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Investing in Indonesia: A Legal Perspective

 

Investing in Indonesia offers a myriad of opportunities, but navigating its legal landscape is essential for success. With a rapidly evolving regulatory environment, understanding the legal frame work governing foreign investments, property rights, and business operations is crucial. This article explores key legal considerations and strategies for successfully investing in Indonesia.

 

Establishment of Business Entity

 

The first step to conduct a business in Indonesia is to establish a company. The most common form of business entity in Indonesia is a limited liability company (Perseroan Terbatas (PT)). PT is a legal entity established based on an agreement by and between the founding shareholders who allocate each own capital and such capital is divided into shares.

 

PT is often chosen by entrepreneurs because of its clearer legal structure and better legal protection. In a PT, shareholders have limited liability only up to the number of shares owned. This means that the financial risk borne by shareholders is limited to the capital they invest in the company.

 

The Law of the Republic of Indonesia Number 40 of 2007 regarding Limited Liability Company and its amendment from time to time (“Company Law”) stipulates the establishments of a PT, capital, shareholders rights, minority and other stakeholders’ rights, PT management organization, PT mergers and acquisition, PT dissolution and liquidation.

 

The founding shareholders will establish the PT by signing the Deed of Establishment in front of the public notary. The public notary will file for the ratification of the PT to the Ministry of Law and the PT is legally established.

 

Capital Requirements

 

The capital is the most important thing to be prepared when planning to establish a business. The Company Law stipulates the capital of a PT consists of authorized capital, issued capital and paid-up capital.

 

The PT's authorized capital consists of the entire nominal value of the shares. The amount of the authorized capital is determined based on the decision of the PT’s founding shareholders.

 

Issued capital is the number of shares taken by the founders or shareholders. Paid-up capital is the number of shares that has been fully paid-up by the founders or shareholders.

 

At least 25% (twenty five percent) of the authorized capital must be issued and fully paid-up by the shareholders. The payment has to be proved by showing valid proof of deposit.

 

The amount of the authorized capital, issued capital and paid-up capital and the number of issued shares is recorded in the articles of association of the PT.

 

A PT whose capital is entirely sourced from or owned by the Indonesian nationality or an Indonesian business entity is called a domestic investment PT (PT PMDN) or simply local PT. While a PT whose shares are wholly or partly owned by foreigners is called a foreign investment PT or PT PMA.

 

There is different capital minimum requirement for a local PT and PT PMA. While there is no minimum amount of capital applies for a local PT, a PT PMA must meet minimum capital requirement. Under the current prevailing laws, minimum issued and paid-up capital requirement for PT PMA is ten billion rupiah.

 

Business Activities for Investment

 

In Indonesia, every business activity is classified in standard industrial classification number according to the Regulation of Statistic Central Bureau (the so called “KBLI”). KBLI number is always referred to in describing business activity. The KBLI number for the planned business activity is determined with self-assessment of the business owner. It is important and crucial to determine the KBLI number accurately.

 

From time to time, Government of Indonesia stipulates business lines (as classified in KBLI number) which are open for investment and business lines which are only reserved for the Government of Indonesia or Indonesia local business. Recent changes have aimed to liberalize certain sectors, offering more opportunities for foreign investors. In principle, most business lines are open for investment, both foreign investment and domestic investment.

 

As mentioned above, the KBLI number will be a basis to identify whether the business lines are open for investment (either domestic or foreign). KBLI number is also referred by the Government of Indonesia in determining the business scale and risk, and therefore to determine the business license required to conduct the business activity.

 

Investment Amount Requirement

 

Different from the capital as aforementioned, an investment amount is related to the investment activity itself. In this context, the investment activity is an allocation of the capital for a business activity that will generate a profit for the company. The Indonesian Government regulates this investment activity through a Ministry of Investment/Indonesia Investment Coordinating Board or what is used to be called “BPKM”.

 

When starting a business, every company must register its investment plan with the BKPM by submitting an investment plan that includes, among other things, the investment value planned to be allocated to the business project.

