By 2030, Indonesia is predicted to be the worlds' seventh largest economy. With GDP growing at around six percent and an emerging middle class there are significant opportunities for foreign entities wishing to invest.
So, what are the choices for establishing a presence in Indonesia?
Our Quick Guide overviews the three main vehicles which are available to foreign entities to establish themselves in Indonesia:
- a foreign representative office (FRO); 1
- a foreign investment limited liability company (PMA Company); and
- a not-for-profit foundation (Yayasan).
Each of the three vehicles has different legal and tax implications.
FOREIGN REPRESENTATIVE OFFICE
An FRO is a useful first step to develop the business interests of a principal foreign company (or foreign group of companies) in Indonesia and prepare for establishment in Indonesia (usually by way of a PMA Company).
An FRO is not permitted to conduct business in Indonesia. It must limit its activities to co-ordinating, liaising, managing and supervising functions in relation to the principal foreign company's interests in Indonesia and/or abroad.
An FRO must have a person nominated by the principal foreign company as the responsible person for the management of the FRO. This Head of the FRO may be Indonesian or foreign, but must reside in Indonesia. The FRO itself must be located in an office building in the capital of the relevant province.
To establish an FRO, the Head of the FRO or the board of directors/management of the principal foreign company must submit an application to the Indonesian Investment Coordinating Board (BKPM). 2
Alternatively, the applicant may grant a power of attorney to its lawyers to do so. In general, BKPM will issue an FRO licence approximately 5 working days after receiving a completed application and required supporting documentation. The licence is valid for three years and can be extended twice for a period of one year each.
An FRO is prohibited from:
- generating revenues;
- entering directly into contracts or transactions relating to any sale or purchase of goods or services with any company or person in Indonesia for business purposes; and
- engaging in the management of any company, subsidiary or branch in Indonesia.
Based on unwritten policy, BKPM considers that the principal foreign company's business must have economic value, so that its investment in Indonesia would be beneficial. Accordingly, a foreign non-profit entity cannot establish an FRO.
All foreign direct investment (either minority or majority) in Indonesia is regulated by Law No.25 of 2007 on Capital Investment (Investment Law), with the exception of "portfolio investments" made through the capital markets. Foreign direct investment must be made by way of establishing a new, or purchasing shares in an existing, limited liability company.
A PMA Company must satisfy the requirements of the Negative List (discussed below) and have an approved Deed of Establishment, which must be signed before an Indonesian notary. The Deed of Establishment functions as the PMA Company's articles of association.
A PMA Company consists of a board of directors and a board of commissioners, each of which is appointed by a general meeting of shareholders. The directors are responsible for the day-to-day management of the PMA Company in the interests of the PMA Company and in accordance with its purposes and objectives.
The commissioners are responsible for supervising the directors, again in the interests of the PMA Company and in accordance with its purposes and objectives. The roles, rights, responsibilities and liabilities of the directors and commissioners are regulated under Law No. 40 of 2007 on Limited Liability Companies (Company Law) and the articles of association of the PMA Company.
The Company Law provides that a PMA Company must have:
- generally, a minimum of one director and one commissioner, with no maximum number; 3 and
- a minimum of two shareholders at all times.
Foreign nationals may serve as directors or commissioners of a PMA Company, but a person cannot have the concurrent role of director and commissioner in the same PMA Company.
The statutory minimum amount which must be invested in a PMA Company is Rp10,000,000,000 (or approximately US$1 million), with a minimum issued share capital of Rp2,500,000,000 (or approximately US$250,000).
Each shareholder must hold the statutory minimum shareholding of Rp10,000,000 (or approximately US$1,000). In certain business sectors, BKPM may require a higher minimum capital amount to be invested in a PMA Company.
A PMA Company may distribute its profits via dividends to its shareholders. It may also establish and invest in other companies, subject to BKPM approval and the Negative List (discussed below).
Foreign investors who wish to invest in a PMA Company must first obtain an "in-principle approval" from BKPM. BKPM will issue an approval approximately 5 to 10 working days after receiving a completed application and required supporting documentation, although satisfying BKPM's requirements often means approvals take longer than this.
For certain lines of business (for example, mining, oil and gas, education), the recommendation of the relevant government regulating institution must be obtained before BKPM will issue its approval.
Once BKPM approval has been obtained, the foreign company may establish or invest in a PMA Company. Establishing a new PMA Company usually takes approximately 4 to 8 weeks.
Every three years, the government issues a regulation (commonly known as the Negative List) specifying the business sectors that are closed to foreign investment or open subject to conditions. The current Negative List is contained within Presidential Regulation No.36 of 2010. A new Negative List is expected to be issued in 2013.
In general, if a business sector is not on the Negative List, then it is open to 100% foreign investment. Sectors that are closed to foreign investment include defence, national security and other areas of national interest.
Sectors that are open subject to conditions usually involve restrictions on the maximum foreign ownership permitted and sometimes the imposition of specific requirements, such as approvals from specific ministries.
The business sectors on the Negative List are derived from the Indonesian Standard Classification of Economic Activities (KBLI) which sets out numerous sub-definitions, activities and codes. A corresponding KBLI must be identified for every business activity sought to be engaged in by a PMA Company.
In addition to the Negative List, relevant industry sector laws and regulations may also apply restricting the ability of a PMA Company to engage in certain business activities, further limiting the maximum foreign ownership permitted in the PMA Company or imposing divestment requirements on the PMA Company.
A Yayasan, or foundation, is an alternative vehicle, mostly relevant to not-for-profit foreign legal entities. It is regulated by Law No.16 of 2001 on Foundations, as amended by Law No.28 of 2004 (Foundation Law) and the implementing regulations, Government Regulation No.63 of 2008 and Government Regulation No.2 of 2013.
A foundation is intended as a vehicle for attaining certain purposes in the social, religious, or humanitarian sectors.
A foundation that is established by a foreign party (or a foreign party with an Indonesian party) must have initial, distinct assets of at least Rp100,000,000 (approximately US$10,000).
A foundation consists of a board of patrons (pembina), a board of managers (pengurus) and a board of supervisors (pengawas).
The board of patrons has the role of:
- appointing and dismissing members of the board of managers and the board of supervisors;
- determining the general policies of the foundation based on the articles of association of the foundation;
- ratifying annual work programs and budget plans of the foundation;
- resolving to amend the articles of association; and
- deciding on mergers or liquidation of the foundation.
The Foundation Law precludes the board of patrons delegating its role to the board of managers or the board of supervisors.
The board of managers is responsible for the management of the foundation in accordance with its purpose and objectives. The board of managers is not authorised to:
- bind the foundation as a guarantor;
- encumber the assets of the foundation; or
- transfer assets of the foundation (except with approval from the board of patrons).
The board of supervisors is responsible for supervising and advising the board of managers in relation to the activities of the foundation.
A foundation is not permitted to distribute its proceeds to its organs. A foundation is restricted from investing more than 25% of its total value. It may establish and invest in other companies which are consistent with its purpose and objectives (although the foundation's board of patrons, board of managers and board of supervisors cannot be involved in those other companies).
Further information on investing in Indonesia is available from the BKPM website, particularly its "investment guide" site which outlines the process to obtain approvals from BKPM.
1There are four types of foreign representative offices in Indonesia: FRO, Foreign Trade Representative Office, Foreign Bank Representative Office and Foreign Construction Service Representative Office. While each are subject to different regulations, this article focuses on FROs only.
2Applications to establish a Foreign Bank Representative Office or a Foreign Construction Service Representative Office are submitted to different authorities.
3Special requirements apply to public companies and companies engaged in certain lines of business, for example banks and insurance companies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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