1. General Discussion

    Over the past ten years, Indonesia has undergone dramatic changes, starting with the crash of its economy during the South East Asian economic meltdown. Shortly thereafter, the Indonesian political structure underwent its most drastic changes in decades when President Soeharto was ousted in May 1998 and democratic elections were held in November 1999 to elect a new president. Since then Indonesia has gone through the growing pains and turmoil of a newly-democratised country.

    In 2004 Indonesia suffered the disturbances of an election year, and with some of the capital that flowed overseas during the political upheavals now returning to the country, Indonesia needs now, more than ever, a cohesive and certain legal system and investment regime, both to continue the implementation and development of the recent reforms and also to attract new investment that might otherwise be attracted by the dynamic economies of China and other SE Asian nations.

  2. Regulations and Restrictions

    The financial crisis in Asia had a disastrous effect on the Indonesian economy but it also had some positive by-products for its foreign investment climate as the Indonesian Government, in an attempt to attract a new flow of foreign capital and investment, opened up industry sectors which were previously closed to foreigners and implemented legislation aimed at making certain aspects of business, such as mergers, consumer rights, antitrust and bankruptcy, more efficient and transparent.

    Traditionally, most private foreign investments have been through the establishment of foreign investment companies, also referred to as 'PMA companies'. PMA stands for penanaman modal asing which means 'foreign investment'.

    The areas of business in which PMA companies are allowed to operate are restricted by a so-called Negative List. Although this list has now become very short (as most areas are now open for foreign investment) recent amendments to the List have increased the number of business areas where a local shareholding is required.

  1. Investment Coordinating Board (BKPM)

    Most forms of foreign investments are governed by the Foreign Capital Investment Law of 1967 which has just been replaced by Law No 25 of 2007 on Capital Investment. The government agency overseeing foreign investments in Indonesia is the Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal / "BKPM").

    The BKPM still acts as the prime regulator of foreign investments into Indonesia although there has been a recent if not dramatic shift from the BKPM to its regional offices, the so-called BKPMD's, which now also fulfill an important task in dealing with certain foreign investment matters. The BKPM endeavors to provide a 'one stop service' for foreign entrepreneurs seeking to invest in Indonesia.

    It should be noted that the oil and gas sector and banking, finance and insurance sector are governed by separate regulatory regimes. Investments in the former fall under the authority of the Ministry of Energy and Mineral Resources, whilst investments in the latter fall under the auspices of the Ministry of Finance and of Bank Indonesia (Indonesia's central bank).

  2. Forms of Investment

    As mentioned, foreign investments in Indonesia are most commonly made through taking a stake in or full ownership of a PMA company. There are a few exceptions to this general rule. For example, in the banking, financial and insurance sector, foreign investments usually occur through a joint venture bank, a finance company, a venture capital company or a multi-finance company. Also, investments in the oil and gas sector are usually affected by way of entering into a production sharing contract with BP Migas (on behalf of the Indonesian Government) and the establishment of a local office. As a general rule, partnerships, branch offices and sole proprietorships are not available as investment vehicles for foreigners. There are a number of different types of representative office that can be established, depending on the business activity of the foreign company.

  3. The PMA Company

    A PMA company is a limited liability company established under Law No 40 of 2007 on Limited Liability Companies (Company Law). A PMA company may be a joint venture company established by a foreign investor and an Indonesian partner or (where 100% foreign shareholding is permitted) a wholly foreign-owned company. A private limited liability company (PMA or local) should at all times have at least two shareholders.

    The BKPM, which supervises PMA companies, makes a number of facilities and benefits available to PMA companies which are normally unavailable to most regular Indonesian companies. These facilities include tax benefits, the right to employ foreign directors and commissioners, the right to employ foreign nationals where no qualified Indonesians are available, exemption from import duties for basic (capital) goods, and loss carry-forward facilities. Usually, new direct foreign investments in Indonesia are structured either by acquiring an existing company or establishing a new PMA company.

  4. Acquisition of Existing Companies

    The acquisition of shares in an already existing Indonesian company may be less popular than the establishment of a PMA company, but it is still frequently used. Of course, the target company's area of business must be open for foreign investments.

    If the target company is an existing PMA company, then the acquisition of shares must be approved by the BKPM. If the target company is an existing domestic capital investment (PMDN) company or a non PMA/PMDN company, then the current regulations require the target company to submit a request to the BKPM to convert its status to that of a PMA company before any foreign shareholding is permitted.

    The legal framework covering acquisitions is laid down in the Company Law and laws and regulations on takeovers and foreign investment. Specific regulatory regimes apply to acquisitions in the banking and finance sector, which fall under the supervision of the Ministry of Finance. The acquisition of publicly listed companies is supervised by the Capital Market and Financial Institution Supervisory Board (Bapepam-LK). Employment considerations are important in mergers and acquisitions.

