INVESTMENT LAW IN INDONESIA

 

 

 

Introduction

 

Indonesia has a New Investment Law No.25 of 2007 (April 26, 2007) (“Law 25/07”). The Law 25/07  supersedes both Law No.1 of 1967 regarding Foreign Investment (January 10, 2007) and Law No.6 of 1968 regarding Domestic Investment (July 3, 1968).

 

Law 25/07 integrates the previous investment laws and its implementing regulations to some extent, but affirmatively addresses some of the impediments frequently cited by foreign investors doing business in the country. Noteworthy changes including those relating to investment approval procedures, land titles, and incentives.

 

Law 25/07 introduces new issues e.g. Corporate Social Responsibility and Dispute Settlement mechanism – International Arbitration.

 

Law 25/07 also introduces one door-integrated services pursuant to licensing and non-licensing process. The process runs from the application stage until the issuance documents both licensing and non–licensing is conducted in one place.

 

Moreover, Law 25/07 introduces the regional autonomy whereas the regional autonomy has right, authority and obligation of an autonomous region to regulate and self-manage its affairs and the interests of the local communities in accordance with laws and regulations. (Art.30 Law 25/07).

 

Law 25/07 will be the main legal umbrella for investment in Indonesia. Law 25/07 becomes the pillars supporting the investment climate. The government offers various attractive packages including equal treatment of every investor by observing national interest, bureaucracy reform in investment services and fiscal incentives. It shows the efforts of the government to make the investment climate more attractive, competitive and fair.

 

 

The followings are highlights of New Investment Law:

1. Equal Treatment

Law 25/07 treats domestic and foreign investors equally.

1. The principle that foreign and domestic investors are equal before law (Art.3(1)(d) Law 25/07);
2. The principle that foreign and domestic investors shall have equal opportunity (Art.4(2) Law 25/07);
3. All investors shall be treated equally (Art.6(1) Law 25/07); and
4. Recognizes that bilateral agreements regarding investment may be made (Art. 6(2) Law 25/07).

 

Note that this does not limit the government rights to determine certain businesses are closed for foreign investments, or that there are certain conditions which must be met before foreign investors may invest in certain other businesses, e.g. the Negative List and unwritten policy by BKPM on the minimum capital requirements for establishment of the Foreign Investment Company in Indonesia (current policy, the minimum capital requirement is in the amount of USD 250.000).

 

 

2. One Door Integrated Services

The Investment Coordinating Board (“Badan Koordinasi Penanaman Modal or BKPM”) is intended to be sole institution having the authority process the investment licenses (excluded certain businesses such as mining and oil and gas sectors, banking etc).The stop services will be provided through a delegation or assignment the power from an institution or an agency currently having licensing authority.

 

In order to implement One Stop Services (“OSS”), some of local regions have issued the local regulations and set up OSS unit/body.

 

3. Immigration Service Facilities 

Law 25/07 provides the possibility of a 2 year temporary stay permit and re-entry permit for multiple entries for up to 2 years if the foreign investors fulfill the criterias.

 

4. Land Title

Law 25/07 now allows for an extended land ownership depending on the types of land rights and the criteria shall be met.

 

5. Tax-related incentives

The government grants equal treatment both foreign and domestic investment in the Capital Investment facilities.

 

The facilities will be provided to the investment company that is willing to expand the investment and invest in new capital investment.

 

Criteria of the investment expanding their investment or investing new capital will be granted certain facilities including (refer to Art.18 Law 25/07):

1. income tax reduction;
2. custom exemption to machineries, capital goods and tools;
3. custom exemption on raw materials;
4. VAT exemption;
5. Accelerated amortization and depreciation; and
6. Incentive on land and building tax.

 

The government also recently issued Government Regulations No.1 of 2007 regarding the Facility of Income Tax for Investment on Certain Business Sectors or Regions (January 2, 2007). The certain business sectors amongst others are: food processing industries, packaging industries, plastic goods industries, cement industries, furniture industries, seafood processing industries, etc. Furthermore, the Government also issued the following regulations e.g. Ministry of Finance No.16/PML/03/2007 regarding Granting Income Tax Facilities for Investment on Certain Business Sectors or Certain Regions, Directorate General of Tax No. Per 67/PJ/07 of 2007 regarding Procedure of Granting Income Tax for Investment on Certain Business Sectors and/or Certain Regions.

 

6. Nationalization and Expropriation

Government will not execute any nationalization action or take over the ownership rights of the investor, unless by law.

