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Investment In Indonesia
June 2007 | Finance | Business Bulletin

Establishing a Foreign Investment Company 

Recent Developments in Indonesian Foreign Investment Law 
The Indonesian Parliament recently approved the new Investment Law on 29 March 2007. The new law will take effect after endorsement by the President. This new law will supersede Law No. 1 of 1967, which governs foreign direct investment, and Law No. 6 of 1968, regarding domestic direct investment, as amended by Law No. 12 of 1970.

The new Investment Law aims to simplify investment-related procedures and introduces fiscal incentives and other arrangements, including one-stop service solutions. It incorporates international standards, practices and investment principles. Equal treatment will be accorded to investors regardless of their nationalities. Local and foreign firms will enjoy the same incentives (including tax incentives) if they meet the pre-requisites.

Significantly, the new law recognises the importance of protecting investments from nationalisation and expropriation. In addition, there are provisions for international arbitration for investment related disputes between the government and investors.

The Indonesian Government clearly hopes to attract foreign investment by improving the investment climate with the proposed new investment rules and regulations, together with proposed amendments to land, labour and tax legislation.

In light of these recent developments, an examination of Indonesia's foreign investment process will be relevant to potential investors who wish to seize new investment opportunities afforded by the country's improving investment climate.

Foreign Investment in Indonesia
Foreign investment is to be conducted by forming a foreign investment company ("PMA Company") in the form of an Indonesian limited liability company (perseroan terbatas, a "PT"). A PT is a legal entity which is established by agreement and conducts its activities using capital divided into shares.

A PMA Company can be set up by way of:

1. establishing a new 100% foreign owned PT; or
2. establishing a new PT by way of a joint venture between a foreign investor(s) and an Indonesian partner(s); or
3. purchasing share(s) in an existing PT. This PT could be a PMA Company or a company established under the framework of domestic capital investment (a "PMDN Company") or an ordinary company (non PMA/PMDN Company).

This article will consider only a PMA Company which is a new 100% foreign owned PT or a joint venture with Indonesian partner(s), as mentioned in items 1 and 2 above.

Procedures for the Establishment of a PMA Company
The following steps are required to establish a PMA Company:

1. Reviewing the Negative List and Business Activities which Require a Local Partnership
   
   Foreign investors should first ascertain whether the intended business activities are open to foreign investment.
   
   Negative List: The Negative List, issued by the Indonesian Government, specifies activities which are: (i) closed for foreign investment; (ii) 100% opened; and (iii) opened subject to certain requirements, such as having to form a partnership with a local party. The list is currently under review to reduce the number of restrictions on foreign investments.
   
   Business Activities Which Require Partnership: In addition to the Negative List, Presidential Decree No. 127 of 2001 specifies activities which require foreign investors to form a partnership arrangement with an Indonesian small-scale enterprise. The scheme of partnership is stipulated in the decree.



2. Foreign Investment Application
   
   The Capital Investment Coordinating Board ("BKPM") is a "One Stop Service" governmental agency for investors. Under the new Investment Law, BKPM will be elevated to a non-departmental institution reporting directly to the President.
   
   A formal "Model I/PMA" form together with the following information and documents should be submitted to BKPM:
   • corporate documents of all investors;
   • annual reports of all investors;
   • tax number (for Indonesian investors, if any);
   • bank references for all investors;
   • draft joint venture agreement (if any);
   • intended business location;
   • flow chart of proposed production/operation (for industry) or description of business (for services); and
   • total intended investment and source of financing.

Officially, BKPM will process applications within 10 working days of receipt of all relevant documents. However, in practice, it usually takes about four to five weeks to complete the process.

No formal minimum capital requirements exist for establishing a PMA Company. BKPM will, however, conduct its own examination as to the capital adequacy of the project based on the commercial feasibility of the proposal. In the most current precedent, the minimum capital required for approval by BKPM is around US$250,000.

