Foreign Investment In Indonesia

Introduction

This guide is designed to give a brief insight into doing business in Indonesia. It contains some background information that will be helpful to companies considering establishing business operations there. It is essential that professional advice be obtained before any business is undertaken.

Capital Investment Coordinating Board

Foreign investment in Indonesia is monitored by the Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal/BKPM). Foreign investment schemes must generally be approved by the BKPM. In addition, foreign investments into the oil, gas, mining, banking, and insurance industries have to be approved by their respective governmental departments. Investors must be prepared to work closely with government departments relevant to their industry, the BKPM, and regional authorities.

Notwithstanding the Indonesian Government deregulating some aspects of Foreign Direct Investment, there can still be a fair amount of red tape and bureaucracy for investors to deal with. Some of the changes to regulations concerning foreign investment include:

  • Foreign parties are allowed to own 100% of issued capital in an Indonesian company (with the exception of companies whose activities are characterised as important to the state, where such investment is limited to 95%).
  • No minimum investment amount required for investment in Foreign Direct Investment companies (PMA Companies).
  • Foreign shareholders may maintain a majority position in a PMA Company and are only required to sell part of their shares (not a majority) to Indonesian Citizens over the first 15 years of operations. This can also be done through the stock market.
  • PMA Companies can now be located anywhere within the Indonesian archipelago, as long as local zoning laws are complied with.
  • Operating licenses for PMA Companies can be extended for an additional 30 years after the initial license expires. The initial license is good for 30 years.

It is important to keep in mind that many of these laws are recent and their implementation may give rise to issues that have yet to be resolved.

The BKPM does not allow foreign investment in certain sectors of the economy. These sectors are found in the “Negative List of Investments” (Daftar Negatif Investasi/DNI)) which is maintained by the BKPM. The List is found in Presidential Decree number 96/2000 jo.118/2000. The negative list includes (a) those business sectors that are absolutely closed to all investment; (b) those which are closed to only foreign investment; and (c) those which are open to foreign investment under certain conditions. Outside the list, all sectors are opened to foreign investment.

General Trading and Retailing

General trading is closed to foreigners. However, with deregulation, foreign joint venture manufacturing companies can now establish their wholesale distribution channels for their products and also import equipment and raw materials needed for manufacture of their products for export.

It is unclear if distribution within Indonesia can be carried out by this joint venture company or if it has to be carried out by a company wholly owned by Indonesians.

Bilateral Investment Agreements

Indonesia has investment protection agreements with the United States, Belgium, Denmark, France, Germany, The Republic of Korea, The Netherlands, Norway, Switzerland, and the United Kingdom.

Foreign Exchange Control

The official currency is the Indonesian Rupiah and there is no foreign exchange control in place.

Foreign Trade Zones

Foreign and local companies that invest in manufacturing sectors contained in designated Bonded Zones do not pay duties on imported goods for manufacture until such goods are “exported” to Indonesian companies. For projects located in such Bonded Zones, foreign investors should submit the application to BKPM through the respective Bonded Zone Authority.

Corporate Taxes

In 1984 and again in 1995, Indonesia completely reformed its tax system. The key features of the tax system are:

  • Simplicity and Self-Assessment
  • 30% maximum marginal rate for all taxpayers (with scope for this to be reduced to 25%)
  • 10% comprehensive Value Added Tax (VAT)
  • Extensive use of withholding taxes, including imported services irrespective of the place where the services are performed
  • Wide definition of income that incorporates capital gains
  • Few exemptions or incentives
  • 20% tax on after tax income derived by permanent establishments, but often reduced to 15% under Double Tax treaties
  • Under the Tax Law, residents of Indonesia are taxed on their worldwide income. Non-residents are subject to tax on income received or accrued in Indonesia. A resident is someone (whether foreign or Indonesian) who has lived in Indonesia for at least 183 days within a 12-month period.

