INVEST IN INDONESIA
Foreign Investment in Indonesia
Starting a business or legal entity in Indonesia can be a hazardous undertaking for foreigners, in particular to newcomers in Indonesia who lack profound experience with the country and do not have useful contacts or a network to rely on. Indonesia is not the world’s most business-friendly country (reflected by the weak ranking in the World Bank’s Doing Business Index) and contains specific cultural dynamics which – to an outsider – can make matters complicated.
There are two legal entities that are permitted for foreigners in Indonesia: (1) a foreign investment limited liability company (in Indonesian: Perseroan Terbatas Penanaman Modal Asing, or, PT PMA), and (2) a representative office (in Indonesian Kantor Perwakilan Perusahaan Asing, or, KPPA). This section aims to provide you all required information about the establishment of a:
|
Representative Office | |
Allowed Activities | All business activities related to the sector it is engaged in and received approval for from BKPM | Only for market research & local representation |
Best Option for | Companies that want to engage in commercial activities in Indonesia | Companies that want to engage in market research, networking, etc. It is strictly forbidden to generate profit and revenue or engage in sales directly |
Foreign Ownership Restriction | Foreign ownership varies between 0% – 100% depending on the Negative Investment List | No restriction |
Minimum Capital | IDR 10 billion (paid up capital at least 25% of investment plan) | No requirement |
Benefits | Operates as an independent limited liability company within the business classification | No capital requirement, |
Disadvantages | Large capital requirement | Cannot engage in commercial activities, |
Issuing Work Permits and Visas for Foreigners | All shareholders, directors and commissioners eligible for work permit, unlimited amount of business visa sponsorships, work permits can be issued to foreign experts | Work permit for the chief representative, unlimited business visa sponsorships, 3 Indonesians for every expat hired |
Compliance | Monthly withholding tax report, quarterly/semi-annual investment report | Monthly withholding tax report, annual activity report to the BKPM |
Time to Establish | 4 weeks | 2 weeks |
Estimated Costs | Starts from USD $8,500 | Starts from USD $2,000 |
Foreign Investment Company (PT PMA)
How to Establish a Foreign Company (PT PMA) in Indonesia?
Indonesia offers great opportunities to foreign investors due to the country’s large and young population, rising consumption, abundant natural resources, and cheap labour. Therefore, each year foreign direct investment (FDI) realization in Indonesia tends to grow. This section discusses the incorporation of a foreign investment limited liability company in Indonesia, known as Perseroan Terbatas Penanaman Modal Asing (abbreviated PT PMA). It is the legal entity through which a foreign investor can conduct commercial activities in Indonesia.
Based on Law No. 25/2007 regarding Investment (New Investment Law), a foreign investment in Indonesia is defined as an investing activity conducted by a foreign investor for the purpose of running a business within the territory of Indonesia. The legal entity through which a foreign person, foreign company, or foreign government body can conduct business in Indonesia (meaning generating revenue streams and profit) is the PT PMA. The establishment of a PT PMA is regulated by Law No. 40/2007 regarding Limited Liability Companies (Company Law). Such a company can be either 100 percent foreign-owned or partially foreign-owned.
It is important to stress that various sectors in Indonesia are closed, or partially closed, to foreign investment. To find out which sectors are open to foreign investment you need to access the Negative Investment List (Daftar Negatif Investasi), a list compiled – and regularly revised (!) – by the Indonesia Investment Coordinating Board (BKPM). In case a sector is partially closed to foreign investment, then the list states the maximum allowed percentage of foreign ownership. This means that you will need to have a local (Indonesian) partner in order to engage in business in that particular sector.
To recap, there are two basic questions a foreigner should ask oneself before investing in Indonesia:
- What type of legal entity do I need? A company (PT PMA) or a representative office (KPPA)?
Do you plan to generate revenues, profit or engage in sales directly in Indonesia, then you need a PT PMA. Do you want to explore business opportunities in Indonesia for your foreign company (through market research, networking, etc.) without engaging in commercial transactions, then it is better to establish a representative office (if such research shows positive results then you can decide to establish a PT PMA later on).
- Is the sector I want to invest in open to foreign investment? If yes, what is the percentage of ownership allowed to foreign investors?
For the answer, take a closer look at the Negative Investment List (latest revision done through Presidential Regulation No. 44/2016). If the sector requires partial domestic ownership, then you need a local partner. If you do not have a suitable local partner, we can try to find one for you (contact us here for further information).
