1. Overview on Indonesia's Economic and Investment Climate
Indonesia, the world's fourth most populous country with 280 million population, is a dynamic and rapidly developing country in Southeast Asia. As the world's 10th largest economy in terms of purchasing power parity and a key-member of G-20, Indonesia has become a major player in the global trade and investment due its vast natural resource. As of the beginning of 2025, Indonesia has also become a full member of BRICS.
Indonesia has made enormous gains in poverty reduction with a notable poverty rate of 9.03% as of March 2024. However, Indonesia's economy was disrupted during COVID-19 pandemic in 2020, with a negative growth of 2.1% (5.0% YoY). This is the first contraction experienced by Indonesia since the Asian financial crisis of 1997-1998.
The Indonesian government has taken a strategic step to support the economic growth during COVID-19 by introducing Law No. 11 of 2020 on Job Creation – Omnibus Law ("Omnibus Law"). The law has intensified Indonesia's economic attractiveness and accelerated the economic recovery by lowering corporate taxes, reorganizing rigid employment laws, simplifying business licensing system, and reducing bureaucratic and regulatory barriers to investment. The law also provides a basis to promote many sectors, including healthcare services, technology, and telecommunication. In addition, the country's emerging e-commerce is unveiling more entrepreneurial dispositions, also building a basis to overcome challenges of Industry 4.0.
The primary objective of Omnibus Law is to incentivize foreign investors in Indonesia, thereby stimulate Indonesia's economic growth and improve social welfare. However, there is a lot of controversy surrounding the Omnibus Law. The law has been the subject of judicial review petitions to the Constitutional Court. Due to such reviews, the Constitutional Court has ordered the House of Representatives and government to revise Omnibus Law, following the stipulation of Law No. 6 of 2023 on Stipulation of Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation to become Law ("Job Creation Law"). This stipulation has revoked the 2020 version of Omnibus Law. After the enactment of the 2023 Job Creation Law, another judicial review was filed to the Constitutional Court, leading to the latest amendment to the manpower law cluster of Job Creation Law. This latest amendment provides several amendments beneficial to the Indonesian manpower, particularly the term of definite period of employment contract, and provisions on severance payment in case of employment termination.
In October 2024, Indonesia inaugurated the new President and Vice President (President Prabowo Subianto and Vice President Gibran Rakabuming Raka) following a general election in February 2024, which marked the end of President Joko Widodo's 10-year-administration. The new administration is expected to make many new economic policies and investment priorities. The main sectors prioritized in this administration would be, among others, renewable energy, natural resources (including the downstream mineral and mining commodities), public housing, financial services, and other labor-intensive industries. With the steady growth of 5% GDP and middle-class population, Indonesia remains an attractive hotspot in Southeast Asia for foreign investment. Given the current geopolitical situation, Indonesia maintains its "natural-active" approach and consistently considered as a non-block non-aligned country, that accommodates foreign investors regardless of their political alignments.
The economic opportunity in Indonesia also comes with the challenges. It is important that any investor coming to Indonesia understands the legal landscape and ongoing challenges in order to make an informed decision. We provide in this guide, the general legal overview of doing business in Indonesia for your reference.
2. Legal Overview on Doing Business in Indonesia
2.1 Types of Business Entity
There are many types of business entities recognized under the Indonesian Law. For this legal guide, we will address the most common entities used by foreign businesses to enter the Indonesian market; (i) Representative Offices and (ii) Limited Liability Companies.
A. Representative Office: Establishing a representative office could be a viable option for a foreign investor to have the local presence in Indonesia. Three general types of representative offices are Foreign Company Representative Office (Kantor Perwakilan Perusahaan Asing or "KPPA"), Foreign Trade Representative Office (Kantor Perwakilan Perusahaan Perdagangan Asing or "KP3A"), and Construction Service Provider Representative Office (Badan Usaha Jasa Konstruksi Asing or "BUJKA").
KPPA and KP3A are licensed offices set up in Indonesia by foreign companies. They are not construed as legal entities and have limited permitted activities, which include market exploration and liaison activities (i.e., acting as the local contact to connect the overseas head office with the Indonesian parties). It is important to note that KPPA and KP3A are strictly restricted from undertaking trading activities and generating revenues in Indonesia. Moreover, KP3A could also be established by a foreign e-commerce platform if they have obtained the necessary e-commerce license (Surat Izin Usaha Perwakilan Perusahaan Perdagangan Asing di Bidang PMSE or "SIUP3A PMSE")
A BUJKA is established for the specific purpose of entering into a joint operation agreement to engage in construction and construction consulting services with an Indonesian entity. Unlike KPPA and KP3A, BUJKA is allowed to carry out profit-making operations. Consequently, the regulatory requirements for establishing BUJKA are comparable to that of a licensed Indonesian construction service company, with some differences in the licensing process.