Tax rates are as follows for companies and individuals:

Up to Rp. 25 Million 10%
From Rp. 25 Million to Rp. 50 Million 15%
Above Rp. 50 Million 30%

Tax losses can be carried forward for 5 (five) years. There is no tax loss carry back allowed.

The cost of providing “Benefits in Kind” to employees is not deductible to an employer. This covers housing, wages for domestic servants, children’s education, club fees, home leave, spouse’s car, etc. Where a person is seconded to Indonesia on a full package of expatriate benefits, these costs can be substantial.

Indonesia has tax agreements with the following countries: Australia, Austria, Belgium, Bulgaria, Canada, Denmark, Finland, France, Germany, Hungary, India, Italy, Japan, South Korea, Luxembourg, Malaysia, Netherlands, New Zealand, Norway, Pakistan, Philippines, Poland, Singapore, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Tunisia, United Kingdom and Northern Ireland, United States of America, and Saudi Arabia.

Intellectual Property Rights

Indonesia is a member of the World Intellectual Property Organization and a party to the Paris Convention for the Protection of Intellectual Property. In March 1997, the Parliament passed amendments to Indonesia’s patent, copyright and trademark laws designed to bring them into compliance with the TRIPS agreement of the Uruguay Round. In 1997, Indonesia also re-acceded to the Berne Convention and signed the Trademark Law Treaty. Other international agreements to which Indonesia is party include the Nice Agreement for the International Classification of Unclassified Goods and Services, the Strasbourg Agreement Concerning International Patent Classification, and the Budapest Treaty on the International Recognition of the Deposit of Micro-organisms.

Patents: Indonesia’s first Patents law came into effect in 1991. The law concerns patent application procedures, fees, registration of patent agents, and publication of approved patents. Patents are granted for products and for production processes subject to certain requirements being met. The right is for 14 years commencing from the date of application. This period can be extended for another two years. In addition to this relatively short period of patent protection, the law includes compulsory licensing provisions, provisions allowing importation of 50 specific pharmaceutical products by non patent holders and provisions allowing patent protection granted only to pharmaceutical products manufactured in Indonesia.

Trademarks: The current Trademark law came into effect in 1993. An important change to Indonesian trademark law is that the rights are determined on a first-to-file basis, rather than a first-to-use basis. There is a requirement for a registered trademark to be used for the registration to be maintained. The law offers protection for service marks and collective marks and sets forth a procedure for opposition prior to examination by the trademark office. It also provides well known trademark protection. Cancellation actions must be lodged within five years of the trademark registration date.

Copyright: The original 1982 copyright law was amended in 1987 and 1997. The current law provides for protection of foreign works, and in general complies with internationally acceptable standards. The United States and Indonesia concluded a bilateral copyright agreement extending reciprocal protection in 1989. In May 1997, Indonesia re-acceded to the Berne Convention on copyright protection. The government has proposed new legislation that will increase penalties for copyright infringement.

New technologies: Indonesian law does not include specific protection for biotechnology. Legislation covering integrated circuits is being drafted for presentation to Parliament. The U.S.-Indonesia Science and Technology Agreement ensures protection for intellectual property derived from cooperative activities under the agreement’s umbrella.

Immigration

Visas are required for all non-Indonesian visitors. Visitors from certain countries, (including the US, EU nations, Canada, Australia, New Zealand, ASEAN countries, and Switzerland) can obtain “exempt short visit visas” free of charge upon arrival at most points of entry. The visa is valid for 60 days and cannot be renewed. A return air ticket is required for issuance of this visa. Other business and tourist visas of longer duration are available, but must be obtained in advance before arrival in the country.

Generally, employment of foreigners is not permitted unless a Work Permit (Ijin Kerja Tenaga Asing/IKTA) has been issued by the Department of Manpower. Expatriates staying in Indonesia will also need to secure a Temporary Residence Visa (KIM/S card), which are valid for six months to a year.

