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Foreign Investment and Company Establishment

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Indonesia is asserting itself as a prime destination for international business and investment. The country's natural resources, large population (including its rapidly growing middle class), macroeconomic stability, generally open investment regime, and low asset prices have become major attractions over the past few years.

The central government's Master Plan for the Acceleration and Expansion of Indonesian Economic Development (MP3EI) for the period 2011-2025 is set to facilitate widespread investments of all sizes across the archipelago. Rp 4,000 trillion has been earmarked to achieve desired developments in Indonesia's six designated economic corridors within the MP3EI – most of these are expected to come from the private sector and state-owned enterprises, and a big chunk will go to infrastructure projects to facilitate connectivity within the archipelago.

Despite the attractions, however, Indonesia has remained a country of many ironies and confusing complexities. Some critics have lebelled it hopelessly chaotic; others have cited gradual improvements. And the intricacies of setting up a company and making an investment in Indonesia are many and complex.

Setting up Business Activities and a Company in Indonesia

To establish a business in Indonesia, you have a range of options depending on your need. If you are to sell products or services without the need for your own presence in Indonesia, you could choose to appoint an Agent or Distributor. Alternatively, you could set up a Representative Office. A Representative Office allows you a legal presence in Indonesia, but it is not allowed to undertake business transactions or receive sales payments in Indonesia.

Some 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. Most, however, prefer to go straight to establishing a full-fledged company (i.e. limited liability or PT). This is referred to most commonly in Indonesia by its Indonesian acronym PMA, or Penanaman Modal Asing. This is the only form of company allowed for foreign investment, as other forms, such as CV and UD, are reserved for Indonesians only, and are usually small-scale.

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 critical 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. Most businesses quickly find the Representative Offices very limiting. It's often more time and cost effective to form an Indonesian company right from the start.

Limited Liability Co or Perseroan Terbatas (PT)

Foreign Direct Investment, most often referred to by its Indonesian abbreviation - PMA, is governed primarily by the Law No. 25 of 2007 on Investment, which replaced its predecessor legislations (i.e. Law No.1 of 1967 on Foreign Investment, as amended by Law No. 11 of 1970, and Law No.6 of 1967 on Domestic Investment as amended by Law No. 12 of 1970). 

The 2007 law did away with the previous differential treatments between PMA and domestic investment companies (PMDN). It also outlines potential incentives subject to certain requirements and streamlining of licensing process. Mandatory divestment is no longer applicable and the business license obtained will remain valid as long as the company continues in operations.

All PMA companies in Indonesia must take the form of a limited liability establishment (PT). Other business forms, such as CV and UD, are reserved for Indonesians only.

Any company owning any percentage of foreign shareholding is a PMA company. 100% foreign-owned PMA companies are possible in many cases, but some sectors require a proportion of Indonesian shareholding, as determined within the Negative List of Investment (DNI).

Incorporation of PMA Company

Under the current foreign investment regime, the Investment Coordinating Board (BKPM) is the government body which processes and handles FDI administration and licensing.

A key provision in Indonesia's FDI regime is the Negative Investment List (Daftar Negatif Investasi, or DNI). The list outlines the business fields (under the government business field classifications) that are closed to investment, the business fields that are restricted to investment (e.g. reserved for Indonesian SMEs, or strategic state-owned companies) and the business fields that are open to investment subject to certain conditions, including foreign ownership limitations. It thus determines in which fields foreign investors can have 100% ownership of companies, in which fields they are required to partner with Indonesian businesses, and what particular regulations (e.g. Compliance with local regulations) should be heeded for other sectors still.

The DNI is updated every two years. The government has sought to make the list specific and more transparent, with the current DNI (issued in May 2010) containing 280 business fields. All the fields not listed in the DNI are supposed to be open to investment and open to 100% foreign ownership as well. However, in reality, the list is open to wide interpretation, and causes a lot of uncertainty.

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. Nevertheless, a minimum of USD 100,000 is actually applied. Foreign investment companies are basically free to choose where in Indonesia they will set up operations.

Establishing a company in Indonesia is a highly bureaucratic process, but nonetheless a process that has become relatively easier over the past few years. The first step in this rather complex process is the obtaining of an Investment Approval from the Investment Coordination Board. This approval process is nowadays relatively quick, and can be completed in as little as 10 days.

But this is only the beginning of the process. Once Investment Approval is given, there are a number of other licences the investor must seek from local authorities, depending upon the exact nature of the business activity. This can take considerable time and is often fraught with bureaucratic chicken-egg situations. The SP also permits the investor to establish an Indonesian company, a process that will take at least two months.
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.

 

Related Information

For further information on required documentation for expatriate managers, please read our article on Visas and Documentation or visit www.imigrasi.go.id.

BKPM website
Doing Business in Indonesia - World Bank

 

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