  5. Establishment of a new PMA company

    Before a formal application to establish a PMA company is lodged with the BKPM, an investor should confirm that the proposed line of business of the company is open for foreign investment by reviewing the current negative list and any applicable investment guidelines issued by the BKPM. It is also important to make preliminary inquiries at the BKPM to ascertain that there are no objections to the proposed line of business and to ascertain whether there are any official or unofficial policies or practices that may be relevant to the application. Also, in the case of a joint investment by a foreign investor and an Indonesian partner, a joint venture agreement should be negotiated to decide upon the terms of the joint venture.

    The entire process of establishing a new PMA company, from lodging the application with BKPM to completion, can take three to six months, and consists roughly of the following steps:

    (1) Submission to the BKPM of a completed Model I/PMA application form including all relevant information about the proposed investment. For certain business activities, a recommendation letter from the relevant technical department may be one of the documents to be submitted along with the BKPM application.

    (2) Issuance of the BKPM approval.

    (3) Execution in the presence of a local notary of the PMA company's deed of establishment containing the articles of association.

    (4) Obtaining a letter of domicile, applying for a tax registration number, establishment of a PMA bank account and payment of capital.

    (5) Obtaining approval of the Ministry of Law and Human Rights (at this point limited liability status is obtained).

    (6) Registration of the articles of association with the relevant office of the Ministry of Trade and fulfillment of other administrative formalities.

    (7) Obtaining approval from the relevant technical department for certain business activities (if necessary).

    (8) When ready to commence the commercial production/operation, application for a permanent business license (izin usaha tetap) to the BKPM.

    In practice, the BKPM (based on its unwritten policy) may impose minimum capital investment requirements for PMA companies, the amount of which will depend on the type of the business activities to be performed by the relevant companies. The BKPM may also impose further specific requirements on a case-by-case basis. Generally, a debt to equity ratio of 3:1 is imposed but for business activities that require a higher investment then the ratio may also be higher. Foreigners may become directors and commissioners in PMA companies, except for a director who is in charge of human resources.

  1. Taxation of Foreign Direct Investment

    Indonesia's income tax system is based on self-assessment and self-compliance. Tax collections are made by the Directorate General of Taxation (Direktorat Jenderal Pajak) within the Ministry of Finance (Departemen Keuangan). Collections are made on a geographical basis since tax subjects register with their relevant District Tax Office. The tax authorities have recently focused on improving tax compliance by resident expatriate individuals. In respect of income tax, tax subjects are taxed on their worldwide income.

    The following are considered tax residents:

  • individuals residing in Indonesia for more than 183 days within a 12 month period, or present in Indonesia during the tax year and intending to reside;
  • Indonesian entities (i.e. companies, partnerships, cooperatives); and
  • Permanent Establishments (applicable to foreign entities with a business presence in Indonesia). A Permanent Establishment generally covers representative offices, management base office, branch offices, office building, plant, warehouse, dependent agencies and may also include construction projects, mines or other places of extraction of natural resources, and consultants providing services in Indonesia as well as computers, electronic agents or automatic tools owned, rented, or used by electronic transaction operators to conduct business activities through the internet.

Under the new Income Tax Law that was enacted on 28 September 2008 (and which came into force on 1 January 2009), the corporate income tax rate is 28 % as of 1 January 2009 and will be 25 % as of 2010. There are some interesting provisions related to foreign investment regulated in this new law such as:

  • A Taxpayer purchasing shares or assets of companies through another party or special purpose company can be determined to be the actual party executing the purchase if the taxpayer has a special relationship with the other party or company and there is something irregular about the price.
  • A sale or transfer of corporate shares between a conduit company or special purpose company established or domiciled in a tax haven country having a special relationship with an entity established or domiciled in Indonesia or a permanent establishment in Indonesia can be determined to be the sale or transfer of shares of an entity established or domiciled in Indonesia or a permanent establishment in Indonesia.
  • The income paid to a resident individual taxpayer from an employer having a special relationship with another company not established or not domiciled in Indonesia, can be re-determined if the employer is transferring all or part of the income of the resident individual taxpayer to another cost or expense paid to a company not established and not domiciled in Indonesia.

The above provisions will be regulated further by a regulation of the Ministry of Finance.

Apart from income taxes, other taxes which foreign investors may come across include:

  • Value Added Tax (VAT) of 10% on goods and services;
  • Luxury Goods Tax of 10%-75% levied on manufacture or importation;
  • Stamp Duty of up to Rp.6,000 on documents;
  • Land and Building Tax (PBB), typically not more than 0.1% per annum of the property value;
  • A 5% land acquisition tax and a 5% deemed profit tax on land sales; and
  • In respect of non-residents, a withholding tax of 20% on most types of payments such as dividends, interest, royalties, services, deemed profit and property disposal proceeds. Under the new Income Tax Law, premiums on swap and other hedging transactions and profit arising from a haircut are also subject to the income tax. The rate may be reduced by Double Tax Treaties of which Indonesia has negotiated over 50.

At present there are no formal exchange controls although there are reporting requirements in certain circumstances. The transfer of certain Indonesian Rupiah amounts to or from overseas requires approval.

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.