 of 2011 on Use of Names of Limited Liability Companies also provides that an application to use a name that is the same as or similar to a well known trademark shall be rejected unless approval is obtained from the holder of the trademark.

Step 2:
  1. Prepare and send the application with required documentation, compiled according to the investment plan (production chart for industry or description of the activity for services) and the planned use of business capital.
  2. Set up a joint venture agreement if you are making the investment with Indonesian partners. For a consulting services company you are required make a presentation to the leadership of BKPM before applying for a Principle License.
  3. Foreign Investment Regulations in accordance with the Head of BKPM Rule No. 5 year 2013, unless otherwise specified by legislation, must adhere to the following conditions: 
    1. Total investment value greater than Rp 10,000,000,000 (ten billion rupiah) or its equivalent value in US dollars, excluding land and buildings;
    2. Equity and paid up of shares equal to the value of paid-up capital of at least Rp 2.500.000.000 (two billion five hundred million Rupiah) or its equivalent value in US dollars,
    3. inclusion in the company's capital, for each shareholders at least Rp 10,000,000 (ten million Rupiah) or its equivalent value in US dollars and percentage shareholding is calculated based on the value of nomimal shares.
Step 3:

Obtain the Principle License (Izin Prinsip), valid a maximum of three (3) years from the date of issuance of the principle license, except for certain sectors which require a longer project completion time and may be given an extension in accordance with an applicable period prior to giving permission.

Step 4: Incorporation of Izin Prinsip BKPM

a. 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 in the State Gazette
b.  Registration of company address with local council (domicile). It should be in an office building or busines area/district.
c.  President Director's personal Tax Identity Number (NPWP)
d.  Obtain a company taxpayer registration number (NPWP) and a VAT collector number (NPPKP)
e.  Registration with the Department of Industry and Trade (TDP)

Step 5: Apply for the Workers Social Security Program (BPJS Program) 

According to legal provisions on workers’ social security (Manpower Minister Regulation  12/MEN/VI/2007), it is mandatory for every company to apply for the Workers Social Security Program (BPJS), operated by the executing agency. This social security program covers occupational accident security, death security, old age security, and health maintenance.

- Fixed Operating License (IUT) - 30 years

Step 1:

Prepare and send the 3-month report (LKPM) of the last period to the BKPM office as well as UUG (HO) nuisance act and enviromental management (SPPL/ UKL-UPL/Amdal) to BKPM and required financial audits for several businesses, if necessary.

Step 2: Fixed Operating 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 a license for Change of Capital and Change of Owner the applications should be submitted to BKPM. According to BKPM, there's no charge to arrange licences.

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 for those who are unfamiliar with dealing with Indonesian ministries. Because of this, many foreign companies choose to acquire the advisory services of a professional investment consultant which specializes in assisting foreign companies who want to establish businesses in Indonesia.

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