For some reasons, setting up a representative office in Indonesia is more of a plausible solution to provide foreign companies with a support system in Indonesia. This way, the company can conduct a market research, identify the potential local partners, offer post-sale service, and become acquainted with Indonesia’s business climate without having to actually engage in the business. That means a representative office offers a low-risk and more secure method with a low-cost local presence to take advantage of the country’s massive economic potential.
A lot of companies prefer to oversee the commercial agreement with local partners at the first place before committing to a substantial investment capital. The predicament is likely because most foreign investors are still unfamiliar with how business works in Indonesia, more often than not, is also caused by limited financial resources and propensity to test the project first. This presence comes with a notion that the company has limited activity and cannot generate revenue whatsoever, locally.
Related Article: Establishment of Foreign Foundation in Indonesia
Indonesia Representative Office Procedure: Setting-Up
According to the Chief of BKPM Regulation No. 15 Year 2015 Article 1 paragraph 28, a foreign company or joint foreign company can appoint one or more foreigners or Indonesian citizen to lead the representative office. Managing the business’ interests in Indonesia is possible after submitting the application to the Indonesia Investment Coordination Board (BKPM).
Indonesia representative office procedure must be fulfilled in order to obtain a license from BKPM and conduct business interest. According to the regulation, a representative office can only be situated in the capital city of a province and must be set up in an office building.
In order to obtain a license, a foreign company must submit the following documents to BKPM:
- Filling the form of a representative office application
- Legalized copy of Articles of Association of the head company and any amendment by notary and Indonesian Embassy in origin of head company
- Legalized copy of registration at chamber of commerce where parent company is operated by notary and Indonesian Embassy in origin of head company
- Copy of passport or identification card of the head of the representative office
- Copy of taxpayer registration number if the chief is Indonesian
- Legalized Letter of Intent from the head company
- Legalized Letter of Appointment from the head company
- Legalized Letter of Statement from the chief of the rep office about the willingness to live in Indonesia, and will not conduct other works or business besides the activity of the representative office.
- Legalized Power of Attorney to sign the application if represented by another party.
The Indonesian Investment Coordination Board (BKPM) will process the application approximately 10-14 working days before the license issued. However, for the representative office to fully operate, the documents required for the establishment also include:
- Approval Letter by Indonesian Investment Coordination Board (KPPA license)
- Domicile Letter from the local sub-district
- Taxpayer Registration Number from the local tax office
- Company Registry Certification (TDP)
A complete application will lead to faster and more convenient submission, in which the licensing will be issued in 5 working days. The license of Indonesia representative office procedure is valid for 3 years and is extendable for two times each for a year.
Foreign Trade Representative Office Indonesia Procedure
One type of representative office that is allowed to operate in Indonesia id the foreign trade rep office, which, despite its name, is still cannot engage in a direct commercial business activity. Kantor Perwakilan Perusahaan Perdagangan Asing (KP3A) or as we refer as the foreign trade representative office Indonesia may act as selling or buying agent, but all the financial transaction must be under the parent company’s name.
According to the Regulation of Head of Investment Coordinating Board Article 1 paragraph 29, a KP3A Indonesia is “an office which is led by an Indonesian citizen or foreigner who is designated by a foreign company or joint foreign company overseas, as its representative in Indonesia”. A KP3A is more suitable for conducting promotional activities and managerial duties.
A foreign trade representative office Indonesia also has 2 legal bases that should be followed by the investors; (i) be established as a form of buying agent, and (ii) be opened in the capital of province and regency/city of Indonesia.
The procedure of obtaining a license for KP3A Indonesia is governed under the Ministry of Public Works Regulation No. 10 (2014) with requirements as follows:
- Legalized application letter by public notary and Indonesian Embassy in the origin country
- Legalized copy of the Article of Association of the head office by public notary and Indonesian Embassy in the origin country
- Legalized copy of the head company registration by public notary and Indonesian Embassy in the origin country
- Company profile of the head company
- Recommended letter from the origin country in Indonesia about the registered company and its good reputation
- Legalized copy of valid business license of the head office
- Copy of competence value (including the last project within 5 years) of the head office
- Legalized copy of Letter of Appointment from the head office to the appointed chief of the foreign trade rep office.
