Doing Business In: Indonesia

Siregar & Djojonegoro

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Recently, the Indonesian government has issued Law Number 11 of 2020 on Job Creation (commonly known as “Omnibus Law”). The issuance of the Omnibus Law is one of the Indonesian government efforts to attract more Foreign Direct Investment and making it easier to do business in Indonesia.

Omnibus Law comprises 15 chapters and 186 articles, which includes the following scopes:

  1. Improvement of the investment ecosystem and business activities;
  2. Manpower;
  3. Protection and empowerment of cooperatives and Micro, Small and Medium Enterprises (MSME);
  4. Ease of doing business;
  5. Research and innovation support;
  6. Land procurement;
  7. Economic era;
  8. Central Government investment and acceleration of national strategic projects;
  9. Implementation of the government administration; and
  10. Sanctions.

Furthermore, in February 2021, the government has issued 49 (forty-nine) implementing regulations of the Omnibus law which consisting of 45 (forty-five) Government Regulations and 4 (four) Presidential Regulations. The following are a number of new regulations related to foreign direct investment in Indonesia, amongst others:

  • Government Regulation Number 5 of 2021 on Implementation of Risk-Based Business Licensing (“Reg 5/2021”);
  • Government Regulation Number 6 of 2021 on Implementation of Business Licensing in Regions (“Reg 6/2021”);
  • Government Regulation Number 8 of 2021 on Authorised Capital of Companies and Registration of Establishment, Amendment and Disbursement of Companies that Meet the Criteria for Micro and Small Business (“Reg 8/2021”); and
  • Presidential Regulation Number 10 of 2021 on Investment Business Fields (“Reg 10/2021”).

As we can see, the Indonesian government intends to improve the ease of doing business in Indonesia by making significant changes in the investment environment, amongst others, by shifting the investment list from the negative investment list into the positive investment list and provides more relaxation in the foreign investment restrictions, providing incentives to certain business fields, introducing a new concept of the risk-based licensing system, and simplifying the process of doing business in Indonesia. The Indonesian government hopes that more investment will come to Indonesia, and it will kickstart Indonesia’s economic recovery due to the Covid-19 pandemic.

Due to the wide scope of Omnibus Law and its implementing regulations, this article will only focus on practical matters in doing business in Indonesia, especially after the major changes of Omnibus Law and its implementing regulations.

Investing in Indonesia

Here are some main issues on investing in Indonesia:

1. Business Vehicles/Legal Entity

In order to invest in Indonesia, the investor should know what the required business vehicle is to invest under the prevailing law. According to Law Number 25 of 2007 on Capital Investment as amended by the Omnibus Law (“Investment Law”), unless specified otherwise, any foreign investment must be in the form of a limited liability company established under Indonesian Law and domiciled in Indonesia (“PT PMA”). Therefore, there are two alternatives for foreign investment, whether foreign investors establish a new PT PMA or acquire an existing company in Indonesia. We will discuss the procedure of setting up a company in Indonesia below.

2. Investment List: whether the proposed business fields open for foreign investment?

On 2 February 2021, the Indonesian government has issued a new investment list called “Positive Investment List” under Reg 10/2021. In principle, the investment list stipulates the parameters or requirements to invest in various business fields or sectors in Indonesia. Positive Investment List is a revised version of the Negative Investment List as stipulated in Presidential Regulation Number 44 of 2016 on Lists of Business Fields that are Closed to Investment and Business Fields that are Conditionally Open for Investment (“Reg 44/2016”).

In principle, the basic concept of these two regulations is still the same. Meanwhile, the differences are as follows:

Negative List 2016
(Reg 44/2016)
Positive Investment List
(Reg 10/2021)
List of Business Fields that are Closed to Investment: 20 Business fields List of Priority Business Fields: 245 business fields
List of Business Fields that are Conditionally Open, Reserved or for Partnership with Micro, Small and Medium Business and Cooperatives: 145 Business fields List of Business Fields that are Allocated or for Partnership with Micro, Small and Medium Business and Cooperatives: 89 business fields
Business Fields that are Open under Specific Conditions: 350 Business fields Business Fields that are Open under Specific Conditions: 46 Business fields

It can be seen that Reg 44/2016 stipulates business fields that are closed and/or opened under specific conditions (i.e., subject to foreign ownership limitation). Meanwhile, all business fields/sectors are expressly stated to be opened for investment in Reg 10/2021, whether it is fully open for the foreign investors or subject to foreign ownership limitation, except for the business fields, classified as Closed Business Fields which will be discussed below.

In conclusion, the significant changes in the Positive Investment List under Reg 10/2021, amongst others, are as follows:

Relaxation in the foreign investment rules: Reg 10/2021 has reduced the number of business fields restricted to foreign investors:

  • Reg 44/2016: 350 business fields were conditionally open for investment (i.e., subject to foreign ownership limitation).
  • Reg 10/2021: only 46 business fields are conditionally open for investment (i.e., subject to foreign ownership limitation).

