The rules for starting a business in Indonesia can be overwhelming and hard to understand. But it doesn’t have to be. This article will outline some things you should know before you jump headlong into this new endeavor. Below are 9 steps that will get you started on the right foot with your new business in Indonesia.

Make Sure the Investment Availability for Your Business Sector

Foreign direct investment is a risky venture that many companies would never consider. The decision to invest can be even more difficult if the country you are investing in does not allow it at all or only under certain conditions.

That’s why after deciding which sector or industry you want to work in you need to make sure whether the business sector is open with conditions or altogether closed for foreign direct investment. You can do this by checking the Presidential Decree No. 49 of 2021.

Presidential Regulation no 49 of 2021

While the above regulations list out various sectors that may or not be open with conditions and investments depending on the business field you want to focus on, you will then need to further look up your business classification using the Indonesian Standard Business Classification (Klasifikasi Baku Lapangan Usaha Indonesia or KBLI) that helps break down what types of businesses exist within those fields.

Choose the Type of Company

There are three business entities you can choose for starting a business in Indonesia as a foreign investor. These include:

  1. Foreign Direct Investment Limited Liability Company (FDI LLC) or Perseroan Terbatas Penanaman Modal Asing (PT PMA)
  2. Locally owned Limited Liability Company known as Perseroan Terbatas Penanaman Modal Dalam Negeri (PT PMDN)
  3. Representative Office

We will take a look at the characteristics, advantages of each business entity as well as some disadvantages that you need to be aware of.

PT PMA Characteristics

  1. PT PMA’s (Foreign Direct Investment) capital is sustained by foreign citizens. Foreign business entities or even governments can provide this investment, which comes in various forms such as direct investments and other schemes.
  2. PT PMA needs to have at least two members (a director and a commissioner), each being either an individual or a legal entity. This minimum requirement is designed not only as an assurance that the company will never be left without its key decision-makers but also to prevent situations where one shareholder could unfairly take advantage of another shareholder’s equity stake.
  3. PT PMA is required to prioritize the employment of local workers who will not only produce a quality product but allow for sustainable progress in their organization.
  4. If a PT PMA wants to bring in more people from overseas, the company is also required to train and transfer special technology to local workers.
  5. Foreign investors can set up their companies anywhere in Indonesia. However, the Indonesian Government has determined that the industrial business sector must be established in industrial estates.

PT PMA Advantages

  1. The minimum organizational structure consists of one Director and one Commissioner.
  2. PT PMA has as many rights and obligations as any local company to conduct business in Indonesia. They are subject to the same regulations and laws.
  3. 100% or less company ownership by the foreign investor.
  4. License and permits are easier to obtain.
  5. Lower on-site tax or import duties.
  6. Qualifies for special customs facilities.
  7. Eligible to sponsor foreign employees.
  8. Temporary (2 years) stay permit for foreign investors.
  9. Foreign investors are eligible for a permanent stay permit provided they have lived in Indonesia for 2 years consecutively.
  10. Re-entry multiple trips for permanent stay permit holders with 24 months maximum duration since the permanent stay is granted.

PT PMA Disadvantages

  1. Required to provide business activities report to BKPM quarterly (every 3 months).
  2. Obliged to present monthly tax reports.
  3. Significantly higher investment plan than PT PMDN (local company) at IDR 10 billion. This amount excludes land and buildings.
  4. Significantly higher minimum paid-in capital at IDR 2.5 billion.
  5. Ownership is regulated by Indonesia Investment Guidance (Daftar Negatif Investasi – DNI).

PT PMDN Characteristics

  1. Similar to PT PMA, a PT PMDN needs to have a minimum of two parties (as a director and a commissioner). Either can be an individual or a legal entity.
  2. Minimum paid-in capital starts from IDR 50 million to 10 billion.

PT PMDN Advantages

  1. Required minimum capital varies according to the company’s business classification.
  2. The company is allowed to have three main business activities.
  3. Limited Liability Company is bound and protected by company activities.
  4. Flexibility to replace leadership by General Meeting of Shareholders(GMS) or Rapat Umum Pemegang Saham (RUPS).
  5. Clear responsibility structure to owners or shareholders.
  6. A shareholder’s liability is limited to how much his share is in the company.
  7. Extra funding or capital can be earned simply by putting in more shares.
  8. Eligilble to sponsor Kartu Izin Tinggal Terbatas (KITAS) or Temporary Stay Permit.
  9. There are no strict limitations.
  10. Allowed to participate in open government tenders.

