The process of starting a new foreign company in Indonesia starts with obtaining the Principle License or otherwise known as Izin Prinsip, which is the official approval from the Indonesian Government issued by Indonesia Investment Coordinating Board (Badan Koordinasi Penanaman Modal or “BKPM”) that yes, you are allowed to start your foreign company here in Indonesia.
EXPIRACY DATE OF PRINCIPLE LICENSE
Unlike a Permanent Business License, Principle License is meant to be an initial Investment License. Its purpose is to help foreign companies (Perusahaan Penanaman Modal Asing, also known as “PT PMA”) prepare themselves for commercial phase and obtain all operational licenses required for full activity. Most importantly, a Principle License is a temporary license. How long is it valid for? It depends on the business sector approved for foreign investment.
For example, Principle License for PT PMA operating in Trading, Consultancy, Tourism, or Services sectors has the valid project period for 1 (one) year after its issuance. Some last longer: Principle License for Construction companies have 3 (three) years of valid project period, while Principle License for Plantation companies can last until 5 (five) years of valid project period.
What happens when the Principle License expires and is no longer valid? the PMA must cease all of its operations in Indonesia. If they want to continue operation, they have to apply for a new Principle License for their business, starting over the process in BKPM.
WHEN SHOULD YOU EXTEND YOUR PRINCIPLE LICENSE?
Based on the Head of BKPM Regulation No. 6 of 2016 regarding Principle License, extensions must be applied for at least 30 (thirty) days before the Principle License expires.
From our experience, BKPM will request an official letter from the Board of Directors of the PT PMA consisting of the reasons for extension and progress report of the investment, such as the activity of the investors and the company since the issuance of the Principle License, so it is advised to start the extension process around 3 (three) months before the validity period of the license ends. This way, you can anticipate any delay caused by the BKPM verification process of the application, and avoid the risk of the license expiring in the middle of your extension application process.
MY COMPANY ALREADY HAS A PERMANENT BUSINESS LICENSE (IZIN USAHA TETAP or IUT) OR IS IN THE PROCESS OF APPLYING FOR IT. SHOULD I EXTEND?
Good news: once your foreign company realizes its investment and obtains a Permanent Business License, otherwise known as Izin Usaha Tetap or IUT, the Principle License is no longer needed as an operational license. As described in its name, the IUT is the business license for PT PMA, provided your company still operates in the business stage in the IUT.
If you intend to or are in the process of applying for IUT for your PT PMA, it is advised that you start the process at least 3 months before the end of your Principle License validity period, to avoid the Principle License expiring in the middle of the IUT application process.
Even with the IUT, you still need to keep your Principle License. You have the obligation to apply for an alteration of the Principle License to the BKPM if there are any changes in the future regarding your investment, for example the change of shareholders in your foreign company.
WHAT SHOULD YOU PREPARE TO EXTEND A PRINCIPLE LICENSE?
First of all, ensure that all the legal documents of PT PMA is in order and up to date. This includes the articles of associations, tax documents, the domicile letter for your current office (Surat Keterangan Domisili Perusahaan/SKDP), the company registration certificate (Tanda Daftar Perusahaan/TDP). If one of the legal documents has already expired, make sure you have applied for a renewal or extension before you apply for the extension of Principle License.
Second, make sure that you have submitted the latest LKPM for your foreign company to BKPM (Laporan Kegiatan Penanaman Modal/LKPM or Investment Activity Report). Note that LKPM for foreign companies operating under the Principle License must be submitted quarterly, or every three months.
Third, prepare an official letter signed by the Board of Directors of the PT PMA addressed to BKPM regarding the reasons for extension. The reasons stated here are commonly in line with the status of the PT PMA reported in its latest LKPM. The foreign company will also be required to submit a progress report containing all investment activities for the PT PMA up until the extension application.
WHAT WILL HAPPEN IF THE PRINCIPLE LICENSE EXPIRES?
BKPM will cancel all Principle License that has expired after its end of validity period. Legally, it means that PT PMA no longer has the foreign investment approval required to start a foreign company in Indonesia. For PT PMA who has yet to have IUT, this means they no longer are approved to conduct business stages in Indonesia.
Never fear, it’s not the end of the world. Investors of the PT PMA can apply for a new Principle License, the issuance of which gives them the foreign investment approval to continue their business stages in Indonesia. However, this will be considered a new application, so investors will be required to start the application from the beginning, including giving a presentation at the BKPM Office in Jakarta if they plan to enter certain business sectors.
The impact of a canceled Principle License will depend on the business activities conducted by the PT PMA. PT PMA who are actively doing business activities will have greater interest on maintaining the validity of their investment license then a dormant or inactive PT PMA.
The Article was prepared by:
Sekar Ayu Primandani / Asharyanto
HOW CAN SMART LEGAL CONSULTING HELP YOU?
To ensure a smooth investment and business operation from the legal perspective, but also still focus on establishing your business in Indonesia and reach your revenue target, it is advised for you to find capable and trusted lawyers or legal consultants for advice and assistance in ensuring your legal compliance with investment regulation.
SMART Legal Consulting have worked and assisted with foreign investors and PMA Companies to restructure, maintain and operate their business in Indonesia in compliance with all prevailing laws and regulations under the current Indonesian foreign investment legal regime. SMART is also able to assist you in applying for investment license extension, alteration, renewal or even a new registration for new business or business expansion in Indonesia.
If you have any questions about foreign companies and investments, or want to book a consultation for assistance, you can arrange a meeting with SMART Legal Consulting at: