FDI regulations and setting up a subsidiary company in Indonesia

To improve the business environment and attract investments, President Joko Widodo has launched measures to streamline licensing procedures and providing tax concessions. Since 2007 Indonesia’s Investment Law established the principle of equal treatment for foreign and domestic investors. Yet improvements in the areas of bureaucracy, corruption and judiciary and economic protectionism would strengthen the business climate in Indonesia.

FDI regulation

Indonesia had bilateral investment treaties (BIT) with about 60 countries as of January 2016. The agreements commit the signatories to giving equal treatment to each other’s foreign direct investment (FDI), protection of FDI from nationalisation and also arbitration in case of disputes between the Indonesian state and foreign investors by the Washington-based, World Bank-sponsored International Centre for the Settlement of Investment Disputes (ICSID). However, in May 2015 the coordinating economic minister, Sofyan Djalil, confirmed Indonesia was allowing the BITs to expire without being renewed, as the country wishes to revise the investment agreements. According to news reports, Indonesian officials want the arbitration clauses on the BITs to be revised because they regard the ICSID framework as disadvantageous to the country. Since Minister Susi reformed fisheries investment regulations FDI in seafood is not allowed in fisheries operations itself. However, to stimulate investments in infrastructure for fish landings and cold-chain, 100% foreign ownership in seafood processing and cold storage is allowed. Also 100% foreign ownership in aquaculture operation is permitted.

Setting up a subsidiary company

After the early stage of entering the Indonesian market, often as representative office, when the business starts to grow, it becomes more attractive to apply for the status of Foreign Direct Investment Company. A 100% or majority foreign owned company is called a Penanaman Modal Asing (PMA) and is obtained through the Indonesia Investment Coordinating Board (BKPM). As PMA you can provide services or sell goods within Indonesia.

PMA

If you prefer full control over the direction of the company and reduce the risk in findin a suitable local partner, then PMA provides these advantages. In addition non equity partnerships can still be established with local Indonesian companies for business services such as marketing. There must be two parties holding shares in a PMA company, either a legal entity or an individual. The shareholders must also appoint at least one director (manager and authority to represent the PMA) and at least one commissioner (supervisor and advisor) of the PMA company. Since 2015 (BKPM Regulation 14/2015) PMAs are required to obtain two types of permits:
  1. an initial investment licence called a “principle licence” (granted for 30 years)
  2. a business licence that is necessary before commencing operations
To obtain the principle licence PMAs must invest at least Rp10bn per specific project in one specific location (excluding investments in land and buildings).

Joint Venture

Key for a successful joint venture is finding a local partner with the same visions and mutual interests. A main advantage is that a local partner can provide access to a local network and knows how to deal with the Indonesian bureaucracy and cultural customs. Especially when dealing both with production and distribution this helps to overcome bottlenecks in transport and custom procedures. A joint venture appears to be the most common form of entry into the Indonesian market. A crucial document for this type of business is the Joint Venture Agreement between the two parties.

Investment-approval check-list

According to the World Bank’s Doing Business 2016 study, the following procedures are necessary to start a business in Indonesia:
  1. Pay fee for obtaining clearance of company name at a bank. Time to complete: one day.
  2. Arrange for a notary to obtain the standard form of the company deed and obtain clearance for the Indonesian company’s name at the Ministry of Law and Human Rights. Time to complete: four days.
  3. Notarise company documents. Time to complete: one day (simultaneous with previous procedure).
  4. Apply to the Ministry of Law and Human Rights for approval of the deed of establishment. Time to complete: less than 
one day (online procedure).
  5. Obtain the building management domicile certificate. Time to complete: one day.
  6. Apply for the certificate of company domicile from the local municipality. Time to complete: two days.
  7. Pay the nontax state revenue fees for legal services at a bank. Time to complete: one day.
  8. Apply at the Ministry of Trade for the permanent-business trading licence (surat izin usaha perdagangan or SIUP). Time 
to complete: 15 days.
  9. Obtain company registration certificate (tanda daftar perusahaan—TDP) from the local government office. Time to 
complete: 14 days.
  10. Register with the Ministry of Manpower. Time to complete: one day.
  11.  *Apply for the Workers Social Security Programme (Badan Penyelenggara Jaminan Sosial [BPJS] Employment) in 
accordance with Law 3/1992. Time to complete: seven days (simultaneously with procedure 10).
  12. *Apply for healthcare insurance with BPJS Health. Time to complete: seven days (simultaneous with procedure 10).
  13. *Obtain a taxpayer registration number (nomor pokok wajib pajak) and a value-added-tax collector number. Time to 
complete: one day.
*Procedures 11,12, and 13 may take place simultaneously.

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