Doing business in Indonesia
There are several forms of business entity, such as sole proprietorship, firma, CV, limited liability company (Perseroan Terbatas or PT). Most of business entity in Indonesia are in form of a limited liability company (PT). The advantages of PT such as:- The shareholders of PT are only liable up to the amount of their investments.
- PT is a legal entity which has a separate legal personality from its shareholder. In addition, PT can hold a right over land (hak guna bangunan).
- PT can be a sponsor for its foreign employee in reference to KITAS (resident permit) application (terms and conditions apply).
PT can be classified into 2 types based on the shareholders.
The Difference between PT PMDN (Local PT) and PT PMA
1. Definition
PT PMDN (Local PT)
Investment activities to do a business in the Republic of Indonesia which are carried out by domestic investors and using domestic capital.PT PMA
Investment activities to do a business in the Republic of Indonesia, which carries out by foreign investors, which consist of foreign capital in a whole or in cooperation with domestic investors.
2. Capital Requirement
PT PMDN (Local PT)
There is no minimum capital requirement for PT PMDN (Local PT)
(based on Government Regulation Number 29 Year 2016 concerning The Changes of Capital Requirement of Limited Liability)PT PMA
The minimum capital requirement for PT PMA is Rp. 10.000.000.000,0 (ten billion rupiah) exclude land and building
3. Business Field
PT PMDN (Local PT)
PT PMDN can engage in any business fields in the Indonesian Standard Industrial Classification in the Regulation of the Head of the Central Statistic Number 19 year 2017, except those are listed in the Appendix 1 of the Presidential Regulation No. 44 of 2016. Such business fields can be classified into two categories, namely the open business fields and the business fields conditionally open (subject to certain requirements)
PT PMA
PT PMA is only allowed to engage in these following business fields.
- Business fields which are not listed in Negative List Investment. Indonesia use “negative list” approach. Therefore, bussiness fields that are not listed in Negative List Investment are 100% open for foreign investment.
- Business field which conditionally open with maximum percentage of foreign ownership.
4 .Sponsor for KITAS
PT PMDN (Local PT)
Only PT PMDN (Local PT) who has capital minimun 10 billion rupiah eligible to be a sponsor KITAS appplication
PT PMA
Every PT PMA can be a sponsor for KITAS application.
A. PMA (Penanaman Modal Asing) or FDI (Foreign Direct Investment)
A PMA (Penanaman Modal Asing) or FDI (Foreign Direct Investment) disposes of shares and works with foreign capital mostly. The director makes the decisions, regardless if the director is foreign or not. In several branches it’s necessary that a part from the shares belongs to a local business or person according to the Indonesian law. The foreign investor can keep the biggest part of shares though in most cases. It is possible to start your own company and make your own decisions as soon as the PMA (Penanaman Modal Asing) is established. The duration of establishing a PMA (Penanaman Modal Asing) is on average 2 to 3 months. A local PT can be established faster, but this legal form can only be used by Indonesian companies or persons. We advise you to establish a PMA (Penanaman Modal Asing) or FDI (Foreign Direct Investment) before you’re going to buy properties or bonds. You have to be sure that you own all the required licenses, if you cooperate with a local company or local person. So you don’t get unwanted surprises.Indo-Ned Consultancy always inform you the documents and licenses that your company needs, so you can start on a legal and fast way. Contact us.
The Process of Establishing a PT in Indonesia
Prior 2018, the PT PMDN (PT Local) is not obliged to apply for principal permit or investment registration. Since the new regulation enacted in 2018, every business entity is required to apply for NIB (Nomor Induk Berusaha). Therefore, the process of establishing a PT PMA and PT PMDN are the same. Overall, there are 7 steps of establishing PT (local or PMA), as follow:
1. Company name Registration
Provide 3 options for company name (in case the name has been used by other parties.
2. Deed of Establishment and its Legalization by Minister Decree
Provided that the required documents and information are completed.
3. Registration at OSS to get NIB
Provided that the required documents and information are completed.
4. Application for Company Domicile Certificate
Provided that the required documents and information are completed. Depend on the local authorities.
