Foreign Investment and Company Establishment
Indonesia, with its robustly growing middle class and vast natural resources, offers a myriad of opportunities for businesses of all sizes - from small and medium-sized companies to large corporations. This potential is supported by the fact that doing business in Indonesia has become easier than ever.
There are several options for foreign investors to enter the market and this article lists the key things you need to know about starting a business in Indonesia.
What is considered a foreign company in Indonesia?
Any company that has even 1% of foreign shareholding is already a foreign company in Indonesia (PT PMA - Perseroan Terbatas Penanaman Modal Asing).
The percentage of the allowed foreign ownership of a company in Indonesia depends on its business activities and is regulated by the Negative Investment List (DNI - Daftar Negatif Investasi). Foreign investors can set up wholly foreign-owned enterprises in many business lines, for example in trading and real estate. However, some business lines are partially or entirely closed to foreign shareholding.
Representative Offices in Indonesia
If you do not plan to conduct any direct sales in Indonesia and only aim to represent your overseas parent company and explore the market, you can choose to set up a representative office instead of a PT PMA.
A representative office enables you to have a legal presence in the country and the option to hire employees in Indonesia without investing a lot of capital or complying with foreign shareholding restrictions. Many foreign investors choose to establish a representative office in Indonesia to gain market intelligence and later proceed with setting up a PT PMA.
There are four types of representative offices in Indonesia:
|Type of Representative office||Suitable for||How long it takes to establish|
|General representative office (KPPA)||
||13 working days|
|Representative office for trading (KP3A)||Manufacturing companies looking for agents and distributors in Indonesia||16 working days|
|Representative office for foreign construction companies (BUJKA)||Foreign construction companies planning to enter the Indonesian market||7-8 weeks|
|Representative office for foreign oil and gas companies (KPPA Migas)||Foreign oil and gas companies that want to have a permanent presence in Indonesia||
The main restriction of a representative office is that it’s not allowed to generate revenue in Indonesia. However, there are several advantages to opening a representative office:
- No minimum paid-up capital requirement
- Can open a bank account
- Can handle sales and deliver its products and services (clients must be charged under the name of the parent company)
- Can hire local and foreign employees and apply for work and limited stay permits (KITAS) for its foreign employees
Requirements for foreign companies
To establish a foreign company in Indonesia, shareholders must inject at least IDR 2.5 billion (~USD 175,000) of minimum paid-up capital, while minimum commitment of total investment should be at least of IDR 10 billion.
According to the Indonesia Company Law (04/2007), every limited liability company in Indonesia requires at least two shareholders, one commissioner, and at least one director. The shareholders can be individuals, corporations, or both.
The commissioner will supervise the company’s activities and can be a non-resident in Indonesia. The director’s responsibility is to manage the company pursuant to its Articles of Association and the Indonesia Company Law.
Directors of a PT PMA can be foreigners or Indonesians, and like commissioners, they are not required to be residents in Indonesia. However, non-resident directors do not have the authority to sign documents on behalf of the company.
Before embarking on the process of incorporation, you need to choose the location of your business and have a registered address in an office building Indonesia. You cannot use your home address as it is not possible to register a company with a residential address. Alternatively, you can also use a virtual office.
Incorporation of a PT PMA
Indonesia has gradually become more liberal toward foreign direct investment (FDI) over the past years. In 2018, the government released a New Government Regulation No.24 of the Year 2018, introducing the One Single Submission (OSS) and simplified procedures of licensing.
The new regulation removed the previously-required approval from the Indonesia Investment Coordinating Board (BKPM - Badan Koordinasi Penanaman Modal) and for most business lines, the establishment process now proceeds through the One Single Submission (OSS) system.
The implementation of OSS reduced the incorporation timeline in Indonesia from previous 3-12 months to less than a month.
Step 1: Deed of Establishment
Before you begin with company registration, the first step is to determine the percentage of the allowed foreign ownership of your planned business activities. As your business line has to be correct from the beginning, it is advised to have a professional consultant to determine it for you.
Once you are confident that the DNI allows foreign investment in your planned business classification, choose a name for your PT PMA. The name has to include at least 3 words and cannot be misleading or similar to any other existing company or government institution’s name. It also cannot contain any vulgar or obscene words.
The company’s activities and purpose must be specified in its Articles of Association within the Deed of Establishment which must be made before a notary.
The Deed of Establishment must also be ratified by the Ministry of Law and Human Rights. This also means that your company is legally established under Indonesian Law.
Step 2: Domicile and Tax Registration
After the Ministry of Law and Human Rights has ratified your Deed of Establishment, the next step is to obtain a Domicile Letter (Surat Keterangan Domisili) from the district government and acquire a Tax Identification Number (NPWP - Nomor Pokok Wajib Pajak) from the local tax office.
Step 3: Identification Number to Operate (NIB-Nomor Induk Berusaha) and Operational License/Commercial License
The last step of incorporation is to register your legal entity to the One Single Submission System (OSS).
A unique identification number, NIB, will identify your company profile in Indonesia and it will also serve as your import license (previously API-U), customs identification number (previously NIK), and business registry (previously TDP).
Registration of your legal entity to OSS also automatically registers your PT PMA under the Indonesian Health and Social Security System (BPJS Kesehatan, BPJS Ketenagakerjaan).
For businesses that do not require specific operational licenses, the OSS system will automatically provide them (such as trading of goods, consulting activities). However, Some business classifications, for example, construction or financial technology companies, require further operational licenses that should be acquired additionally from the governing authorities.
Taxation and Compliance
All companies in Indonesia must pay and report taxes on a monthly and annual basis. Main corporate taxes imposed on companies in Indonesia are corporate income tax (CIT), value-added tax (VAT), and land and building tax.
The general corporate income tax rate imposed in Indonesia is 25%. Medium-sized companies with annual revenue of less than IDR 50 billion can apply for a reduced income tax rate of 12.5%, and small companies with annual revenue of less than IDR 4.8 billion are eligible for corporate income tax of 0.5%.
Apart from taxes, companies must also register for social and health program (BPJS) by the government.
Regulations in Indonesia tend to change frequently and for any specific advice on doing business in Indonesia, it is a wise move to take counsel from a professional consultant or a lawyer who would walk you through the process and explain you the current applicable laws and regulations.
2021 UPDATE: Presidential Regulation No 49 No 2021 - List of Business Fields that are closed and business fields that are open with requirements in the field of Capital Investment:
Updated July 6, 2023