Priority business fields: the Indonesian government has grouped certain business fields into priority business fields, in which the government also offers fiscal and non-fiscal incentives for such priority business fields:

  • Fiscal incentives: in the form of tax holidays, tax allowances, free import duty on imports of machinery and goods for project construction.
  • Non-fiscal incentives: provided in the form of business license, work permits and supporting infrastructure.

The following are the closed business fields and opened business fields for investment as updated by Reg 10/2021:

a. Closed Business Fields for Investment

Under the Omnibus Law jo. Reg 10/2021, the following business fields are closed to both foreign and domestic investments:

1. Business fields that are closed to investment under the Investment Law:

  • cultivation and industry of category I narcotics;
  • gambling and/or casino activities;
  • capture of fish species listed under Appendix I of Convention on International Trade in Endangered Species of Wild Fauna and Flora;
  • utilisation or taking of corals and utilisation or taking of reefs from nature which are used for building materials/lime/calcium, aquarium, and souvenirs, as well as live coral or recent death coral from nature;
  • chemical weapon manufacturing industry; and
  • chemical industry and ozone-depleting substance industry.

2. Business fields for activities that can only be carried out by the Central Government, i.e., activities that are of a service nature or within the framework of defence and security that are strategic in nature and cannot be carried out or cooperated with other parties.

b. Business Fields that are Open for Investment

Reg 10/2021 outlines certain business sectors available for investment, both foreign and domestic investors, as follows:

No. Classification Criteria Notes
1. Priority Business Fields
a. Business fields that are entitled to obtain Tax Allowance facility
e.g., pharmaceuticals materials industry, tin ore mining, battery industry, automotive industry, coal gasification, e-commerce application.
b. Business fields that are entitled to obtain Tax Holiday facility
e.g., metals refining, oil refining, manufacture of the motor vehicle, renewables.
c. Business fields that are entitled to obtain Investment Allowance
e.g., the wood furniture industry, coffee processing industry.
  • must be included as national strategic projects/program;
  • must be capital intensive;
  • must be labour intensive;
  • must utilise advanced technology;
  • must involve a pioneer industry (e.g. metals, oil refining, renewables);
  • must be export-oriented; and/or
  • must be oriented towards research and development and other innovative activities.
  • Open for domestic and foreign investors.

 

  • Investors who invest in the priority business fields will be entitled to receive fiscal incentives and/or non-fiscal incentives.
2. Business fields that are:

a. Allocated for Cooperatives and Micro, Small and Medium Enterprise (“MSMEs”)
e.g., Clinic General Medical, Residential Health Services.

b. Required local partnership with Cooperatives and MSMEs
e.g., building construction, clinic medical laboratories.

  • business activities that do not utilise technology or utilise simple technology;
  • business activities that have a specific process, labour intensive, and have a unique and hereditary cultural heritage; and/or
  • business activities capital does not exceed IDR 10 billion (approx. US$699,3491) (excluding the value of land and buildings).
  • business fields that many cooperatives and MSMEs work on; and/or
  • business fields that are encouraged to enter into the supply chain business.
3. Business fields under specified requirements:

a. reserved for domestic investors under specific requirements;

b. open for foreign investors under specific investment requirements;  e.g., marine transportation

c. Investment requirements with special approvals

No specific criteria for the business fields, as long as fulfilling the investment requirements under Reg 10/2021. The restrictions on foreign investment do not apply to:

  • any investment activities located in the special economic zones (SEZs);
  • any foreign investors who obtain special rights due to bilateral/multilateral agreement between Indonesia and the country of origin of such investor, unless the provision under this regulation is more favourable to the investor; or
  • any portfolio investment through the domestic capital market.

Please note that as of 2 March 2021, the Indonesian government has revoked alcohol drinks as one of the business fields open for foreign investment.

4. Business fields that are not included in the above categories No specific criteria. Open for all investors without restriction.

Despite most business fields are now fully opened for foreign investment, and only a few business fields are still subject to certain foreign ownership limitation, however, we still have to wait for any specific application of the new rules to determine the actual foreign ownership restrictions under the new regulations. Further consultation with the relevant authorities will also be required to ensure the implementation of the new investment list.

Please note that the new regulations will not apply to any investments approved before the promulgation date of Reg 10/2021. Nevertheless, the existing investors can take advantage of new foreign ownership limitation under the new Reg 10/2021 that is more favourable to the investors.

3. Minimum Investment Value

Despite the fact that Omnibus Law has removed the requirement of the minimum authorised capital of a company, Article 7 Reg 10/2021 stipulated that the foreign investors can only carry out business activities with an investment value of more than IDR 10 billion (approx. US$699,3492), excluding the value of land and buildings. Therefore, the minimum investment value required for PT PMA is above IDR 10 billion (approx. US$699,3493), excluding the value of land and buildings. However, this requirement does not apply to any foreign investors in the tech-business sector in SEZs that will be further discussed below.

