Foreigners can open restaurants in Indonesia. However, foreigners must have an Indonesian Partner(s). Based on the negative list regulation (Government Regulation 36/2010) on List of Business that opens/closes for the Foreign Investment, stipulates that the composition of shares of the Foreigner(s) is maximum 51% for restaurant industries.
The foreigner(s) and Indonesian partner(s) enter a joint venture agreement. Then, they submit a foreign investment application to the Investment Coordinating Body of Indonesia (“Badan Koordinasi Penanaman Modal Asing or BKPM”). After receiving the BKPM approval, then the foreigners & Indonesian partner(s) may set up an Indonesian entity (PT PMA or Foreign Investment Limited Liability Company) under the Indonesian Law.
The foreigner(s) may hold position in the Company except as a Human Resources Director. When a PT PMA hires an expatriate, a PT PMA must have a plan of expatriates utilization (“Rencan Penggunaan Tenaga Kerja Asing or RPTKA”) and Working Permits (“Izin Mempekerjakan Tenaga Asing or IMTA”).
I attended briefing meetings of the new draft of Negative List of Investment in Indonesia couple weeks ago. Mr. Gita Wirjawan, the Head of Coordinating Investment Body of Indonesia (“Badan Koordinasi Penanaman Modal or BKPM”) gave insight overview on the said draft. He stated that the new negative list of investment will be issued soon.
The new draft of Presidential Regulation on Negative List comprises of some provisions of Presidential Regulation No.77/2007 and No.111/2007 that are still deemed relevant and new articles.
This regulation clearly stipulates that Negative List is not applied to indirect investment or portfolio investment through a transaction made in the domestic stock exchange.
Further, the Grandfather clause will come into force for mergers and acquisition in the same business fields. This new regulation will not apply to any investment that was approved by the Government prior to the stipulation of this regulation. The exemption is when the new provision is more beneficial for the pertinent investor.
The expansion of business in the same business fields with different location is not required to establish a new business entity or obtain new business permit, except it stipulated specifically by the Law. This provision should make it easier for investor to expand their business activity in the same business field.
This regulation stipulates a new provision on rights issues and treasury stocks. Business expansion in the same business fields which require additional capital through the issuance of new shares (right issues):
(1) Foreign investor has pre-emptive rights since domestic partner cannot participate in the capital increment.
(2) In the event the foreign capital exceeding the limitation of foreign capital in its Approval Letter (“BKPM Approval”) , within 2 years of the limitation must be adjusted back down to the required maximum foreign ownership as mentioned on the Approval Letter, through finding another domestic investors, selling the shares through domestic stock market, and buying back the excess shares as treasury stock pursuant to Article 37 Company Law.
Excerpt Article 37 Company Law:
Article 37 Repurchase of Shares
(1) Limitations A Company may repurchase the shares which have been issued, provided that: a. the share repurchase does not render the Company’s net assets less than the capital subscribed for and the statutory reserve that have been allocated; and b. the total nominal value of all shares repurchased by the Company or the fiduciary encumbrance of shares held by the Company itself and/or other Company which shares directly or indirectly are owned by the Company shall not exceed 10% (ten percents) of the capital subscribed for the Company, unless provided otherwise by the prevailing laws and regulations in the area of capital market.
(2) Void by Law A repurchase of shares, directly or indirectly, which is in contrary to the stipulation in paragraph (1) is void by law.
(3) Directors’ Liability The Board of Directors are jointly and severally liable for all losses suffered by the shareholders who acted in good faith, which is caused by the lawful nullification of the share repurchase as referred to in paragraph (2). (4) Three Years Maximum Shares repurchased by the Company as referred to in paragraph (1) may be held by the Company only for a maximum of three (3) years.
This regulation will supersede both President Regulation No.77/2007 and No.111/2007.
The Investment Coordinating Body of Indonesia (“BKPM”) issued BKPM Regulation No. 12 of 2009 regarding Guidelines and Procedures Application (December 23, 2009) (“BKPM Reg 12/09”) that replaced the previous BKPM Regulations on the Guidelines and Procedures for Investment Applications under Domestic and Foreign Investments. There are several points to be highlighted amongst others: the application process divides into 3 stages e.g. registration, principle approval and operation approval; the electronic submission of application; and the process of application is in 3 days from the receipt of a complete application. This regulation came into force on January 2, 2010.
After the Foreign Investment Company (“PT PMA”) has been approved by Ministry of Laws and Human Rights (“MoLHR”), it means that PT PMA is duly established in Indonesia. PT PMA should take the following obligations.
There are several corporate actions must be conducted by PT PMA. PT PMA must held First Meeting of the Shareholders, Directors and Commissioners. The Shareholders should confirm that the appointment of members of the Board of Directors (“BoD”) and Board of Commissioners (“BoC”) and together with the Directors and Commissioners approve all action conducted in the name of PT PMA prior to MoLHR approval of the Deed of Establishment. The founding Shareholders do not oblige with the actions that not approved.
Further the resolution must be agreed, if the Directors are to be indemnified by the Shareholders for corporate action prior to publication of Deed of Establishment.
PT PMA also must prepare the Share Certificates, the Shareholders Registry and the Special Registry,
PT PMA must submit periodic reports to the Coordinating Investment Body (“BKPM”) describing the actual operations conditions of its company in the standard form of BKPM. That report is called Report of Capital Investment Activity (“Laporan Kegiatan Penanaman Modal or LKPM”).
If PT PMA has not obtained the Permanent Business License (“Izin Usaha Tetap or IUT”), PT PMA must submit LKPM every six (6) months e.g. first period January 1 to June 30 and second period July 1 to December 31. The submission must be made no later than one (1) month after the end of each period.
If PT PMA has obtained IUT, PT PMA must submit LKPM annually. The submission must be made no later than January 31 of the following year.
Permanent Business License
The Initial Investment Approval only serves as a temporary operating license until PT PMA reaches the commercial operation or commercial production. At that time, PT PMA must submit IUT application to BKPM. After PT PMA obtains IUT, PT PMA is authorized to operate for a period of 30 years.
PT PMA may be required to conduct analysis of the business’ impact on the environment (AMDAL) before PT PMA may conduct its business activities. However, this obligation depends on PT PMA’s type of business activities.
AMDAL is one of the required documents to obtain IUT. PT PMA must submit environmental management (RKL) and environmental monitoring plan (RPL) to BKPM. The RKL and RPL also must be submitted to the relevant authorities where the property or project is located.
If a business activity is deemed to cause insignificant adverse effect on the environment, PT PMA is required to submit environmental management effect (UKL) and an environmental monitoring effort (UPL).
PT PMA must report to the relevant regional office of the Ministry of Manpower (“MoM”) regarding its employees within the period of 30 days from the date of establishment of PT PMA. The manpower report is in the standard form of MoM. Moreover, PT PMA must prepare an annual report of its employees after the commencement of its commercial production.
A. ESTABLISHING A FOREIGN INVESTMENT COMPANY
Investment in Indonesia is regulated mainly by New Investment Law No.25 of 2007 (April 26, 2007) (“Law 25/07”). 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:
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.
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.
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.
 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).