 

In the event government takes action of nationalization or takes over the ownership rights as mentioned above, then the government willl grant compensation, which amount will be specified based on the market value.

Market value is determined pursuant to the internationally-accepted methods adopted by an independent appraiser named by the parties.

 

If there is no consensus on the amount of compensation among the parties, the dispute shall be settled through arbitration.

 

7. Transfer and Repatriation

Law 25/07 confirms that foreign investors has rights to freely transfer and repatriate in foreign currency, relating to profits or proceeds liquidation or sale of investment, as long as taxes and other financial obligations payable to the Indonesian government have been satisfied (Art.8 Law 25/07). Further, the foreign investor is obliged to give reports on fund transfer.

 

8. Corporate Social Responsibility

The investors that manage unrenewable natural resources shall allocate funds progressively for the preservation of the area to attain the environmental and social standards as required by prevailing laws and regulations.

 

9. Development of Investment for Micro-Scale, Small-Scale, Medium-Scale Business and Cooperative Enterprise

The government specify the business sectors that are reserved for micro-scale, small-scale and medium-scale business and corporative enterprises, and those sectors open in cooperation with large-scale. Additionally the government will attempt to achieve the development of micro-scale, small-scale and medium-scale business through establishing partnership programs enhancing the capacity to compete.

 

Furthermore, the government encougares the development of the micro-scale, small-scale, medium-scale business and cooperative through partnership program, enhancement of capacity to compete, supporting innovation and market extension and wide distribution of information.

 

Recently, the government issued the Instruction of the President of the Republic Indonesia No.6 of 2007 regarding Policies to Accelerate Development of the Real Sector and Empower Micro, Small and Medium Enterprises (June 8, 2007) and Law 20 of 2008 regarding Micro, Small and Medium Scale Enterprises ( July 4, 2008).

 

 

10. International Arbitration for Investment Dispute

Law 25/07 specifically stipulates that any investment dispute involving the Indonesian government and foreign investors shall be resolved through an international arbitration agreed by the parties. Whilst the dispute emerges between government and domestic investors is reffered to arbitration or court.

 

 

 

 

 

 

 

 

 

 

It’s not all about Numbers

Modern life has transformed most of human beings into a commodity. If he conducts investment, he wants to highest profit. If he has good job, he wants to the higher position in the company. The main objective is to change his skills, knowlegde and his personality package with other who are equally intent on a fair and profitable exhange. Life has no goal except the one to move, no principle except the one of fair exchange, no satisfication except the one to consume.

This condition may be influenced us to see the relationship. If one gives 100% of his love, other persons must give 100% of her love. Or maybe you are familiar with this sentence – so cliché ‘Our feeling is not the same stage’ or ‘I could not trust you 100%’.

How can we measure love? When we start talking about percentage of love, we will trap in the calculation of love, love may be up and down. Love may be decreased, then it could finally die because there is no room to grow.

Let the love grows naturally, everywhere, every part of our heart. Do not calculate it, do not limit it. To love means to commit oneself without guarantee, to give oneself completely in the hope that our love will produce love in the loved person.

Well…sometimes it is not all about numbers!

Dedicated to Nadia G & Nicola M.

Investing in Indonesia

A. ESTABLISHING A FOREING INVESTMENT COMPANY

Investment in Indonesia is regulated mainly by New Investment Law No.25 of 2007 (April 26, 2007) (“Law 25/07”).[1] Law 25/07 integrates the previous investment laws and its implementing regulations to some extent, but deals with some of the bottlenecks frequently cited by foreign investors doing business in the country. Important changes include those relating to investment approval procedures, land titles, and incentives.

 

Law 25/07 introduces new issues such as Corporate Social Responsibility and Dispute Settlement mechanism. Law 25/07 also introduces one door-integrated services pursuant to licensing process. The process runs from the application stage until the issuance of documents of all necessary documents, everything can now be done.

 

Moreover, Law 25/07 gives regencies and cities the right, authority and obligation to regulate and self-manage investment approvals taking into account the interests of the local communities.

 

Law 25/07 also offers equal treatment of every investor by bureaucracy reform in investment services and fiscal incentives. It shows the efforts of the government to make the investment climate more transparent.

 

The limitation on Foreign Ownership

The foreign investors may be a corporate entity or an individual. In some sectors, the investors can own all shares of a foreign investment company (“PT Penamanan Modal or PT PMA”) with certain exceptions. However, the said PT PMA must divest a portion of shares to an Indonesian party within 15 years after commencing commercial operations. On the other hand, the foreign investor can establish a joint venture with Indonesian parties. The Indonesian parties at least own 5% at the time of establishment. In that case, the foreign company is not required to divest its shares to Indonesian parties within 15 years.