 

Under the current regulations, there is no minimum investment amount requirement for a local PT, while the minimum investment value requirement for PT PMA is more than ten billion rupiah excluding land and buildings. There is also specific investment value requirement for specific KBLI.

 

Every certain period (usually quarter or semester), a company is obliged to submit an investment activity report, what is so called LKPM. The report should correctly well correspond to the investment plan that was initially submitted at the beginning stage of business activity. Therefore, the investment plan must be prudently made to avoid inquiries from BKPM regarding the investment activity.

 

Management Board

 

As regulated under the Company Law, a PT is represented and managed by a board of directors (BOD) and supervised and guided by a board of commissioners (BOC). BOD and BOC members are appointed by the General Meeting of Shareholders by way of resolutions of General Meeting of Shareholders.

 

The General Meeting of Shareholders has authority that is not granted to the BOD or the BOC, within the limits determined in the Company Law and/or the Articles of Association.

 

A PT must have at least one member of BOD and one member of BOC. A PT engaging in certain business activity such as managing public funds, issuing debt instruments to the public, or publicly listed companies, must have at least two members of each BOD and BOC.

 

The BOD as represented by a president director serves as management of the PT, manages the day-to-day business activity, and has the authority to represent the PT both inside and outside court.

 

The BOC supervises management policies, the general running of management, both regarding PT and the business activity, and provides advice to the BOD. Certain matters, for example annual report will require approval from BOC before the matters are brought up to the General Meeting of Shareholders.

 

It is advisable to have a resident director considering the easiness to operate daily’s company activity. In addition, personal attendance by the company’s director is required in relation to the interview for processing permit application. The resident director can be a foreigner or an Indonesian national. If the resident director is a foreigner, it is necessary to obtain the relevant work permits and become an Indonesian tax resident.

 

Registered Domicile of the Company

 

Having a registered domicile is essential for compliance with Indonesian regulations and for establishing the company's legal presence in the country.

 

The registered domicile of a company in Indonesia refers to the official address where the company's administrative and financial activities are conducted. This address is used for legal and tax purposes, and it must be registered with the Indonesian authorities.

Before establishing a PT, it is necessary to already plan the business location for registration of the company and issuing of a tax registration number.

 

The registered domicile of PT can be the company's main office or administrative headquarters or the residence of its management members. The registered domicile of PT is preferably in areas which are designated for business activities. Business activities located at Special Economic Zones (SEZs) is usually given an incentive. PT PMA must be located at the area that is designated for business activity or office.

 

For the purpose of signing the Deed of Establishment, at least the City/Regency and the Province where the new company will have registered domicile should have been already determined.

 

Business License

After the establishment of the PT, PT must first obtain business license to be able to operate its business activity.

Under the prevailing regulations, the PT must first obtain a Business Registration Number (Nomor Induk Berusaha / “NIB”) as the identification of business actor.

 

Thereafter, before starting and conducting business activities, businesses are required to fulfill licensing requirements. Business licensing is the legality given to business actors to start and run their business and/or activities. The business license is given based on the level of risk of business activities.

 

In addition, depending on the business activity, other supporting operational or commercial license will also be required.

 

The Online Single Submission (OSS) system streamlines the process of obtaining business licenses. However, understanding the specific requirements for different industries is essential.

 

Property Rights

 

The prevailing Indonesian agrarian law gives right only to Indonesian nationality to own freehold land in Indonesia. Individual foreigners and entities cannot own freehold land in Indonesia.

 

The most common land title usually owned for business activity is right to build and use (Hak Guna Bangunan/HGB) and right to cultivate (Hak Guna Usaha/HGU). HGB is usually granted to the right holder to build and use the land for instance office building, apartment, factory, or warehouse. While HGU is granted to use and utilize land for agriculture and plantation business activity. The HGB and HGU are granted for a certain period. Those rights are only given to Indonesian citizen or legal entity established under the law of Republic of Indonesia.

 

Individual foreigners and foreign entities can only hold right over the land with leasehold rights (Hak Pakai) for a certain period. Hak Pakai is the right to use and/or collect the proceeds from land.