Procedures for Setting up a Foreign Investment Company (PT PMA) in Indonesia
If, after considering the above questions, you decide to establish a foreign company in Indonesia, then you need to turn to the Indonesia Investment Coordinating Board (BKPM), which is the investment service agency of the Indonesian government and deals with foreign investment. Although the BKPM has recently improved its services, it can still be a hazardous undertaking for a foreigner (especially one who is new to Indonesia and is yet to learn the language and customs) to arrange all permits in a timely and smoothly manner. To avoid problems, most foreign investors prefer to use the services of a local company, one that is specialized in the setting up of a PT PMA or representative office, to deal with all procedures at the BKPM and other institutions (the foreign investor only needs to send all necessary documents to this local company). There are many local Indonesian companies that offer a “company establishment package” to foreign investors. Depending on sector, costs for the establishment of a PT PMA can vary, but generally such a package should cost around USD $3,000 and requires about ten weeks to be completed. Indonesia Investments also offers these services (contact us here for further information).
You do not necessarily need to establish a PT PMA from scratch. You can also decide to acquire an existing PT PMA or an existing Perseroan Terbatas (PT). Regarding the latter, as the PT is a local limited liability company, it needs to be converted into a PT PMA after acquisition.
Generally, the following licenses/documents are required for the establishment of a PT PMA in Indonesia:
Estimated Time | |
• Principle License & Business License from BKPM | 7 |
• Deed of Establishment (containing the Articles of Association) | 1 to 2 |
• Legalization of the legal entity status of the PT PMA by the | 10 |
• Domicile Letter from the local district authority | 3 |
• Tax Identification Number (NPWP) and taxable entrepreneur | 3 |
• Company Registration Certificate (TDP) from the agency for | 14 |
• Manpower Report and Company Welfare Report from the | 7 |
Note: the licenses/documents listed above involve the general guideline for the establishment of a PT PMA. However, additional licenses and/or documents can be required in specific sectors. Therefore legal advice should be sought before engaging in investment activity.
Shareholders of the PT PMA
At least two shareholders are required (President Director and President Commissioner) for the establishment of a PT PMA. At least one of the shareholders needs to be a foreign individual (or foreign legal entity). The Director needs to reside in Indonesia to take care of all daily activities. The foreigner who works and resides in Indonesia is required to obtain a tax number (NPWP) and a work permit (KITAS).
Deed of Establishment of the PT PMA
In order to set up a PT PMA in Indonesia, the shareholders must present a deed of establishment which needs to be legalized by a public notary. The deed of establishment contains, besides the Articles of Association, the following additional information:
- Regarding the Founders:
a. In case the shareholder is an individual, the name, date of birth, place of birth, current residence information and citizenship.
b. In case the shareholder is a legal entity, the domicile of the legal entity, including the full address, the date and number of legalization of the ministry. - Regarding Board of Directors and Board of Commissioners:
a. The name, date of birth, place of birth, current residence information and citizenship information of the members of Board of Directors and Board of Commissioners who are first appointed through the deed of establishment - Regarding the Shareholders (other than the founders):
a. The names, the number of shares and their issued and paid up nominal value.
Minimum (Paid Up) Capital Requirements for the PT PMA
For the establishment of a PT PMA, the foreign investor needs to comply with minimum capital requirements for foreign investment. Currently the minimum requirement stands at IDR 10 billion or the equivalent value in US dollars. The Indonesian government set a high requirement in order to attract large scale companies and investors, while protecting smaller sized local businesses.
Paid up capital is generally set at 25 percent of the minimum capital requirement (hence IDR 2.5 billion). In certain (capital intensive) industries paid up capital requirements are higher. In practice, however, it frequently occurs that a PT PMA is established without the foreign investor needing to transfer the paid up capital to an Indonesian bank account. The shareholders of the PT PMA can sign a Capital Statement Letter pledging that the paid up capital can be transferred (without ever transferring it). However, in specific sectors, such as the financial services sector, this is not possible.
If you have any questions about the establishment of a PT PMA, you can contact Indonesia Investments.
Representative Office (KPPA)
How to Establish a Foreign Company (PT PMA) in Indonesia?
When a foreigner wants to engage in market surveillance, networking, explore business opportunities or provide other managerial support in Indonesia to the parent company abroad, he needs to establish a (general) foreign representative office (in Indonesian: Kantor Perwakilan Perusahaan Asing, abbreviated KPPA). This office is the local representative of the foreign parent company. It needs to be emphasized that this foreign representative office is strictly forbidden from engaging in commercial activities and generate revenue/profit, send invoices, etc. For these kind of business activities a foreign investment company (PT PMA) is required.