 

The foreign investors also must check the Negative List for the minimum percentage that can be held by foreigners in a company in certain sector in Indonesia.

 

 

Getting an Investment Approved

The Capital Investment Coordinating Board (“BKPM”) is the central authorized body receiving, reviewing and approving investment capital applications as well as monitoring approved projects.

 

The Foreign investors must submit an application form, so-called Model I, to BKPM. Various attachments must be submitted together with Model I including (a) a copy of the investors’ Articles of Association (or passport/identification card in the case of individuals), (b) flowchart of the production process or description of services, (c) power of attorney if the application is not signed and submitted by the investors themselves.

 

After obtaining BKPM approval, the applicant can establish a limited liability company by executing a Deed of Establishment (“DoE”) in the notary public. Then, this DoE shall be submitted to the Ministry of Laws and Human Rights (“MoLHR”) for approval.  One of the requirements to obtain MoLHR approval that the investors must submit a proof that they have paid the issued capital.

 

The Company also has the obligation to register in the Company Registry maintained by Department of Trade. Moreover, the Company must apply the Letter of Domicile to Sub District (“Kelurahan”).

 

The Company must obtain a Taxpayer Registration Number (NPWP) and a taxable Entrepreneur Number (NPPKP) from the relevant tax office.

 

After the Company has been established, the Company must proceed immediately to take the following post formation steps:

 

Corporate Housekeeping

After the DoE has been approved by MoLHR, the PT PMA must take several corporate actions.

 

A first meeting of Shareholders, Directors and Commissioners must be held. The General Meeting of Shareholders (“GMS”) should confirm the appointment of the members of the Board of Commissioners (“BoC”) and the Board of Directors (“BoD”). The GMS together with BoD and BoC ratify all actions taken in PT PMA’s name prior to MoLHR approval of the DoE. Moreover, the Share Certificates, the Share Registry and the Special Register shall be prepared too.

 

 

After obtaining a BKPM Approval, PT PMA has the obligation to submit a report of Capital Investment Activities (“Laporan Kegiatan Penanaman Modal or LKPM”) to BKPM. PT PMA that has not yet obtained a Permanent Business License (“IUT”), shall submit a Semi Annual Report of LKPM to BKPM. PT PMA that has obtained IUT must submit an Annual LKPM. This report is in the standard form of BKPM. Furthermore, the copies of LKPM also must be delivered to the relevant government institutions, such as Department of Trade, Bank Indonesia or the Regional Office of the relevant technical department.

 

 

The Initial Investment Approval serves as a temporary operating license until PT PMA reaches the stage of commercial production. At that time, PT PMA shall apply for an IUT (“Permanent Business License”) to BKPM. Upon issuance of the IUT, PT PMA is authorized to conduct its activities for 30 years period.

 

Employing People

PT PMA must apply for An Expatriate Manpower Utilization Plan (“RPTKA or Rencana Penggunan Tenaga Kerja Asing”) from the Department of Manpower (“DoM”) in order to employ expatriates. The RPTKA serves as basis for the expatriate to obtain their temporary stay permits (“KITAS”) and work permit (“IKTA”). DoM is required PT PMA who employs one expatriate must employ 3 local employees. So the percentage is 1:3 for expatriate : locals.

 

For a company with more than 10 employees, the Company must prepare the Company Regulations and registered with the Department of Manpower. If the Company has labor union, then the Collective Labor Agreement is required to be registered in Department of Manpower.

 

Moreover, Indonesia law recognizes both indefinite-term employment agreement and definite-term employment agreement. Before the Company hires the employees, the Company shall consider the advantages and disadvantages these types of agreements.

 

Importing Goods

PT PMA wishes to import capital goods/raw materials is required to have a Limited Importer License Number (“Angka Pengenal Import Terbatas or APIT”). The APIT is obtained through BKPM. Goods imported under an APIT are subject to a reduced withholding tax of 2.5% compared to the normal rate of 7.5%. This tax is a prepayment of income tax and is fully creditable. Under some conditions, an exemption from this tax is possible.

 

PT PMA may obtain favorable import duty reductions on imported production equipment, spare parts and raw materials that are not locally available. PT PMA must submit Master List application to BKPM or the Customs and Excise Office (in certain circumstances). After the Master List is approved, then PT PMA receives an import duty reduction on the item listed in the letter to a maximum 5% duty rate.

