In order to finance their subsidiaries in Indonesia in the form of PT PMA, many foreign parent companies enter into loan agreements with their subsidiaries. Learn more about the obligations applicable to Indonesian subsidiaries that receive loan from their parent companies.
It is common for foreign subsidiary companies (Perseroan Terbatas Penanaman Modal Asing or “PT PMA”) in Indonesia to engage in a loan agreement with their parent company overseas. This is one of the many possible sources of financing PT PMA even though the PT PMA and their parent company are 2 (two) separate legal entities by law with separate assets isolated from each other.
However, the loan agreement can not be executed automatically. PT PMA that will receive the loan must comply with the procedures as stipulated in the Law Number 40 Year 2007 regarding Limited Liability Company (“Company Law”) and the prevailing laws and regulations concerning Foreign Loans in Indonesia.
Securing loans is one of the activities classified as company transfer of assets. Article 102 paragraph 1 (b) Company Law elaborates further regarding the mandatory internal procedure for a company (both PT and PT PMA) that will conduct the transferring of assets. The procedure is as follows
“(1) The Board of Directors must request approval from General Meeting of Shareholders to:
- Transfer the Company assets; or
- Put the Company assets as collateral;
The assets of which having a total value of more than 50% of the Company net worth, in 1 (one) transaction or more, related to each other or not.”
Therefore, if the Company intends to apply for loan(s) with the total value of more than 50% of the company’s total net worth, the Board of Directors is required to request approval of the GMS. The Board of Directors of the Indonesian subsidiary is required to have an approval of the GMS to apply for the loan.
The Company Law does not regulate rules concerning the transfer of assets below 50% of the net worth of the company. Therefore, in the event that the Company intends to get a loan with the total value less than 50% of the Company net worth, the procedure will be in accordance with the Company Articles of Association. Depending on the Articles of Association, the Board of Directors may be requested to obtain approval from Board of Commissioners or the GMS or the Board of Directors can execute the loan on their own as the authorized representative of the Indonesian subsidiary.
FOREIGN EXCHANGE FLOW COMPLIANCE
To execute the loan given by foreign parent companies to their Indonesian companies is not only subject to corporate compliance as stipulated in Company Law and the Articles of Association of the Company. But, it must also be done pursuant to the foreign exchange flow regulations issued by Indonesian Central Bank (also known Bank Indonesia).
Article 1 sub paragraph (1) of Law of the Republic of Indonesia Number 24 Year 1999 concerning Foreign Exchange Flow and Exchange Rate System (“Law 24/1999”) stipulates that foreign exchange flow is defined as the transfer of assets and liabilities between residents and non-residents, including transfers of financial assets and liabilities among residents abroad.
From such provision, we can conclude that the transfer of assets between an Indonesian subsidiary in the form of PT PMA as an Indonesia legal entity and its foreign parent company is classified as a foreign exchange flow activity. Therefore, both parties are subject to the provisions of Law No 24/1999.
The form of foreign exchange flow which is being practiced in this case, is the transfer of assets (in the form of loans). Article 3 (2) of Law 24/1999 regulates that every citizen is obliged to provide information and data regarding the accomplishments of foreign exchange flows, either directly or through other parties designated by Bank Indonesia. Under this provision, the Indonesian subsidiary in the form of PT PMA has the obligation to report the foreign loans from its foreign parent company to the Bank Indonesia.
The obligation to submit reports to Bank Indonesia applies for Companies those are:
- Has minimum total assets in the amount of Rp 100,000,000,000.00 (one hundred billion rupiah), or;
- Has an annual turnover of minimum Rp 100,000,000,000.00 (one hundred billion rupiah).
Thus, if the Indonesian subsidiary has total assets of at least Rp100,000,000,000.00 (one hundred billion rupiah) and has a sales turnover for the year of at least Rp 100,000,000,000.00 (one hundred billion rupiah), it has the obligation to make a report to Bank Indonesia.
HOW CAN SMART CONSULTING HELP YOU?
To ensure a smooth investment and business operation from the legal perspective, but also still focus on maintaining 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 prevailing laws and regulations.
SMART Consulting is an Indonesian Corporate Legal Services firm. Our experience and dynamic firm value assist Clients in staying up-to-date with the newest Indonesian laws and regulations. SMART focuses on foreign investment and general corporate matters, including establishment of PMA Company and providing Corporate Secretarial and Legal Services to maintain investors’ business Indonesia.
Contact Us Now to get your legal solution for your business goals in Indonesia, and still comply with the prevailing laws and regulations.