 

Taxation and Incentives

 

The new established PT will automatically get a Tax Registration Number (“NPWP”) once the PT obtained ratification from the Minister of Law.

 

Indonesia offers various tax incentives to foster investment, including tax reductions or exemptions for a specified period, particularly for investments in priority sectors and/or located at Special Economic Zones (SEZs).

 

Currently the corporate income tax rate is generally a flat rate of 22%. Public companies meeting certain criteria get a reduced rate of 19%.

 

Standard value added tax (VAT) is continuously changed, the current rate is 11%, with some goods and services being exempt or zero-rated.

 

Certain payments like dividends, interest, and royalties will be subject to Withholding Taxes.

 

Import goods will be subject to duties on imports and excise taxes, higher rates will be imposed on specific goods like clothing, alcohol and tobacco.

 

Beside the taxes charged by the Central Government, there are taxes regional tax governed by regional or Local Government for example land and building tax, and tax on land and building transfers, or restaurant/cafe tax (for restaurant/cafe business).

 

Employment Law

 

Companies must adhere to strict labor laws, including minimum wage regulations, severance pay, and employee benefits.

Businesses can hire employees on either fixed-term or indefinite-term contracts. Fixed-term contracts are for a specific duration, while indefinite-term contracts are ongoing.

 

The standard working hours are 40 hours per week, with provisions for overtime pay if employees work beyond this.

Employees are entitled to annual leave, sick leave, and maternity leave. For example, female employees receive three months of fully paid maternity leave.

 

Businesses must follow specific procedures for terminating employment, including providing notice and severance payment.

Hiring foreign employees requires a Foreign Worker Utilisation Plan (RPTKA) approved by the Ministry of Manpower.

 

Director and Commissioner of PT as appointed by the shareholders are not a employee as defined under the prevailing manpower regulations.

 

Environmental Regulations

 

In Indonesia, businesses must comply with environmental regulations to ensure their activities do not harm the environment.

Businesses need to obtain an environmental license before starting operations. This license assesses the potential environmental impacts and ensures compliance with regulations.

 

Depending on the impact of the business activity, before obtaining environmental license, business must prepare Environmental Impact Analysis (AMDAL). AMDAL evaluates the potential environmental risks of proposed business activities and outlines measures to mitigate these risks.

 

In addition, businesses must manage waste properly, including reducing, treating, and disposing of waste in an environmentally friendly manner, do not pollute air and water resources, maintaining standards for emissions and effluent discharge.

 

The Ministry of Environment and Forestry oversees compliance, and businesses can face administrative sanctions for violations.

This framework ensures businesses operate sustainably, balancing economic growth with environmental protection.

 

Dispute Resolution

 

Indonesia recognizes both litigation and alternative dispute resolution methods.

 

Arbitration, particularly under the rules of the Indonesian National Board of Arbitration (BANI), is a preferred method for resolving private disputes, especially commercial and investment disputes due to its efficiency and confidentiality. The decision of Arbitration Court is final and binding so it will be directly enforceable to parties.

 

Court-based resolution is available for both public and private disputes however the procedure can take longer that the arbitration or other alternative dispute resolution methods.

 

When entering a business agreement, as an anticipation, partners in business can agree and clearly state in the agreement on their preferred dispute resolution methods and the forum for the dispute resolution if the dispute occurs in the future.

 

Other alternative Dispute Resolution (ADR) includes mediation, conciliation, and negotiation, offering less formal and often quicker solutions.

 

Conclusion

 

Investing in Indonesia offers substantial opportunities, but understanding the legal landscape is crucial for mitigating risks and ensuring compliance. By familiarizing yourself with the regulatory framework, property rights, tax incentives, compliance requirements, and dispute resolution mechanisms, you can make informed decisions and capitalize on Indonesia’s growth potential. This comprehensive approach will enable investors to navigate the intricacies of Indonesia's legal system and maximize their investment returns. Consult with us to decide the best investment strategy for you.

 

Disclaimer: This article is for informational purpose only and is not intended as a legal advice and cannot be relied on as a legal advice or any other form in similar nature. Should you need legal advice or assistance please contact your own lawyer of adviser.