B. Limited Liability Companies: In terms of direct investment, Indonesian companies are categorized as follows:
- Foreign Capital Investment Company/ Perusahaan Modal Asing ("PMA Company"): A company that has foreign shareholding.
- Domestic capital investment company/ Perusahaan Modal Dalam Negeri ("PMDN Company"): A company that only has domestic shareholding.
PMA and PMDN companies are registered to the Ministry of Law (Kementerian Hukum or "MoL") and the Online Single Submission ("OSS") system. The OSS system, currently managed by the Ministry of Investment and Downstream/Investment Coordinating Board (Kementerian Investasi dan Hilirisasi/Badan Koordinasi Penanaman Modal or "BKPM"), provides an integrated one-stop business licensing system, unifying the relevant licensing authorities under the central government.
In practice, a foreign company planning to carry out business activities that are open for foreign investment could establish a PMA Company, or acquire shares of an Indonesian company. In limited areas such as the upstream oil-and-gas and construction services, a foreign entity should be licensed to carry out business in Indonesia.
Minimum Required Shareholders: Please note that Law No. 40 of 2007 on Company Law, as lastly amended by Job Creation Law ("Company Law") requires any PMA or PMDN company to have, at least, two shareholders. However, Job Creation Law exempts micro-and-small enterprises from meeting the requirement and allows them to establish a limited liability company with only one shareholder. Please note that a micro or small enterprise can only be established as a PMDN. A PMA Company will be considered as a large-scale company, which must fulfill the minimum requirement of two shareholders.
2.2 Establishing Business Entity
A. General Procedure and Requirement for Establishing a Representative Office
General procedure: The following are steps to establish a representative office in Indonesia:
- Preparing the documents for the representative office's establishment (legalized by the Indonesian Embassy of the principal office);
- Renting the office in Indonesia;
- Appointing the Head of Representative Office;
- Applying to the OSS system to obtain the Business Identification Number (Nomor Induk Berusaha or "NIB"), and relevant licenses;
- Applying the SIUP3A PMSE to the OSS system for the e-commerce platform (if necessary);
- Applying for the taxpayer identification number (Nomor Pokok Wajib Pajak or "NPWP") to the relevant tax office;
- Opening an Indonesian bank account for the operational purposes; and
- Submitting the licensing application to the Minister of Public Works (Kementerian Pekerjaan Umum or "MoPW") for a BUJKA representative office.
Capital Requirement: The prevailing law does not stipulate any capital investment requirement for the establishment of KPPA or KP3A, while MoPW specifies the annual sales and capital requirement for a BUJKA establishment.
Approximate Time Frame: The establishment of a representative office takes approximately one to two months from the document preparation until it is ready for operation.
B. General Procedure and Requirement for Establishing a PMA Company
General Procedure: A foreign investor needs to carry out the following steps:
- Reserving the company name to MoL;
- Analyzing proposed business activities of the PMA Company;
- Preparing drafts of the deed of establishment and articles of association, and the deed execution of the PMA Company before a public notary;
- Obtaining MoL's acknowledgement through the electronic filing system;
- Applying to the OSS system to obtain NIB;
- Applying for NPWP to the relevant tax office;
- Opening an Indonesian bank account for the company operation and share capital deposit;
- Obtaining the Taxable Entrepreneur Confirmation (Surat Pengukuhan Pengusaha Kena Pajak or "SPPKP"); and
- Obtaining the business licenses and fulfilling the business requirement, as applicable.
Minimum Capital Requirement: Pursuant to BKPM Regulation No. 4 of 2021 on Guideline and Procedure for Risk-Based Business Licensing and Capital Investment Facilities ("BKPM Reg. 4/2021"), a PMA Company must have a minimum paid-up capital of, at least, IDR 10 billion (equivalent to USD 605,199). Moreover, it must fulfill the investment commitment of more than IDR 10 billion (excluding the land and building value) per registered Indonesia Business Field Classification (Klasifikasi Baku Lapangan Usaha Indonesia or KBLI).
Approximate Time Frame: The establishment of a PMA Company takes approximately two to three months from the document preparation until it is ready for operation. However, the time frame may vary depending on the business, subject to the document processing as required by the relevant authorities.
2.3 Government Authorities
Generally, BKPM is responsible for the processing and issuance of the approvals and/ or licenses for all foreign investments, except those in the banking and financial sector. Under the new regime, the business licenses are issued through the integrated OSS system.
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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.