It frequently occurs that a foreign investor opens a representative office in Indonesia first in order to ‘get to know the market’. If his findings are positive, then he can open a PT PMA. The advantage of opening a representative office first is that it requires no large capital investment and it is a relatively easy and quick way to establish a legal entity in Indonesia. Contrary to the PT PMA (which is restricted by the Negative Investment List), a representative office can be established in most – but not all (!) – industry sectors (for example, a law firm cannot open a representative office in Indonesia).
Indonesia is a lucrative market for foreign entrepreneurs due to the country’s huge population (a giant consumer force), low minimum wages, and abundant natural resources. However, if Indonesia is a new market for you, or, if you are not sure whether your product, services or project can become a success, or, your financial resources are limited, you are advised to open a “Rep office” first, and use this legal entity to explore the market, promote your products, find business partners (distributors) and become acquainted with Indonesia’s (business) culture. But, we emphasize again, you cannot use your “Rep office” to generate profit or engage in direct business activities.
Besides being a much cheaper option compared to the PT PMA, the advantage of a Rep Office is that you have 100 percent (foreign) control over this legal entity and there are no director or shareholder requirements. However, we emphasize here, as this is sometimes misunderstood, that there has to be a foreign parent company abroad before you can open a Rep Office in Indonesia. A strategy that is often used by foreign companies is that the Rep Office promotes and offers the parent company’s products to Indonesian retailers/clients (invoices to the Indonesian client are sent by the parent company abroad). Then, after a strong client portfolio has been established, the foreign company decides to open a PT PMA in Indonesia (this strategy does have an impact on the corporate income tax liability of the Rep Office as it is considered “guiding indirect profits for the parent company abroad”, this is further explained below).
Besides the general foreign representative office, which is the main topic that is discussed in this section, there are also the foreign trade representative office (K3PA) and the foreign construction services representative office (BUJK). Both are separate entities from the general representative office and are thus subject to different requirements (regulated by the Ministry of Trade and Ministry of Public Works, whereas the general foreign representative office is regulated by Indonesia’s Investment Coordinating Board, abbreviated BKPM). The K3PA and BUJK are not further discussed in this section. So, lets get back to the general foreign representative office.
What are the Allowed Activities of a Representative Office in Indonesia?
Based on Article 68 (2) of BKPM Regulation No. 5/2013, the activities of a general foreign representative office are limited to:
- Taking care of the interests of the foreign parent company or its affiliated companies
- Preparing the establishment and development of a foreign investment company (PT PMA) in Indonesia
What are the Restricted Activities of a Representative Office in Indonesia?
Article 2 BKPM 22/2001 explicitly regulates that the general foreign representative office is not allowed to:
- Search for income from sources inside Indonesia, including carrying out activities or doing anything related to the engagement in and/or sales and purchases of goods or services with a company or individual inside Indonesia, and/or
- Participate in any form in the management of a company, a subsidiary or branch office in Indonesia
Based on Article 4 (3) of BKPM Regulation 22/SK/2001, the Chief Representative of the representative office is allowed to employ foreign employees (if they possess the relevant expertise). All foreigners working in Indonesia need a permit called KITAS (non-permanent stay permit) and an IMTA (work permit). These can be issued through representative offices for the representative office executive, while business visas for limited stays can, without limitations, also be sponsored by the representative office.
However, KITAS sponsorships are restricted by the rule that for each foreign national working at the Rep Office there needs to be (at least) three Indonesian employees. Hence, if you want two expats to work at your Rep Office in Indonesia, then you need to hire at least six Indonesian staff-members (either experts or administrative staffs). This regulation was made in order to combat Indonesia’s unemployment rate. Authorities will check whether this foreign/local worker ratio is being respected and therefore you need employment contracts, payment (salary) slips, and copies of the staff-members’ identification papers as evidence.
In case you do not want to have any expats working at your Indonesian Rep Office (and even if the Rep Office Head or Chief Representative is an Indonesian citizen), then you will still need to hire three Indonesian staff-members.
The representative office needs to be located in an office building (or commercial building) in a provincial capital city in Indonesia (a virtual office is not allowed). You cannot open the Rep Office in a house or apartment.
About the Chief Representative Officer of the Rep Office
The Rep Office Head in Indonesia (also known as Chief Representative Officer or Chief Representative) needs to be appointed by the director of the parent company abroad. It is important to know that both positions cannot be filled by the same person; the foreign director needs to appoint someone else as Rep Office Head in Indonesia (or the director of the parent company abroad needs to step down from his position first, appoint a new director for the foreign parent company, and then can become the Rep Office Head in Indonesia). Regarding the nationality of the position of Rep Office Head, this can be filled by an expat or an Indonesian individual. General guidelines are that he/she holds at least a Bachelor degree and three years of working experience in the related field.
