DOING BUSINESS IN INDONESIA

Overview

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. Government data revealed that Indonesia's economy expanded by 5.31% in 2022 compared to the previous year. This indicates a significant milestone for Southeast Asia's largest economy, as it has successfully regained its pre-pandemic growth trajectory[2]. This is one of several factors that place Indonesia as the largest economy in Southeast Asia. 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 launched their first Mass Rapid Train (MRT) operating in March 2019[3], to various policy and regulatory 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environment through the introduction and implementation of the Online Single Submission (OSS) system Subsequently, a newer version of the original OSS called the OSS RBA was introduced. For further information regarding the OSS RBA, please refer to this article. This system is intended to integrate and expedite the business licensing application process, which in the past, was done manually through various government institutions, hence time consuming, and less cost efficient for applicants.

In line with the efforts to create a more transparent, synchronize, and integrated investment environment, the Indonesian Government introduced massive changes through Law No. 11 of 2020 on Job Creation[4], known as the Omnibus Law. These reforms were further reinforced on 30 December 2022, when the government promulgated an emergency regulation, Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation[5]. This new regulation repeals and replaces the Omnibus Law, which was declared “conditionally unconstitutional” by the Indonesian Constitutional Court due to procedural grounds on 25 November 2021. These comprehensive reforms aim to streamline and improve the licensing process, providing a more conducive environment for business development and investment.

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, there are two type of entities 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). There are other types of representative offices that are applicable specifically to trading, construction, electricity sectors[6], but we will not cover them in detail in this article.

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, now known as the “Positive List of Investment” (previously known as the “Negative List”)[7], please refer to this article. Under the positive investment list, the general principle is that a business sector is open to one hundred percent foreign investment unless it is subjected to specific limitations.

Indonesia has classified business fields into five categories: priority sectors, business fields open to large enterprises but with compulsory partnership with cooperatives and micro, small, and medium-sized enterprises (MSMEs), business fields reserved for cooperatives and MSMEs without foreign investment, business fields with specific requirements or limitations, and business fields closed for investment.

General comparison between the two entities:

	Foreign Investment Company or PT PMA	Foreign Representative Office or KPPA
Business Activities	Subject to the above Positive List of Investment, specific to the business activities approved by the license and covered under its articles of association.	Preparation, 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 Positive List of Investment, as discussed above.	No foreign shareholding restriction, as this is only representative office of the principal.
Minimum Issued and Paid-Up Capital	More than IDR 10 billion excluding land and building – , unless otherwise stated in other specific regulations – Note: specific rules apply for  certain business sectors. Please refer to this article.	NA
Pros	1. May generate incomes from its specific business activities. 2. 　Limitation of liabilities for shareholders up to the amount of capital injected in the company.	-          No capital requirement -          Generally, takes less time to establish
Cons	Minimum capital requirement – as discussed above.	Limitations: 1. May only act as a supervisor, liaison, coordinator, and handling the interests of the company or its affiliated companies. 2. May prepare for the establishment and business development of a foreign investment company (PMA) in Indonesia or in other countries and Indonesia. 3. Located in an office building in the provincial capital. 4. May not seek any income from sources in Indonesia, including not being allowed to engage in activities or enter into agreements/transactions for the sale and purchase of goods or commercial services with companies or individuals within the country. 5. May not participating in any form in the management of a company, subsidiary, or branch located in Indonesia.
Work Permits	Possible for foreign shareholders, directors and commissioners and workers	Possible for the chief representative of the representative office and foreign workers.
Application Process	Via the OSS RBA System	Via the OSS RBA System

The information provided in this article does not, and is not intended to, constitute legal advice and is for general informational purposes only. Readers of this article should contact an attorney to obtain advice with respect to any particular legal matter.

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[1] https://www.worldbank.org/en/country/indonesia/overview

[2] https://asia.nikkei.com/Economy/Indonesia-s-GDP-grew-5.31-in-2022-hitting-9-year-high

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

[4] Undang-Undang Nomor 11 Tahun 2020 tentang Cipta Kerja

[5] Peraturan Pemerintah Pengganti Undang-Undang Nomor 2 Tahun 2022 tentang Cipta Kerja

[6] a. representative office of foreign trading company;

b. representative office of foreign construction services entity; and/or

c. representative office of foreign electricity support services

[7] Peraturan Presiden Nomor 10 Tahun 2021 tentang Bidang Usaha Penanaman Modal yang telah diubah dengan Peraturan Presiden Nomor 49 Tahun 2021

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