Establishing a Foreign-Owned Company in Indonesia

Establishing a Foreign-Owned Company in Indonesia: Dealing with the Challenging Procedures and Regulations

Despite the economic slowdown and the poverty rise in Indonesia, the demands on products are surprisingly increasing. In fact, according to the data of Central Statistics Agency (Badan Pusat Statistik/BPS), between 2014 and 2015, 1.1 million people in Indonesia have become poor. So, what makes the demands on products or purchasing power in Indonesia get stronger again after hibernating for a while?

Bambang Sumantri Brodjonegoro, the minister of National Development Planning department, denied the claim that purchasing power in Indonesia is weakening. According to him, Bank of Indonesia lately announced that there is a percentage rise in the people’s savings. There was 5% increase in the country’s economic growth in 2017, and it keeps growing up to now. He added that fintech (financial technology) might have contributed so much to that.

This could be a good sign for many investors, both local and foreign, to invest in new businesses in Indonesia. In addition to that, the rising young middle-class population, bigger Government expenses in the country’s infrastructures and its nation’s welfares, plentiful natural resources, and low-priced labors also attracted many foreign investors to come and start their business here.

However, if a foreigner is interested in establishing a new company in the country or at least investing some in the company, they have to follow some regulations. They have to know that even if there is only 0,5% of foreign stockholders in a company, it is still considered as a foreign-owned company in Indonesia. Thus, how to establish a foreign-owned company in Indonesia | PT PMA (Perseroan Terbatas Penanaman Modal Asing)? How to start everything at all? The answer could be as follows.

 

 

The questions a foreigner should figure out before conducting investment in Indonesia

A future foreign investor should answer themselves the following questions before even starting anything:

  • What type of legal entity do I need to establish? Is it going to be a foreign direct investment company (PT PMA) or merely a representative office (Kantor Perwakilan Perusahaan Asing or abbreviated as KPPA)?
  • Is the business sector or industry I would like to invest in open to foreign investment? If so, how much percentage is the company ownership allowed for foreign investors?
  • Have I researched the procedures of a PT PMA establishment, tax regulations, minimum capital requirement, the structure of an organization, Indonesian human resources, required business activity reports, etc.?

It is important to answer all the above questions before deciding to start foreign investments as the procedures on how to establish a foreign-owned company in Indonesia | PT PMA is rather complex.

 

 

What includes a foreign-owned company in Indonesia?

A company is regarded as a foreign-owned company when its shares are held by the foreign parties, whether it is 100%, 50%, or even only 0,5%. Therefore, foreign-owned companies in Indonesia belong to the group of PT PMA (Perseroan Terbatas Penanaman Modal Asing) or LLC (Limited Liability Company) with foreign investment.

This has been regulated by the Law No. 25/2007 concerning the New Investment Law: foreign investment in Indonesia is considered as an act of investment done by a foreign inventor aiming for business within Indonesia territory. PT PMA includes a legal entity where foreign people, companies, and government institutions that are allowed to run a business as well as earn income and profit in Indonesia. The regulation of a PT PMA establishment is based on the Law No. 40/2007 regarding LLC (Limited Liability Companies) Law.

In addition to that, it is also legitimate for a foreign investor to set up a representative office to represent its company abroad in Indonesia without generating any revenue. Below is some information on a representative office establishment for foreign investors.

 

 

The advantages of establishing a PT PMA

Even though options of business fields are limited for foreign investors in Indonesia (which makes them find local partners to share their company ownership with), establishing a PT PMA (a Limited Liability Company) in the country could be advantageous. The decision to set up a PT PMA means the foreign investor can dominate the company direction, deal with no limitations on any choices of the location they want to operate in Indonesia and face fewer risks to find a local partner that meets their needs.

 

5-Things-You-Need-To-Know-About-PT-PMA

 

Setting up a representative office (KPPA)

Before a foreigner is sure to start a PT PMA in Indonesia, he/she is allowed to set up a representative office (KPPA) in the country. The main purpose of setting up this office is to do some research on the market, networking, and opportunities for business in Indonesia before conducting any investments and commercial activities. Note that the Indonesian regulation has strictly forbidden KPPA from doing any activities that gain any revenue and profit.

There are several advantages that a foreign investor may obtain if they want to start everything from opening a KPPA, including:

  • No large investment capital is required to set up a representative office (KPPA).
  • No complicated procedures in setting up the office.
  • Unlike a PT PMA which is limited by the Negative Investment List (Daftar Negatif Investasi), a KPPA can be opened based on (almost) any industry sectors.
  • A way cheaper option than a PT PMA in operational expenses.
  • A foreigner can have full control over a KPPA as there is no general organizational structure applied (e.g., no directors or shareholders needed).

