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Establishing a Presence in Indonesia

Foreign investment approvals are issued by Indonesia’s Investment Coordinating Board (BKPM). In addition to issuing investment licences, BKPM is also charged with improving the investment environment in the country.

In August 2017, the Indonesian government released the 16th Economic Policy Package (EPP), part of which is related to plans for better coordination between various government ministries and regional authorities with regard to the issuance of business permits, as well as details of the proposed shift to an online licence processing system. This came in the wake of continuing criticism of many regional authorities for failing to properly implement a number of the government’s investment policies.

The EPP envisaged the establishment of a one-stop shop in BKPM for all of the business licences and permits, along with greater transparency with regards to costs and processing time, as well as an expedited service. That said, the process to invest in Indonesia remains tedious and complex and in the meantime, Hong Kong investors are advised to seek advice from an Indonesian law firm on investment application matters.

There are two ways for a Hong Kong company to set up a business presence in Indonesia:

1. Establish a limited liability company for foreign investment purposes (Perusahaan Terbatas (PT)). A PT company formed with a foreign shareholder is referred to as a PMA Company in Indonesia.

2. Establish a Representative Office (RO).

Indonesian Investment Law requires foreign investors wishing to engage in commercial and business activity in the country to set up a PMA company. An RO set up in Indonesia cannot engage in any commercial activity or generate income (with the exception of ROs specifically delivering construction services) and ROs activities are restricted to marketing or promotion activities, market research and a review of business opportunities.

Setting up a PMA Company

Regulations

  • The Investment Law (Indonesian Law No. 25/2007) regulates foreign investment by granting a right of entry to foreign businesses through a government licensing procedure principally controlled by BKPM

  • The Company Law (Indonesian Law No. 40/2007) stipulates the legal framework for companies

  • Sectoral regulations can be viewed on the website of BKPM

Investment Requirements

PMA companies are required to have a minimum investment as follows:

1. Total investment must be more than IDR10 billion (about US$750,000), comprising equity and loans but excluding land and building

2. Paid up capital must be equal to the subscribed capital and should not be less than IDR2.5 billion (about US$188,000)

Investment Restrictions

The foreign investment regime in Indonesia is governed by the Investment Negative List (DNI), which stipulates the sectors that are open, wholly or partially to FDI. Sectors that are closed to foreign investment or subject to certain investment restrictions are also set out in the DNI. The DNI was last refreshed in 2016 with restrictions in certain sectors removed to encourage greater FDI in Indonesia. The DNI now allows 100% FDI in the sectors of e-commerce, cold storage, pharmaceuticals manufacturing and film.

Examples of the sectors where investment is restricted are provided in the following table, but it is advisable to refer to the 2016 DNI for full details.

ClosedOpen with Restrictive Conditions
(FDI limited to between 30% and 95%)
Transportation (e.g. administration or testing of certain types of motor vehicles)Industrial (e.g. automobile maintenance and repair)
Industrial (e.g. chemical industry)Trade (e.g. most retail businesses)
Education and culture (e.g. casinos)Energy and mineral resources (e.g. oil and gas construction services)
Marine affairs and fisheries (e.g. the utilisation of coral for construction materials and souvenirs/jewellery)Tourism and creative economy
 Financial and banking

 

Procedures to Follow to Set up a Company

The World Bank’s Doing Business 2018 report ranks Indonesia 144 out of 190 economies in starting a business, reporting that it takes 22 days to start a business, which is in line with the average for East Asia and Pacific, but considerably longer than the average of 8.5 days for OECD high-income economies. As mentioned above, the Indonesian government has embarked on a major overhaul of the investment regime with the BKPM charged with streamlining the licensing procedures and cutting the processing time.

To set up a company in Indonesia, the following procedures are to be completed:

1. Obtain approval of investment from BKPM.

  • In 2018, BKPM adopts the Investment Registration (Pendaftaran Investasi or PI) as the initial permit for investing in Indonesia to speed up the licensing process, superseding Principle Licence (Izin Prinsip or IP). Certain companies can straightforwardly apply for a Business Licence (Izin Usaha or IU), for example, companies do not require construction of dedicated facilities.

2. Obtain clearance of company’s name from the Ministry of Law and Human Rights (MOLHR). A fee of IDR200,000 (about US$15) should be paid.

3. Obtain the standard form of the company deed and notarise company documents, which are handled by a lawyer. The maximum notary fee is 1.5% of the total value of the object of the deed.

4. Apply to MOLHR for approval of the deed of establishment.

5. Apply for the Certificate of Company Domicile, which can be provided by the local tax office or the building management where office space is leased. There is no official fee for this certificate, which is required for tax registration.

6. Obtain a taxpayer registration number (NPWP) and a VAT collector number (NPPKP). 

7. Legislation of Article of Association will be provided by MOLHR. Upon receiving this, pay the non-tax state revenue fees for legal services at a bank and request publication of the company at a total cost of:

  • IDR 1 million (about US$75) for validation of company as legal entity
  • IDR 550,000 (about US$42) for publication in the Supplement State Gazette
  • IDR 30,000 (about US$2) for publication in the State Gazette

8. Apply to the Ministry of Trade for the permanent business trading licence and the registration certificate of the company.

9. Register with the Ministry of Manpower and apply for the workers social security programme and healthcare insurance with BPJS Ketenagakerjaan, Indonesia’s social security administration body.

Accounting Requirements

Companies are required to maintain accounting records and prepare annual financial statements in accordance with the Indonesian Financial Accounting Standards (SAK), which are mostly adopted from International Financial Reporting Standards (IFRS). All accounting books, records and financial statements should be prepared in the Indonesian language. A company is allowed to use other languages in financial statements only after obtaining permission from the Ministry of Finance.

Setting up a Representative Office

In Indonesia, a representative office (RO) is known as Kantor Perwakilan Perusahaan Asing (KPPA). To set up a KPPA, Hong Kong companies are generally required to complete the following procedures:

1. Prepare the relevant documents, which should be reviewed by a lawyer and the Indonesian Embassy in the originating country of the foreign company. The following documentation must be in place:

  • A letter of appointment from the RO’s parent company
  • Articles of Association from the RO’s parent company
  • Copy of registration with a chamber of commerce of parent company
  • Letter of Intent and Letter of Statement concerning the commitment to stay and only work in the position as an RO

2. Request from BKPM a Letter of Approval

3. Obtain a Letter of Domicile, which can be provided by either the local tax office or the building management where office space is leased

4. Obtain a taxpayer registration number (NPWP)

5. Complete application and obtain the Company Registration Certificate

The licence of a KPPA lasts for three years and can be extended twice, each for a period of one year, for a total of five years. After five years an Indonesian company (a PMA company) will have to be set up or the RO will need to exit Indonesia.

Business Incentives

Indonesia provides certain investment incentives such as tax exemptions, tax holidays and import duty exemptions. Exact details of the incentives and eligibility requirements can be found on the Investment Incentives webpages on the BKPM website, which also provides information on investment opportunities available in specific sectors (agriculture, industry, infrastructure, etc.) and regions.

Indonesia has also established Free Trade Zones (FTZ) in Batam, Bintan and Karimun, which are treated as if they were outside of the Indonesian customs territory. There are no import duties and other taxes on the importation of goods in the FTZs.

 

A Practical Guide to Doing Business in Indonesia

  1. Regulatory Environment
  2. Establishing a Presence
  3. Intellectual Property Protection
  4. Staff Recruitment
  5. Tax Considerations
  6. Import/Export Procedures
  7. Further Information


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