Foreign experts may be employed in Indonesia with the purpose of training their Indonesian counterparts as well as certain experts required for further development of the country. Generally, companies can only hire foreigners for positions that the government has classified as open to non-Indonesians. Such experts are eligible for Temporary Resident Visas.

All temporary and permanent residents must pay a 1 million Rupiah fiscal tax upon departure at the airport each time they leave the country. This is in addition to the departure tax of 50,000 Rupiah.

Legal System

With important exceptions, particularly the Foreign Investment and Tax Laws, much of the Indonesian legal system is based on very old Dutch colonial law.

The Indonesian government has agreed to submit any investment disputes to the International Center for the Settlement of Investment Disputes (ICSID) in Washington, D.C. Indonesia has signed on to the UNCITRAL (United Nations Commission on International Trade Laws) arbitration rules. Foreign investors can enter into arbitration hearings in Indonesia under UNCITRAL administration. An Indonesian investment arbitration board, BANI, is available when both parties to a dispute agree to submit to its arbitration.

Indonesia is also party to the 1958 New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. In practice, foreign companies have had great difficulty enforcing foreign arbitration awards or getting the judicial system to honor arbitration clauses in contracts involving foreign investors. In 1999, Indonesia enacted a Law on Arbitration that addresses many concerns, but the new law’s impact has yet to be felt.

The Commercial law is based on the Dutch Commercial Code, promulgated in the middle of the 19th Century. A new Corporations Law was enacted in March 1996. However, the Foreign Capital Investment Law of 1967, which provides the basic framework for foreign investment, is still in effect.

The sources of Indonesian laws fit into a hierarchy as follows:

  • The Indonesian Constitution
  • Decrees of the National Assembly
  • Government Regulations signed by the President and ratified by the DPR
  • Government Regulations signed by the President to implement laws
  • Presidential Decrees
  • Ministerial Regulations
  • Ministerial Instructions.

Circulars issued by Government departments (such as the Director General of Taxation), whilst do not have the force of law, they are often treated as though they do.

The Indonesian Court system has three levels:

  • District Courts
  • High Court (Appellate Court)
  • Supreme Court.

These Courts exercise both civil and criminal jurisdiction.

In addition, there are Religious Courts (before which only Muslims may appear and which deal with matrimonial and inheritance matters), Military Courts and Administrative Courts (to deal with questions between citizens and officials).

Types of Business Organisations

Foreign participation in certain Indonesian legal entities (especially proprietorships and partnerships) is often restricted by law and historical precedence.

Foreigners can to do business in Indonesia through (a) companies, (b) branches of foreign companies in certain limited cases (referred to as Representative Offices in some cases) and (c) by other arrangements using joint ventures and technical assistance agreements. Some entities, such as Production Sharing Contractors, Contract of Work companies, banks and insurance companies are subject to special regulations.

In practice, virtually all foreign investors operate through a company in Indonesia generally through a PT Company (i.e. locally incorporated company) with BKPM approval (the PMA Company).

As Indonesian law in this area is constantly changing, the following is meant only as a guide. Professional advice should be sought on the specifics of these legal entities before any decision of the actual investment vehicle is made.

Perseroan Terbatas (PT)

Limited Liability Companies are divided into private or public companies. PT Companies are governed by the 1996 Corporations Law. This law requires a PT Company to have at least two shareholders. In establishing a PT Company, the Articles of Association should be prepared and submitted for approval to the Ministry of Justice.

PT Companies are managed by a Board of Directors. A Board of Commissioners supervises the board of Directors. The members of these groups are appointed at the General Shareholders meeting held in the second half of the financial year. There are no specific requirements as to the specific number of persons required to sit on the Board of Directors or the Board of Commissioners. Generally non-Indonesian citizens may not be directors or commissioners in a PT Company.

Public Companies are listed on the Jakarta Stock Exchange and are monitored by the Capital Market Supervisory Board (BAPEPAM).