4. Priorities Investment in Special Economic Zones

The Indonesian government intends to boost investment across Indonesia, especially investment in the Special Economic Zones (SEZs). Therefore, the Indonesian government offers leeway to the investment in SEZs. For example, investments in SEZs are not subject to the foreign ownership limitations under Reg 10/2021 and special conditions that applied to a particular business sector. Currently, there are 15 (fifteen) operating Special Economic Zones across Indonesia. The upcoming 4 (four) SEZs are still in the development phase. Visit https://kek.go.id/peta-sebaran-kek for more details on the information and locations of SEZs.

The Indonesia government also aims to focus on the technology sector. As we know, the growth of Indonesia’s digital internet ecosystem has exploded during the past years. Start-up companies have also been growing significantly. Thus, in order to stimulate the technology development in SEZs area, the foreign investors in the tech start-ups business in SEZs are exempted from the minimum investment requirement of more than IDR 10 billion (approx. US$699,3494) applied to other types of foreign investments.

In addition, there are also certain incentives for foreign investors who invest in the priority business fields located in SEZs area under Reg 10/2021, for instances, investors who propose to invest in the hotel industry in Toba District, North Sumatera, or invest in the golf course in Belitung District are entitled to receive Tax Allowance facility.

Procedures for Setting up a PT PMA in Indonesia

If the investors decide to set up a new PT PMA, please be informed that PT PMA is regulated by Law No. 40/2007 on Limited Liability Companies as amended by the Omnibus Law (“Company Law”). The following are the stages in setting up the company in accordance with Company Law and new implementing regulations of Omnibus Law:

  • Articles of Association: the founders or their proxies must sign a deed of establishment of the company containing articles of association (“AOA”) of the company before a notary public. It should be noted that the company’s business activities shall be in line with Central Statistics Body Regulation Number 20 of 2020 on Indonesia Business Fields Classification (“KBLI 2020”).
  • Registration to MOLHR: to obtain a legal entity status, the AOA shall be registered to the Ministry of Law and Human Rights (“MOLHR”). The notary will handle the registration process at the MOLHR.
  • Business Registration Number (NIB): after obtaining proof of registration from MOLHR, PT PMA must register with the Online Single Submission (“OSS”) system managed by the Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal). Furthermore, the OSS system will issue a NIB for the company. The NIB shall also apply as Company Registration Certificate (Tanda Daftar Perusahaan), Importer Identification Number (Angka Pengenal Impor) and custom access rights (hak akses kepabeanan).
  • Business License and Commercial/Operational License: before the issuance of Reg 5/2021, together with the issuance of NIB, OSS will also issue a business license for PT PMA depends on its business activities. Afterwards, the company shall fulfil its commitment under the business license to obtain the commercial/operational license and start commercial activities. However, the new Omnibus Law and Reg 5/2021 have introduced the new concept of the risk-based licensing system (which will be effective in June 2021), therefore, the business license of PT PMA will be determined by risk-based licensing system that will be discussed below.

The major changes to business licensing after Omnibus Law

Under Reg 5/2021, in order to start and doing business activities, the business actors shall fulfil the following:
a. Basic requirements for Licensing; and/or
b. Risk-Based Licensing System.

Furthermore, Article 5 Reg 5/2021 stipulates the basic requirements of business licensing cover the suitability of spatial layout activities, environmental approvals, approvals of the buildings (persetujuan bangunan gedung or known as building permit (Izin Mendirikan Bangunan)) and certificate of feasible function (sertifikat laik fungsi).

Moreover, the risk-based licensing system is a standard method to determine the type of business license required for the company in accordance with the risk level of its business activities, generally counted on the hazard level and the potential hazard value. Article 10 Reg 5/2021 has classified business licensing based on the risk level of the business activities as follows:

The risk-based licensing system is one of the crucial changes launched by Omnibus Law; it shifted the business licensing system in Indonesia from license-based to become risk-based. Starting from June 2021, the Indonesian government will implement the risk-based licensing system. Nevertheless, it is still unclear how fast these changes will be implanted in Indonesia’s OSS system.

In a nutshell, theoretically, the issuance of Omnibus Law and its implementing regulations is a breakthrough and will bring wider opportunities for Foreign Direct Investment, especially in business lines that previously closed for Foreign Direct Investment. However, due to the new regulations that have only recently been issued, it will be important to look at the other implementation regulations issued. In other words, it still needs to be proved whether these changes have answered and anticipate the needs of the business actors, especially foreign investors, who will expect the improvement of business licensing certainty in Indonesia. We are looking forward to navigating our clients through this new era of investing in Indonesia.

 

For more information, contact:

Zippora Siregar, Partner (zippora_siregar@sdlaw.co)
Stefy Yully Nataly, Senior Associate (stefy.nataly@sdlaw.co)

Disclaimer: The description and information herein are not intended to be a comprehensive review of all relevant laws and practices, or to cover all aspects of those referred to, or to be deemed as a legal advice. Please contact us if you seek some advice to specific legal issues or any transactions matters.

Footnotes

1. BI rate as of 4 March 2021, 1 US$ = IDR 14,299
2. BI rate as of 4 March 2021, 1 US$ = IDR 14,299
3. BI rate as of 4 March 2021, 1 US$ = IDR 14,299
4. BI rate as of 4 March 2021, 1 US$ = IDR 14,299