- Copy of latest financial report of the head office
- Copy of valid passport or identification card of the appointed chief of the representative office
- Curriculum vitae of the appointed chief of the representative office
- Legalized copy of domicile letter
- Legalized Power of Attorney to apply for the representative office development and to get a general license.
- Taxpayer registration number
The foreign company is obliged to appoint someone with at least three years of experience to manage the rep office with relevance educational background. According to the Article 24 Paragraph (3), BKPM Regulation No. 15 Year 2015, the KP3A Indonesia must employ at least 3 (three) Indonesian workers when hiring a foreign manpower as the Chief of the Representative of the KP3A.
Once the company submitted the application, the BKPM will issue Surat Izin Usaha Perusahaan Perwakilan Perdagangan Asing (SIUP3A). Please note there are three types of KP3A validation license according to the Article 25 BKPM Regulation No. 15 Year 2015:
- Temporary license: Applicable for 2 months since the issuance
- Permanent license: Applicable for 1 year since the issuance
- Extension of license: Applicable for 3 years since the issuance. Extendable in accordance with duration stated in the Letter of Appointment.
- Amendment license: issued when KP3A settled to amend or add some details to its content, such as information about the represented company, places of the rep office, information on the chief of the rep office, and the use of worker.
Representative Office vs. Local Limited Liability Company: Roles and Functions
We can say that both are allowed to establish in Indonesia, but the two have quite significant differences. For a brief understanding, here are the differences between a representative office in the form of KPPA and KP3A, and the local limited liability company (PT).
A representative office in the form of KPPA can only act as a local representation or market research purposes. A foreign company can opt to establish KPPA in order to study the business climate, market position, or investment policy in Indonesia before setting up a PT PMA. There is neither a capital requirement nor foreign ownership restriction when establishing a KPPA.
In short, here is the scoop on activities of foreign representative office:
- Act as a supervisor, connector, coordinator, and manager of the head company’s interest or the affiliated companies in Indonesia.
- There is no participation in any form of the management of the companies, subsidiaries, and branches of companies allowed.
- Act as initial preparation of the establishment of foreign investment in Indonesia (PT PMA). However, KPPA is restricted from generating income earnings from any resources.
- No financial or any business transaction is allowed, made a contract, sale and or purchase goods and or services, etc.
A KPPA also has other compliances such as monthly withholding tax report and annual activity report submitted to BKPM. The rep office must also be situated in an office building and is not allowed on using the virtual office as a company address.
A foreign trade representative office Indonesia (KP3A) also has a limited role and mostly acts as a local representation of the head office abroad. However, KP3A is permitted to conduct more business activities compared to the KPPA, despite the fact that it cannot generate any revenue from any business transaction. Setting up a KP3A is quite easy, with no capital requirement or foreign ownership restriction, and extendable license for every 3-year period.
Here is the scoop on activities allowed for foreign trade representative office in Indonesia:
- Promoting, introducing, and upgrading the marketing goods of the foreign company
- Providing information for utilization and influx of products to the companies in Indonesia
- Monitoring the trading activity in Indonesia within the limitation of marketing goods and conducting a market research
- Conducting a study for the commodity and or services required by the market in Indonesia
- Attributing and giving information and directions about the terminology regarding the export of goods
- Acting on behalf and for of the head company with users in Indonesia relating to the activities of export.
In other words, a foreign trade representative office in Indonesia can act as a selling agent, manufactures agent, or buying agent. However, all transactions must still be under the parent company’s name, and the rep office must not generate any revenue from any resources in Indonesia.
- Local Limited Liability Company
A local limited liability company is also known as PT in Indonesia. This type of business is allowed to conduct all business activities as mentioned in the business field it got approval for. A PT is most suitable for local investors, and cannot involve in any foreign shareholders. However, the company also has a limited amount of work permits for foreigners, which depends on the size of the capital.
The scoop of activities of a PT is not limited as KPPA or KP3A Indonesia. It is unconfined to perform any business activities in the field as stated in the permit/business license. The company also has compliance of annual tax report, monthly withholding tax report, and annual tax report.
