Doing Business in Indonesia: Opportunity, Legal Risks, and Risks Mitigation

Indonesia is the largest economy in South East Asia. As a country that has an abundant supply of natural resources and a fast growing middle class society, Indonesia offers many opportunities to foreign investors. In the past recent years, Indonesia has enjoyed its strong economic growth. In line with its strong economic growth, business challenges and legal complexity arise. 

As one of Indonesia’s leading corporate and commercial law firms, BE Partners offers a wide range of expertise in corporate and business law. Founded by professionals who are recognized for their experience in handling various notable transactions in Indonesia, BE Partners continues its growth with an equal commitment to our reputation as “boutique practice focuses on client service” and provides its domestic and international clients with high-quality advice which is commercially focused and personally delivered.

The purpose of this publication is solely to provide a general overview of legal and regulatory framework related to conducting business n Indonesia. Further professional advice should be sought before any action is taken based on matters contained on this publication.

Indonesia at a Glance

Indonesia from the Economy Perspective

Indonesia’s Economic Growth

Indonesia is the 16th largest economy in the world and has a strong potential to be the 7th largest economy in the world by 2030 according to McKinsey Global Institute Report on September 2012. Indonesia expects the 71% of the population in cities to produce 86% GDP in 2030. It is estimated that by 2030, Indonesia will have around 135 million members of the consuming class with US$1.8 trillion market opportunity in consumer services, agriculture and fisheries, resources and education.

Over the years, Indonesia’s economy has had one of the most consistent growth rates among global economies. In recent years, Indonesia has made great strides in economic growth. The Indonesian economy has been projected to grow gradually and consistently from roughly 5.5 percent in 2010 to approximately 6.9 percent or higher in 2019. Indonesia aims to keep increasing its GDP in the future. 

Indonesia’s Potential

Indonesia has a lot of potential resources to offer. Some of the potentials are the demographic potentials, the abundance of its natural resources, and its geographical advantages. These potentials are hoped to help Indonesia to develop.

Population and Human Resources

In 2014, Indonesia ranks the 4th most populous country in the world with the total population of 252,164,800. Its huge population and the rapidly increasing buying power of its population is creating a significant market. Moreover, the population is also increasing in the quality of its human resources, thus providing a desirable competitive edge. An important implication of this condition is the increased importance of job creations that will cater to the huge portion the population productive age. More importantly, if the general education continuous to improve, Indonesia’s economic productivity will experience an exponential growth. Natural Resources Indonesia has an abundance of renewable (agricultural products) and un-renewable (mining and minerals) natural resources. The country is home to a biodiversity that is only second to Brazil. With natural reserves, Indonesia has become a commodities powerhouse and a leading commodities exporter in a number of resources.

Indonesia is one of the world’s major producers of a broad range of commodities. Based on the data of Coordinating Ministry for Economic Affairs in Indonesia, the country is the largest palm oil exporter in the world, exporting around 19 million tons annually. According to New Energy and Industrial Technology Development Organization (NEDO), Indonesia has the largest geothermal resources in the world with the total of 27,790 geothermal resources. Indonesia is also the 2nd largest exporter of tin and cocoa, and the 4th largest exporter of nickel and bauxite. It is also one of the largest producers for steel, copper, rubber, and fisheries.

Geographical Location

Indonesia is the world’s largest archipelago, stretching from east to west with a length of 5,200 km and a width of 1,870 km. Indonesia’s geographical location is very strategic, located at the center of world economy’s most dynamic region. Indonesia has a direct access to the world’s largest market since it is passed by one of the most active Sea Lane of Communication (SLOC), i.e. the Malaccan Strait.

Investing in Indonesia

Foreign Direct Investment

Investment activities in Indonesia are conducted through one-door integrated services whereby Indonesia Investment Coordinating Board (“BKPM”) is acting as the provider. BKPM is responsible for approving all investment activities, except investment in the banking and financial services sector, the upstream oil and gas sector, and a portfolio investment.

Commencing on 26 January 2015, BKPM has officially started a One Stop Services Center, which is an integrated services concept between BKPM with some ministries/institutions to provide quick, simple, transparent, and integrated licensing services. BKPM has also implemented an online application procedure for certain investment licenses where investors are only required to create a virtual folder at http://online-spipise.bkpm.go.id and follow the application procedure.