PMA Companies

The most typical investment vehicle for foreigners is a PMA Company (Penanaman Modal Asing/PMA). This is a PT company licensed by BKPM to have direct foreign equity participants. Under recent deregulatory changes, a local partner will only be required for infrastructure projects, although there will often be practical reasons for commencing business with a local partner.

Following the evaluation process, The Chairman of BKPM will issue “The Initial Investment Approval” (IIA). Obtaining this IIA takes an average of 10 to 15 working days. Previously this could take months. The IIA serves as a temporary operating license for a period of 12 months (the license can be extended), and it enables the PMA Company to start its commercial activities.

The IIA allows the parties to form a PT Company by executing through an Indonesian notary a Deed of Establishment. The Articles of Association of the PMA Company are included in the Deed of Establishment and must comply with Law No. 1/1995 on Limited Liability Companies. Once executed, the Deed of Establishment is submitted to the Ministry of Justice. Approval usually takes more than the 60-day statutory maximum, and until companies receive formal approval, the founding shareholders are personally liable for all obligations undertaken in the name of the Company. Once the permission has been received, the PMA Company must be registered in the Company Registry under the Department of Industry and Trade and the Deed of Establishment published in the Supplement to the State Gazette (Tambahan Berita Negara). The time between formal Ministry of Justice approval and publication in the Supplement can take more than a year, during which the directors of the company are jointly and severally liable for actions taken in the name of the company.

The IIA can be used until the PMA Company reaches the state of commercial operation or commercial production. At that point, the PMA Company must apply through BKPM for a Permanent Business License (Ijin Usaha Tetap, or IUT). This licensing process can take months.

There is no minimum level of foreign investment required by BKPM. The equity agreed to be contributed must be paid up. This contribution can be made in kind or in cash.

PMA Companies may keep their records in English rather than in Bahasa Indonesia and my keep their accounts in US$ rather than Rupiah, though it must secure approval from the Finance Minister to do this. Tax returns must be lodged in Bahasa Indonesia and in Rupiah and any outstanding tax liabilities paid in Rupiah.

Representative Offices

A Foreign Representative Office (Kantor Perwakilan Perusahaan Asing/KPPA) is typically formed to facilitate transactions between local and foreign buyers and suppliers. A Reprensentative Office can only facilitates such transactions (ie, by preparing import/export documents) but cannot carry on business activities or other corporate activities that should be properly carried out by a PT.

A Foreign Representative Office must be established with the approval of the Chairman of BKPM.

Joint Ventures

Foreign Direct Investment Companies may be in the form of Joint Ventures between foreign and domestic capital owned by Indonesian citizens or organizations, or through straight investment.

Badan Usaha Milik Negara (BUMN)

These organisations are companies owned by the Indonesian Government and cover many different industries.

Perusahaan Dagang (PD)

Such entities are known as private trading companies, most of which are sole proprietorships. They are usually owned by Indonesian citizens.

Limited Liability Partnerships (CV)

This legal designation only applies to the silent partners in a given partnership.

Firma

These are unlimited liability partnerships more commonly known as disclosed partnerships.

Land Ownership

Generally foreigners are prohibited from owning land in Indonesia. The land law is based on the basic Agrarian Law of 1960 and sets out eleven separate categories of rights with respect to land. Securing certainty of tenure can be difficult due to problems in tracing ownership. This can be complex and time consuming.

Mortgages and secured interests are recognised, but a comprehensive and efficient recording system is not in place. Foreign investors’ land holdings are often obtained through long-term lease agreements with the Indonesian Government. Leases are generally for 20/25 years and are renewable up to 100 years. These leases can be used as collateral.

However, enforcement of secured interests is problematic. The court system does not provide effective recourse for settling property disputes. Indonesia’s decentralised recordal system has resulted in many land claims by local residents against foreign companies notwithstanding that such companies often operate on government-granted concessions.