Indonesia is a country with huge market for foreign investors, the fourth largest countries in terms of population (following, China, India and United States of America[1]) with a number of unique characteristics, and abundant natural resources. Indonesia in recent years has registered a steady growth at above 5 percent[2], which is one of the factors placing Indonesia in the Southeast Asia's largest economy. Most notably, there has been strong commitment and support from the government in recent years to promote Indonesian foreign investment by improving many important aspects, from infrastructure development, ie. Indonesia just recently launched their first Mass Rapid Train (MRT) operating in March 2019[3], to various policy changes, which are primarily aimed at opening new opportunities and giving flexibilities for foreign investors, alongside with the improvement in the law enforcement.

One of the efforts shown by the government in terms of investment policy is by creating a more transparent and integrated investment environment through the introduction and implementation of the Online Single Submission (OSS) system[4]. This system electronically integrates different kinds of business licenses application, which in the past, was done manually through various government institutions, hence time consuming, and less cost efficient for applicants.

Regardless of such notable changes, starting a business in Indonesia can be very challenging for foreign investors, particularly without any experience within the country and no useful contacts or a network to rely on. Indonesia also has a unique and quite complex regulatory and government supervisory system. There are many layers of regulations depending on the type of business, transaction, company status (private or public) and location (central or regional). The government supervising authorities are also divided depending on such many factors. As such, selecting an experienced and competent consultant to assist and provide with the proper advice and practical solution from both legal and business aspects is as very much crucial. This article will only discuss basic information about investing in Indonesia.

As a general introduction, two type of entities that are permitted for foreign investors to engage in business activities or specific promotional activities “in Indonesia: (1) a foreign investment limited liability company (or know as PT PMA), and (2) a representative office (in Indonesian Kantor Perwakilan Perusahaan Asing, or, KPPA).

Foreign investment limitation

For option (1), foreign investors also need to observe type of business sectors/activities that are open for foreign investment/ shares participation as well as the threshold of foreign shares participation (if any).

The limitation is set out by the government from time to time, in the list, known as the “Negative List of Investment” (this list in detail sets out classification of certain lines of business (also known as Klasifikasi Baku Lapangan Usaha Indonesia or “KBLI”) that are either totally closed for investment (including businesses that are reserved for small and medium-scale enterprises) or opened for investment with certain conditions; for example (a) limitations on foreign ownership, (b) a requirement for local partnership, (c) limited permitted locations, and (d) a requirement for special license). Note: Early this year 2019, the Indonesian government was planning to amend the current Indonesian Negative List of Investment to allow full foreign ownership in a wider number of business sectors, showing another action plan to support foreign investment growth in Indonesia.

General comparison between the two entities:

Foreign Investment Company or PT PMA

Foreign Representative Office or KPPA

Business Activities

Specific to the business activities approved by BKPM and covered under its articles of association

Promotional, market research & local representation

Best Option for

Investors who would want to engage in commercial activities (generates income) in Indonesia

Companies that want to engage in market research, networking, promotional. It is strictly forbidden to generate profit and revenue or engage in sales directly

Foreign Ownership Restriction

Varies depending on the Negative List of Investment

No shares restriction, as this is only representative office of the principal.

Minimum Total Investment

More than IDR 10 billion excluding land and building – except for real property sector meeting specific requirements (paid up capital at least IDR 2.5 billion investment plan) – Note: certain business sector may require higher investment amount

NA

Pros

-  Operates as an independent cooperation within the business classification

-  May generate incomes from its specific business activities.

-  Limitation of liabilities for shareholders up to the amount of capital injected in the company.

-          No capital requirement

-          Takes less time to establish

Cons

Minimum capital requirement

May not engage in commercial activities other than for marketing, networking, promotional.


Valid for a maximum period of 5 years, extendable depending on the approval

Work Permits

Possible for foreign shareholders, directors and commissioners and workers

Possible for the chief representative of the representative office and foreign workers as long as the minimum ratio of foreign vs Indonesian workers is met.

Time to Establish

3 to 4 weeks subject to complete requirements (excluding administrative license)

1 to 2 weeks subject to complete requirements


[1] https://www.worldometers.info/world-population/

[2] https://www.aseanbriefing.com/news/2019/01/18/indonesias-investment-outlook-for-2019.html

[3] https://www.straitstimes.com/asia/se-asia/indonesias-jakarta-set-to-inaugurate-mrt-system-to-tackle-one-of-worlds-worst-traffic

[4] https://www2.investindonesia.go.id/en/article-investment/detail/online-investment-system-eases-direct-investment-procedures-in-indonesia