Investment Procedure

Investment procedure in Indonesia can be divided into three stages; preparation, pre-operation, and commercial operation. During the preparation stage, investors are required to conduct the following steps:

  • Obtaining Principle License

According to BKPM Regulation No. 15 of 2015 concerning Guidelines and Procedures for Licensing and Non-Licensing Matters in relation to Investment, foreign investors are required to obtain Principle License from BKPM prior conducting activities in Indonesia. Principle License is an initial government approval  granted to investors who wish to invest in Indonesia. 

In order to obtain Principle License, investors need to file the application, which consists of: (i) application form; and (ii) the required supporting documents. Based on the evaluation of the application, BKPM will issue the Principle License.

  • Establishment of the Company

Once the Principle License has been obtained, the next step is to establish the Limited Liability Company. The establishment process is started with the reservation of the company’s name at the Ministry of Law and Human Rights (“MOLHR”).  Subsequently, the Deed of Establishment containing the Articles of Association of the PMA Company must be executed before a notary. According to Law No. 40 of 2007 concerning Limited Liability Company (the “Company Law”), a company’s Deed of Establishment must be executed by at least two shareholders.

  • Obtaining Basic Licenses

There are some basic licenses that must be obtained during the early stage of establishment, which are:

    • Certificate of Domicile of the Company
Certificate of Domicile (Surat Keterangan Domisili Perusahaan, “SKDP”) evidencing the registered address of the PMA Company, which can be obtained from the office of the head of sub-district in which the PMA Company is domiciled. SKDP is required prior to obtaining the Taxpayer Identification Number.
    • Taxpayer Identification Number 

As a subject of Indonesian Income Tax Law, a PMA Company must obtain a Taxpayer Identification Number (Nomor Pokok Wajib Pajak, “NPWP”) from tax office in the jurisdiction in which the PMA Company is domiciled. Furthermore, a PMA Company shall also obtain Taxable Entrepreneur Affirmation Number (Nomor Pengukuhan Pengusaha Kena Pajak) from the tax office.

  • Legalization of Articles of Association by MOLHR and Registration to Department of Trade

After the company has obtained the basic licenses, such as SKDP and NPWP, the company’s Deed of Establishment is submitted to MOLHR by notary in order to obtain approval on validation of its status as Limited Liability Company (Perseroan Terbatas, “PT”). Following the MOLHR approval, the Notary will carry out registration of the company at the Department of Trade. Resulting from these processes, the documents known in Indonesia as Surat Keputusan Menteri Kehakiman (SK Menkumham) and Tanda Daftar Perusahaan (TDP). As the last administrative stage, the company’s Deed of Establishment will be submitted to the State Printing Office for publication in the State Gazette.

After completing the abovementioned steps, if import of machineries, equipment or raw material is required for the company’s  activity, the company must obtain Import Identification Number (Angka Pengenal ImportirAPI”), which divided into Angka Pengenal Importir ProdusenAPI-P”), applicable for manufacturing, and Angka Pengenal Importir UmumAPI-U”), which is applicable for trading business.  Regularly the company must also submit Investment Activities Report (Laporan Kegiatan Penanaman Modal, “LKPM”) to BKPM every 3 months. In practice, there are usually some special  particular permits that need to be obtained for the relevant sector.

Furthermore, before starting the commercial operation or production, investors are required to obtain Business License from BKPM. For manufacturing companies, Business License must be obtained when 80% of the machineries have been installed. Meanwhile, for other companies, Business License must be obtained when all infrastructures are ready.. A PMA Company that has obtained a Business License is required to submit LKPM every 6 months.

Types of Business Entities

Indonesia recognizes several types of business entities. However, foreign investor may only choose one of the following forms:

  • Foreign Investment Company (Penanaman Modal Asing, “PMA Company”)  

Foreign Direct Investment in Indonesia is regulated under Law No. 25 of 2007 concerning Investment (“Investment Law”). Under the Investment Law, foreign investors who wish to invest in Indonesia must establish their business be in the form of a Limited Liability Company.

  • Representative Office

Establishing a representative office is the fastest way to get a legal presence in Indonesia. There are two types of representative office in Indonesia; a General Representative Office (Kantor Perwakilan Perusahaan Asing – KPPA) and Representative Office for Trading (SIUP3A).

The set up of a representative office in Indonesia requires an approval from BKPM. However, it should be noted that a representative office’s activities are limited. It can only be considered as a liaison and marketing office. A representative office cannot enter into any agreement and generate any revenue.

Source: BAGUS ENRICO & PARTNERS

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Bagus Enrico & Partners

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