5. Application for NPWP (tax identification number)
Provided that the required documents and information are completed.
6. Application for business license
The process depend on the availability of the required licenses. Before applying for business license, the company must have location license, environmental license and building construction permit license.
7. Application for operational or commercial license
Provided that the required documents are completed.
B. Representative Office (KPPA)
1. General information concerning KPPA
A. Legal basis
Article 37 of the BKPM Regulation No. 13 of 2017
B. Characteristics
- KPPA is prohibited to carry out any commercial activities that generating income or profit;
- KPPA manages the interest of the parent company by conducting surveillance or acting as a connector or coordinator;
- KPPA usually perform market research to prepare the establishment of a PT PMA (company) or expansion of business;
- KPPA must be located in the capital city of province in Indonesia;
- KPPA cannot engage in the management of the subsidiaries or affiliated companies;
- The Chief of the KPPA must lived in Indonesia (can be foreigner or Indonesian nationality);
- KPPA must have a KPPA license. The license is valid for 3 years.
C. Comparison between KPPA and PT PMA (company)
1. Activities
KPPA
Limited (no commercial act.)
PT PMA
Full capacity to run business
2. Capital requirement
KPPA
None
PT PMA
Minimum Rp. 10 Billion
3. Shareholding
KPPA
100% foreign ownership
PT PMA
Depend on the business field
4. Potency as sponsor
KPPA
Limited
PT PMA
Highly possible
5. Validity period
KPPA
3 years or temporary
PT PMA
Sustainable or permanent
D. Requirements
- Article of Association of the company (English or Indonesian version);
- Letter of Appointment of the representative made by the (parent) company and witnessed by the Indonesian Embassy in the country of origin;
- Letter of Intent witnessed by the Indonesian Embassy in the country of origin;
- Letter of Statement made by the Head of the KPPA stating his or her commitment not to do any business activity except being the head of the KPPA, witnessed by the Indonesian Embassy in the country of origin;
- Letter of Reference made by the Indonesian Embassy in the country of origin;
- ID detail of the Head of the representative (Passport for foreigner; KTP and NPWP for Indonesian citizen);
- Closed up picture (4 X 6 cm) 2 pcs (color);
- Power of Attorney if the application is not conducted by the Head of the Representative Office.
2. The process of acquiring KPPA license
The process of acquiring KPPA license can be completed within 60 working days provided the required documents are completed. This estimation may be affected by a change of regulation or technical factors, such as the late delivery of the documents. In addition, some of the requirements must be made or witnessed by Indonesian Embassy in the country of origin of the foreign company.A representative office gives a foreign company a minimal presence in Indonesia, allowing them to promote their products and services but not engage in direct sales or contracts. It is a fairly routine process requiring a minimum of paperwork. It is often set up after an agency or distributor agreement has been established allowing a foreign company to more closely monitor its brand and keep in close contact with its distributors and customers. (see next section for agency agreements). The Indonesian Investment Coordinating Board (BKPM) attempts to operate as a one-stop shop for investors. Recent reforms have reduced the paperwork process and delays in applying for the necessary government permits for foreign investments in Indonesia. Depending on the nature of the business, several government agencies may be involved in issuing a business permit.
To open a foreign representative office in Indonesia, the firm must appoint a representative, who may be either an Indonesian national or an expatriate. A foreign representative office in Indonesia is actually more of a liaison office. Under Indonesian law, a representative office is restricted in the types of activities that it can pursue. For example, these offices are restricted from signing sales contracts, collecting payments, conducting trade activities and sales transactions, and participating in other related business activities.
Prior to opening an office, however, the firm must establish itself as a legal entity by registering with the proper Indonesian government authorities. The process is as follows: A letter of intent, a letter of statement, and a letter of appointment (indicating the appointed representative), from company headquarters on official letterhead, must be sent to the Indonesian Embassy or an Indonesian Consulate for notarization. A letter of reference from the embassy or consulate is also required (See Chapter 9 for contact information). The notarized letter of intent, the notarized letter of appointment, and the letter of reference, along with the resume of the appointed company representative and his or her Indonesian work permit (KIMS Card) must to be submitted. If the appointed company representative is an Indonesian citizen, a copy of his or her Personal Identity Card (KTP) needs to be submitted instead.