Branch Office vs. Subsidiary Company vs. Representative Office
In Indonesia, foreigners can only invest in two forms of business activities, namely the representative office or Penanaman Modal Asing (PMA). Just because the representative office act and play its role as the representative of its head office, doesn’t mean that it has the same function as a branch or even subsidiary company. The definition of the three may get some people mixed up, but there are clear, distinctive features and functions of a branch office, a subsidiary company, and a representative office.
- Branch Office
A branch office has the same legal entity as the parent company, and act as an extension of it. The liabilities of a branch office in Indonesia also extend to the parent company, and it should have the same name.
The office is allowed to conduct commercial and non-commercial activities including market research, purchase and keep a quantity of goods, employ workers, and buy or sell goods and services or engage in manufacturing, processing, and construction process; same as the parent company.
However, there is limited sector allowed to develop a branch office in Indonesia, such as banking sector. From the authority perspective, the government through OJK set out general requirements for a foreign bank to expand a branch in Indonesia, as follows:
- Must have good rank and credit as assigned by international rating agency
- Required to have total assets as world’s top 200 banks, as stated in the Banker’s Almanac information
- Must allocate investment funds amounting to IDR 3 trillion (minimum) or equal in other currencies.
- Subsidiary Company
In general, a subsidiary company has separate legal entity distinct from its parent company, and its liabilities are limited to the subsidiary as well. The entity name of a subsidiary company may be similar or different from the parent company, and the type of business activities conducted may also be similar or different.
In Indonesia, opening a subsidiary company has the similar procedure of setting up a PT PMA (Penanaman Modal Asing), with an option of full foreign ownership or joint ventures with a local company. A paid-up capital of 20% from the total of at least IDR 10 billion must be fulfilled and the foreign investors are allowed to conduct business in any sectors except for the ones listed in the Negative Investment List by BKPM.
However, the requirements are different when proposing to open a subsidiary company for a foreign bank in Indonesia. The investors must fulfill the following conditions:
- An international bank must open an Indonesian PT with a joint venture with at least one founder.
- Apply for licensing the company to engage as a commercial bank to the Financial Services Authority (Otoritas Jasa Keuangan or OJK)
- Representative Office
A representative office can only act as the representative of a foreign company. Setting up a representative office in Indonesia doesn’t need any paid-up capital or shareholder compliance, so it’s suitable for the investor with limited financial ability. With such convenience, a rep office cannot generate any profit or conduct any financial activities during their presence in Indonesia.
However, a foreign trade representative office Indonesia can actually act as the foreign company’s agent, be it as the buying/selling, or manufacturing agent. The difference from a branch office or subsidiary company, any financial transaction conducted by a rep office must be under its parent company. They cannot issue an invoice, and only parent company can charge clients.
Tax Treatment of Foreign Representative Office in Indonesia
Among submitted compliance of a representative office is monthly withholding tax report, which is, easy to calculate when you have something to buy or sell. According to the regulation, the established rep office in Indonesia has special treatment from the authorities.
The Indonesia representative office taxation extends to two majors; tax on employee’s salary, and company’s income.
- Employee’s Income Tax
The obligation to pay the employee’s income tax is under the representative office, which is mostly done by subtracting the worker’s monthly income to pay to the government. According to the Income Tax Article 21, below are the tax rates for employees in representative office:
- 5% on the first IDR 50 million income
- 15% on the next IDR 200 million income
- 25% on the next IDR 250 million income
- 30% on the next IDR 500 million income or more
- Company’s Income Tax
A certain regulation of tax for Indonesia representative office taxation, Article 25 states that a rep office is eligible for 0.44% of corporate income from Gross Export Values. The amount of gross value of export is determined by the revenue of the company abroad that has a rep office in Indonesia. Investors from a country with Tax Treaty with Indonesia must pay the company’s income tax based on the rate of the branch profit tax as mentioned in the Tax Treaty.
The regulation state that deadline of tax reporting is on the 20th date of each month, while the deadline for tax payment is on the 15th date of each month. An Indonesia representative office that fails to meet the deadline will be employed a tax penalty.
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.
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