PT PMDN Disadvantages

  1. The company is 100% owned by local shareholders. Foreigners must apply to said owners for a reliable special purpose agreement, and no one else can purchase shares in the firm’s stock without their approval.
  2. Reports to shareholders include the company’s trade secrets, costing its secrecy.
  3. The process of dissolution, amendments to the articles of association, mergers, and other purposes require time, funds, and approval at the general meeting of shareholders (GMS) or Rapat Umum Pemegang Saham (RUPS).
  4. Subject to separate tax, also applies to dividends.
  5. Establishment requires a lot of time and funds (compared to other entities).

Representative Office

It is common for a representative office (which takes the form of a branch office of the parent company) to be created before the establishment of PT/PMA. The company’s products or services will need to prove they are marketable and suitable for Indonesia, so an examination would follow after approval from Indonesian authorities. Once this has been verified then foreign companies can establish either type of corporation above.

The Indonesian government’s tax policies make opening up a representative office easy to do because they have no large taxes on initial incorporation or transferring ownership shares over time. However, there are some limited regulations governing these businesses which could affect companies who want more than just one location here like limitations concerning dividends paid abroad; restrictions against conducting any banking, sales, and purchase activities from within this type of establishment; limiting foreign equity participation – (which may require special approval).

Representative Office Advantages

  1. No minimum paid-in capital required
  2. No shareholders requirements necessary
  3. No directors and commissioners required

Representative Office Disadvantages

  1. Ownership is regulated by Indonesia Investment Guidance (Daftar Negatif Investasi – DNI).
  2. Operational activity is limited to supervision, monitoring, management, coordination, and research. Any activities to generate profit as well as purchasing services and goods in the name of the representative office are prohibited (should be addressed directly to the parent company).
  3. A specific requirement for representative office location (in a provincial capital and in an office building).
  4. Sponsorship to foreign investors is limited.

Obtain the Deed of Incorporation Through a Public Notary

Once investors attain their Principle License (IP), they will be able to register with any public notary office and draft the establishment of an FDI company (PT PMA).

Get Ministry of Justice and Human Rights’ (SK HAM) Approval

The Ministry of Justice and Human Rights will need to approve the incorporation draft mentioned above before it can be published in the state gazette.

Get Provincial Level Permits and Licenses

After getting the company deed approved, investors will need to apply for provincial government licenses that refer mainly to regional regulation and certification required by business operating entities. Regulated by what sector the business is in, the licenses needed are Company Domicile Certificate (SKDP), Environmental License, Building Permit (Izin Mendirikan Bangunan or IMB), Nuisance Ordinance Permit, Location Permit, and Company Registration Certificate.

Obtain Company Tax Identification Number (Nomor Pokok Wajib Pajak or NPWP)

The next step is to register the company at the Directorate General of Taxes (DGT) with the necessary documents to obtain a tax ID (Nomor Pokok Wajib Pajak – NPWP).

Obtain a Single Business Identity Number (Nomor Induk Berusaha or NIB)

The next mandatory step is to apply for a Single Business Identity Number (Nomor Induk Berusaha or NIB). This identification number serves as multiple licenses in the past such as:

  • Company Registration Certificate or Tanda Daftar Perusahaan (TDP)
  • Import Identification Number or Angka Pengenal Impor (API)
  • Customs Identification Number or Nomor Identitas Kepabeanan (NIK)

Additionally, NIB also serves as registration ID for Health and Social Security Systems or BPJS Kesehatan and BPJS Ketenagakerjaan for companies.

Apply for Other Licenses

Pre-operational additional licenses may be required depending on the business sector. Such additional licenses are commercial and tourism licenses.

If you need assistance with any of the above steps, we’re happy to help. From translating your business plan into Bahasa Indonesia and getting all necessary permits for a company opening in Indonesia, to preparing financial documents, our team is ready to assist at every step of the process. Find out how our team can help make your life easier by clicking here now!

 

[Photo by Ke Vin on Unsplash]



For more information:

Agustin, S.H., M.H., Managing Partner

agustin@irglobal.co.id

The contents of this publication are intended for informational purposes only and should not be construed as legal advice, nor create a lawyer-client relationship between the reader and the author. The material contained here does not represent the opinion of any attorney at law or other professional legal advisers.

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