What Taxes Does the Representative Office Has to Pay?
Even though the representative office in Indonesia is not engaged in direct sales and therefore cannot generate revenue or profit, it is a taxable entity and therefore it is mandatory to report and pay tax every month (as well as the monthly social security report). Income tax will be zero.
Each month you will have to report withholding tax (amount of an employee’s pay withheld by the employer).
But what about the Rep Office guiding indirect profit for the parent company abroad?
There is also a specific regulation for those representative offices that (seemingly) facilitate the generation of profit for their parent company abroad as a result of the Rep Office’s activities in Indonesia. Despite revenues being paid directly from Indonesian client to the parent company abroad, a tax liability can be levied by authorities. This is why social media platforms like Facebook and Twitter encountered problems in Indonesia. Although earnings from advertisement – originating from the Indonesian audience (through doing business in Indonesia) – were booked at the regional office in Singapore, tax officials found these social media to be liable for corporate income tax as well as value added tax (related to service delivery in Indonesia).
If the Rep Office is indeed guiding indirect profits for the parent company abroad from Indonesia – generated through the Rep Office’s activities in Indonesia -, then it must apply the “special metric of gross export value when calculating corporate income tax”. In this case income tax would not be zero but the applied rate for gross export values is 0.44 percent (however, in case of a tax treaty between Indonesia and the country abroad, the corporate income tax rate follows the branch profit tax rates as set in the tax treaty).
Opening a Bank Account by a Rep Office or Expat
Being a legal entity incorporated in Indonesia, your Rep Office can open a bank account at a local bank. Usually Rep Offices open a rupiah-denominated account for administrative matters, including the transfer of wages for the employees (a US dollar-denominated account is also possible). Per bank, the exact requirements may differ but in general you will need to show the Rep Office’s Copy of Company Registration (TDP), Business License, and Copy of tax number (NPWP). Usually a minimum deposit is required (for example IDR 1 million or approx. USD $100). Also the expat working for the Rep Office in Indonesia can open a personal bank account. Generally, the expat simply needs to show his passport, KITAS and place a minimum deposit. Based on our experience the process takes less than one hour (provided you bring all necessary documents).
Required Documents and Steps for the Setting Up of a Rep Office in Indonesia:
The following licenses/documents are required for the establishment of a (general) foreign representative office in Indonesia:
Required Documents
- A Letter of Appointment from the foreign parent company
- Articles of Association of the foreign parent company including amendment(s) in English
- Copy of registration at Chamber of Commerce of parent company
- Power of Attorney to sign the application if being represented by another party
- Copy of a valid passport (of foreign national), or, copy of identification card number and tax number/NPWP (of Indonesian national) who will be proposed as Representative Office Head
- Letter of Intent & Letter of Statement concerning the commitment to stay, and only work in the position as a Representative Office Executive without conducting other business in Indonesia
Please note that the Letter of Appointment (LOA), Letter of Intent (LOI), Letter of Statement (LOS), Power of Attorney (POA), copy of registration at Chamber of Commerce, and Articles of Association (including amendments) need to be legalized by a Public Notary and an Indonesian Embassy in the country of the foreign parent company
The following steps are required to set up a (general) foreign representative office in Indonesia:
Required Steps
- Request BKPM Letter of Approval
- Letter of Domicile of the representative office
- Power of Attorney to sign the application if being represented
by another party - Tax identification number (NPWP)
- TDP/Company registration certificate
Estimated Time(days)
10
5
10
2
14 – 21
The license of a general representative office (KPPA) lasts for 3 (three) years and can be extended twice, each for a period of 1 (one) year, to a total of 5 (five) years. Hereafter it cannot be extended, unless the representative office can show that its activities are different from its earlier activities. Generally, after five years, you have the choice: set up a PT PMA or exit Indonesia.
For foreigners who are not familiar with Indonesian bureaucracy the establishment of a Rep Office can be a complex and time-consuming affair. Therefore, in many cases it is better to appoint a local business consultancy or agent to set up the office for you.
What Can Indonesia Investments Do for You?
- Establish the representative office in accordance with existing laws and regulations
- Assist finding the right office space at the right location (Jakarta only)
- Assist making the employment contracts between you and the staff-members
- Arrange the immigration process for your expat workers and/or Rep Office Head
What Does the Representative Office Establishment Package Cost?
Approx. USD $2,000 (excluding immigration services); it will take about two months
If you have any further questions regarding the establishment of a foreign representative office, or need support to establish such office, please contact Indonesia Investments