Regional representative offices, classified as serving two or more other ASEAN nations, can also be established in Indonesia. The regional representative office is limited to more of a liaison role and is restricted from participating in many business transactions. Interested firms should contact the Capital Investment Coordinating Board (BKPM) for registration information.
Using an Agent or Distributor
Foreign companies wishing to sell their products in Indonesia are required to appoint an Indonesian agent or distributor pursuant to Ministry of Trade (MOT) Regulation No. 36/1977. The registration of an Indonesian agent or distributor with the Directorate of Business Development and Company Registration at the MOT is mandatory under MOT Regulation II/M-DAG/PER/3/2006. Appointment of an Indonesian agent (or distributor) requires care, since it is difficult to get out of a bad relationship. Indonesian law allows the severance of an agency agreement only by mutual consent or if a clause permitting the severance is contained in the original agency agreement. A trial agency period of at least six months is generally written into agency contracts. As in many countries, the Indonesian agent’s network of contacts and personal power affects costs and ability to exit an unsuccessful bad agency agreement.The services of an aggressive, active Indonesian agent or distributor can be an important means of expanding sales in Indonesia because they know the cultural minefields and systemic processes that foreigners need years to begin to master. Many Indonesian importers do not specialize in particular product lines, and represent multiple foreign manufacturers and product lines. Generally, however, large conglomerates establish discrete company units that tend to specialize around a product range. Medium and smaller importers tend to specialize in a narrow range of goods, but are not averse to adding a completely different product line if a profit can be foreseen. It is generally advisable to set up agency arrangements with firms that handle a complementary range of products. These are not essential, however, since substantial sales can often be made by firms active in quite different product lines. An increasing number of firms identifying themselves as suppliers of “technical goods” concentrate on general industrial machinery and equipment. These firms often have engineers on their staff and are prepared to provide engineering assistance and after-sales technical support.
In many cases, foreign companies have established close connections with Indonesian importers, allowing the two companies to function as one. The Indonesian company acts as the importer and distributor, and the foreign company promotes its products, sometimes seconding expatriate staff to its Indonesian distributor or partner. A more active role for the foreign firm can be arranged through a management contract, which can take many forms.
Foreign principals often work out a management agreement that allows the foreign company in Indonesia to play a more active role in the marketing efforts of its Indonesian agent or distributor. In many cases, a separate agreement is signed between the expatriate personnel and their foreign employer to regulate this relationship. The tax liability of the foreign firm is limited to the income of the expatriates assigned to the representative office, while any other taxes are assessed to, and borne by, the agent.
Types of management agreements include:
- technical assistance agreements;
- management agreements;
- management agreements coupled with financial agreements. The technical assistance agreement limits the foreign firm’s function to providing technical assistance to the Indonesian company. The management agreement allows the foreign firm to manage the company or a division within the company. In the management agreement coupled with a financial agreement, the foreign firm also finances the Indonesian operation, either under the name of the Indonesian company or a division thereof.
Remuneration to the foreign company can be in one of the following forms:
- fixed fee;
- commission;
- (profit-sharing.
Whatever basis is used for remuneration, it must be formulated clearly in the agreement, and it must comply with current Indonesian laws. To protect the foreign company’s interests properly, a bona fide and comprehensive agreement should be drawn between the parties concerned.
C. Joint Ventura
A joint venture (JV) is a form of foreign invested enterprise (FIE) that is created through a partnership between foreign and Indonesian investors, who together share the profits, losses and management of the JV. It is used most often when there is a need for a local business partner who can offer distribution channels, government relationships or significant market knowledge. Despite this the JV structure can bring challenges and risks by entering a business relationship with Indonesian investors.
Steps Required:
- Register Business License
- Obtain Certificate of Approval
- Name Internal Supervisor
The process or requirement may vary depend on the specific facts and conditions. In addition, the law and regulations in Indonesia subject to frequent changes. Please contact us to get an up to date information and accurate advise. Indo-Ned Consultancy will inform you up to date information of the government regulations in Indonesia to help you start business in Indonesia.