 

 

B.ESTABLISHING REPRESENTATIVE OFFICE IN INDONESIA

A Foreign Company could not establish a branch office in Indonesia for purpose of conducting the operational activities of its principal company such as trading or business transactions. In order to conduct those activities in Indonesia, a Foreign Company must establish an Indonesian legal entity. It is so-called a Foreign Investment Company or PT Penanaman Modal Asing (“PT PMA”).

 

Moreover, a Foreign Company that wishes to assess the potential market in Indonesia may establish a Representative Office and not a branch office.

 

There are several types of representative office currently allowed to be set up in Indonesia e.g.:

 

1.    Foreign Company Representative Office (Kantor Perwakilan Perusahaan Asing);

2.    Foreign Trade Company Representative (Perwakilan Perusahaan Perdagangan Asing); and

3.    Construction Service Provider Representative Office.

 

Foreign Company Representative Office

A foreign company or a group of foreign companies may open a representative office in Indonesia to manage its interest, or to prepare the establishment and development its business in Indonesia (refer to Article 1 Presidential Decree No. 90 of 2000 jo Article 1 Decree of the Chairman of BKPM No.2001). A foreign company or a group of foreign companies must submit application to the Indonesia Investment Coordinating Body (“BKPM”).

A Foreign Company Representative Office’s (“Rep.Office”) activities are limited to the role of supervisor, intermediary, coordinator or manager of such foreign company group’s interest. Further a Rep.Office may not participate in managing the foreign company, its subsidiary or it branches in Indonesia and it’s not allowed to generated revenues from Indonesia.  A Rep.Office may not engage in an agreement or transaction in the sale and/or purchase of goods and services with an Indonesian company or Indonesian nationals.

 

Foreign Trade Company Representative Office

A Foreign Trade Company (“FTC”) is established by a foreign company or a group of foreign companies to act as its representative in Indonesia. A FTC may be established as either: a selling agent; manufacturer agents; and/or a purchasing agent.

 

FTC is prohibited from conducting trades, transactions or sale activities which represent a full-blown transaction from beginning to the end (e.g. from submission of tender documents, signing of contract and settlement of claims) (refer to Art.4 Ministry of Trade Regulation No.10 of 2006 regarding the Procedure of Issuing the License of Foreign Trade Representative Office (March 29,2006) (“Permen 10/06”).

 

The scope of a Foreign Trade Company Representative Office is limited to the following (refer to Art.3 Permen 10/06): such as introduction and promotional activities, market research and supervision of domestic sale; and close of contract for and on behalf of the appointing foreign company with domestic companies relating to exports.

 

 Foreign Construction Service Provider Representative Office

A  Foreign Construction Service Provider that wishes to conduct construction activities in Indonesia must apply the Representative Construction Service Provider License from the Ministry of Public Works. This license is only valid for three (3) years and can be extended.

 

Decree of Ministry of Public Works No. 28 of 2006 has actually replaced the former regulation, Decree of Ministry of Public Works No. 50 of 1991; however, as no implementing regulations related to the new regulation has been issued, in practice the older regulation is still applicable.

 

This type of Representative Office is only allowed to conduct projects in Indonesia through the Joint Operation with locals. This Joint Operation is only permitted to join the tender and conduct the Government projects funded by the Foreign Aid, projects in the frame of Foreign Investment and Domestic Investment as well as the projects funded by private funds.

[1] The Law 25/07 supersedes both Law No.1 of 1967 regarding Foreign Investment (January 10, 2007) and Law No.6 of 1968 regarding Domestic Investment (July 3, 1968).

 

 

 

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Yoga, Vote Abstention & Smoking

When I read newspaper, I was shocked. The Indonesian Ulema Council (MUI) issues fatwa for Moslems that bans on yoga, vote abstention and smoking. According to MUI, yoga has Hindu elements so they ban it. Because they are afraid that it will corrupt the Moslem beliefs. Then, vote abstention is forbidden too. Why do we have to vote if we feel that those candidates are not qualified? Hello… This is democracy country aight?  Ban on smoking? Do they realize that many Indonesian Moslems are smoker? Have they thought the labors who work in tobbaco factories will have no jobs if they ban smoking? I think in order to discourage people to stop smoking, why dont give enough information about the bad effects of smoking and not using religion. Whoah, other pointless rules after the Pornography Law passed!!!!

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A fatwa in the Islamic faith is a religious opinion on Islamic law issued by an Islamic scholar. In Sunni Islam any fatwa is non-binding, whereas in Shia Islam it could be, depending on the status of the scholar. (http://wikipedia.org)