Once the application is approved, BKPM will issue an approval, or an in-principle business licence. Such BKPM licence gives the investors the right to commence real investment in Indonesia and up to three years to start commercial operations of the intended investment.


3. Incorporation of the PMA Company
   
   The founders of the PMA Company have to incorporate the PMA Company by executing the Deed of Establishment (the "Deed") containing the Articles of Association before a Public Notary in Indonesia. This is followed by the injection of capital into the PMA Company's account (as described in step 6 below). The capital injected must be in line with the BKPM licence.
   
   After execution of the Deed, the PMA Company has legal capacity to act although its liability will not be limited until approval of the Deed is issued by the Minister of Law and Human Rights, described in step 7 below.



4. Letter of Domicile
   
   The next step is to obtain a letter of domicile from the landlord of the office building (if relevant) and from the Village Level (Kelurahan) Regional Government Office, which states the address of the PMA Company ("Letter of Domicile").



5. Taxpayer Registration Number
   
   The investors should apply to the Directorate General of Taxation of Foreign Companies ("Foreign Tax Office") for their Taxpayer Registration Number, commonly known as NPWP (Nomor Pokok Wajib Pajak), by submitting the following:
   
   • Completed application letter (form available at the Foreign Tax Office)
   • Copy of the executed (notarial) Deed of Establishment
   • Letter of Domicile
   • Copy of the BKPM approval, and
   • Copy of the KTP/ID card or passport of the PMA Company's President Director.


6. Opening a PMA Bank Account
   
   The regulations of Bank Indonesia require that all banking transactions (such as capital injection, administration of loans, payment of capital equipment, raw material, etc.) of a newly established PMA Company be transacted through a special foreign investment account ("PMA Account") to be opened with an approved foreign exchange bank in Indonesia.



7. Approval from the Minister of Law and Human Rights
   
   The notary drawing up the Deed of Establishment is to submit the Deed to the Ministry of Law and Human Rights for approval (the "Ministry"). Documents required for submission include the NPWP, letter of domicile and a bank statement evidencing capital contribution. It takes about two to three months for the Ministry's approval to be obtained. Upon approval, the PMA Company is considered a limited liability company.



8. Registration and Publication of the Deed of Establishment
   
   Within 30 days of the Ministry's approval, the approved Deed of Establishment must be registered with the Department of Trade in the domicile of the PMA Company and then published in the Indonesian State Gazette.



9. Relevant Supporting Licences and Registrations
   
   Some other relevant procedures when establishing a PMA Company are:
   
   • obtaining an Expatriate Utilisation Plan (Rencana Penggunaan Tenaga Kerja Asing - RPTKA) from BKPM to support the applications for work and stay permits for expatriates who will be assigned to the PMA Company;
   • obtaining a Location Permit (Ijin Lokasi) from the local land office, which must be obtained before the PMA Company acquires office buildings or land which is not located in an industrial estate;
   • obtaining a Building Construction Permit (Ijin Mendirikan Bangunan) from the local government for the construction of a factory/building;
   • obtaining a Nuisance Law Permit (Ijin Undang-Undang Gangguan) from the local government (except for factories located in an industrial estate or offices located in commercial office buildings);
   • obtaining environmental licences (for certain businesses);
   • obtaining a Customs Facilities/Master List to facilitate importing capital goods and/or raw materials (if relevant);
   • obtaining bounded warehouse facility from the Customs Office (if relevant); and
   • obtaining a Limited or General Import Licence (Angka Pengenal Importir Terbatas/Umum) (whichever is relevant).


10. Operation and Permanent Licence
    
    When the PMA Company is ready to fully conduct its commercial activities and has obtained the relevant supporting licences and registrations, the PMA Company must obtain a permanent business licence ("IUT") from BKPM. The IUT shall be valid as the business licence of the PMA Company for 30 years. The IUT may be amended or expanded upon request by the PMA Company if there are changes or expansion in the investment plan and may also be extended for the same period.