Nevertheless, note that before a foreigner set up a representative office in Indonesia, they should have established its parent company overseas first. Many foreign companies in Indonesia use the strategy to promote the products or services that the parent company offers despite the consequences it will lead. After collecting many potential customers, the company (the representative office) eventually decides to establish a PT PMA in the country.

Related: A Guide for Foreign Investment in Indonesia

 

 

 

The restrictions on foreign company ownership

Remember the question “how much percentage is the company ownership allowed for foreign investors?” mentioned above? A foreigner is allowed to own 100% shares of a company in Indonesia at the most, and vice versa, they can even have less than 1% of the shares if they want to. However, some official rules restrict on which business/industry sector a foreigner is allowed to hold their shares in. They are all listed on the Negative Investment List (Daftar Negatif Investasi/DNI) issued by the Indonesia Investment Coordinating Board (Indonesian: Badan Koordinasi Penanaman Modal or known as BKPM).

 

Following the most updated Presidential Regulation No. 44/2016, a foreign investor’s ownership of a company relies on the industry sectors allowed on the DNI. Some of the sectors listed there require partial local ownership (by an Indonesian investor or company), therefore, in that case, it is necessary for the foreigner to find a local business partner.

Some of the industry sectors forbidden in Indonesia include:

  • Marijuana cultivation
  • Taking artifacts from a shipwreck
  • Substances of pesticide making
  • Alcoholic drink industry, including wine and beer
  • Capturing endangered animal species
  • Public museums
  • Casinos (gambling industry), and many more.

Meanwhile, some of the sectors of industry allowed for the foreigners to invest in are as follow:

  • Cultivation of staple food crops, such as rice, soy, corn, etc. (on a more than 25-Ha (Hectare) land)
  • Plantation seeding on a less than 25-Ha area, such as sugar cane, tobacco, cotton (and other textile raw materials), coconut, palm oil, etc.
  • Soybean Tempe and tofu industry
  • Hand-drawn Batik industry
  • Art studios, and so on.

Some of the above business sectors cannot be owned by the foreign investors more than 49% (such as the staple food crop cultivation). However, the sectors conducted in an area less than 25 Ha, like the plantation seeding of sugar cane and tobacco can be owned by the foreigners for 95% at the maximum. In that case, they have to find a local partner to share their company ownership with.

For additional information, foreign investors do not need to worry about the revision of the Negative Investment List done once in three years. The renewed regulations will not take effect on registered foreign-owned companies, especially those of long-time, as the Indonesian government has grandfathered them.

Minimum capital to establish a foreign-owned company (PT PMA) in Indonesia

Another big question from foreigners interested in investing in Indonesia is: how much is the minimum capital to establish a foreign-owned company in Indonesia and does it have to be paid in advance payment? First, it is important for the foreign investors to know the difference between foreign-owned investment capital and the investment plan.

An investment plan explains all about the estimated expenses of the company (except for the land and building costs) using the investment capital which is divided into two types of expenses, i.e.:

  • The fixed capital which includes machinery, tools, equipment, furniture, operational vehicles, office rent, etc.
  • Working capital, including salaries, utilities (electricity, phone bills, internet quota, etc.) and inventory.

On the other hand, the ideal investment capital required to establish a PT PMA in Indonesia is Rp10 billion (or US$ 750,000). However, the reality speaks differently. Due to today’s recession and other losses, foreign investors are allowed to pay for at least US$ 190,000 or approximately Rp2,5 billion for their investment capital, unless the business sector they are going to run needs higher amount of capital.

Next, after a foreign investor has gathered up his/her money or assets (yes, the investment capital does not necessarily have to be in cash) such as machinery and operational vehicles, especially when the company is merged, they have to sign a statement letter of the investment capital. This letter has to be signed by all the shareholders and make sure that there are enough funds to be transferred as investment capital.

The shareholders

In Indonesia, all the limited liability companies necessarily have to have at least two shareholders, either corporate or individual, or both. Then, each shareholder has to claim their number of shares in their investment application. Remember, the investment capital required is ideally Rp10 billion or 750,000 USD. In addition to that, the company owner should assign some people to be a director and a commissioner who supervises the director.

While a commissioner can either be an Indonesian or a foreigner, a director should just be an Indonesian, as he/she oversees the overall company operations. He should know better the working atmospheres in Indonesia and how to communicate smoothly with the local staff than a foreigner does. In case it is hard to find any trusted people to do the job, it is advisable to use the service of a nominee director.

 

 

Where the company will be sited

As a decentralized country, Indonesia is under regulations of the local governments in each of its districts. One of the local regulations applied is that a company (especially a foreign owned one) cannot use a house or an apartment address to either send or receive emails. It needs a real office address. So, before even registering a company for an operational license, it is suggested that a foreign investor find a business location in advance.

A virtual office can also be set up for a newly established foreign-owned company to reduce operational, land, and building costs. However, a physical office address is certainly still required for legal and administration importance in the future.

 

The procedures of foreign-owned company registration (PT PMA) in Indonesia

On top of everything, this part could explain how to establish a foreign-owned company in Indonesia | PT PMA could be rather complex, yet once everything is done, everybody will get satisfied. Foreign-owned company registration (PT PMA) in Indonesia takes 4 – 5 weeks. Longer time may be required in case the company is still in need of other certain business permits.

 

Below is the process of the foreign-owned company registration (PT PMA) in Indonesia:

 

No. Procedures Documents Estimated time
(on weekdays)
1. Company name registration at the Indonesian Ministry of Law and Human Rights. An official name of the LLC/PT PMA 1
2. Preparation and approval of Principal License at the Indonesian Investment Coordinating Board (BKPM) The Principal License issued by BKPM 7
3. The Article of Association preparation by a notary and the shareholders sign it. The Article of Association (Akta Pendirian Perusahaan) 3
4. Article of Association legalization by the Indonesian Ministry of Law and Human Rights The Decision Letter of the Minister of Law and Human Rights (SK/Surat Keputusan Menteri Hukum dan Hak Azasi Manusia) 1
5. Obtaining the Letter of Domicile The Letter of Domicile from the local government 3
6. The registration of taxpayer number The Taxpayer Registration Number (Nomor Pokok Wajib Pajak/NPWP) 3
7. The Tax Registration Letter from Directorate General of Taxation The Letter of Registered Tax (Surat Keterangan Terdaftar/SKT) 3
8. Company registration to the local government of the district The Certificate of Company Registration (Tanda Daftar Perusahaan/TDP) 7

 

Therefore, the procedures of how to establish a foreign-owned company in Indonesia | PT PMA takes 28 days (four weeks) in total. It could take longer depending on the completeness of the application documents.

 

 

 

What is next?

As soon as the foreign-owned company registration finished, one can begin operating and do business-related activities, such as:

  • Signing up the company to a corporate bank account in Indonesia.
  • Purchasing property or other assets of the company
  • Preparing for the company’s operation, such as employing staff, conducting office renovations, and so on
  • Obtaining work and stay permits for foreign employees working in the company
  • The Principal License issued by BKPM can be renewed after three years, depending on the industry sector the company runs its business in.

Earning a permanent operating license

Apparently, getting a Principal License is not enough for a company to keep operating in the long run. To do so, a foreign investor has to apply for the Permanent Business License (Indonesian: Izin Usaha/IU). However, it takes 1 – 3 years (depending on the business sectors) after the company registration to obtain the IU, but it is worth the wait.

Once a company gets the Permanent Business License, it will get full support to operate in the long run and obtain other permits, like the construction license, import license, and a KITAS for hiring foreign experts.

 

Using a nominee company service

For foreign-owned companies with the smaller amount of investment capital that runs a business in service sectors, there is a solution to get full control over the company without having to get held back by the complicated foreign-owned company regulations: i.e., a Nominee Company. This company will help those in need in such a way as serving a package of legal agreements regarding full ownership by Indonesian stockholders, but the foreign investors still fully rule the company and its finances.

Conclusion

Seeing the current market of Indonesia, the business opportunities are wide open for those who choose the challenges of entrepreneurship. However, the complex regulations of foreign-owned company establishment in Indonesia could be a discouragement for some. Fortunately, once everything is in check, everyone will get satisfied. So, hopefully, this article on how to establish a foreign-owned company in Indonesia | PT PMA can be handy for those in needs.

 

HOW CAN SMART CONSULTING HELP YOU?

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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. SMART has assisted Clients in dealing with matters related to Investment Law, such as assist Client to establish Foreign Direct Company and Representative Office. We also assist Clients regarding the Compliance and Corporate Legal Services.

Contact Us Now to get your legal solution for your business goals, and still comply with the prevailing laws and regulations.
E: info@smartcolaw.com
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