A Glimpse of How to Invest in Indonesia

Jumat, 24 Maret 2017 | 16:17 WIB oleh Tiara Ika Winarni

by: Mursal Maulana

History of Investment in Indonesia

The existence of investment in Indonesia could be traced back before Indonesia declared its independent as sovereign state. Due to trade relation with several European countries (predominantly initiated by Portugal in 1511), those countries begin to exploit the opportunity to import herb and spices from Indonesia through Malacca Strait. This relation then continued to colonial era when Netherland (1596-1795 and 1816-1942), France (1795-1811), Great Britannia (1811-1816) and Japan (1942-1945) respectively occupied Indonesia’s territory.

After Indonesia officially declared its independent in 1945, the paradigm of investment had switched drastically. Despite the fact that its independent state status, Indonesia still left behind in economic development. In response to this phenomenon, some argue that relying solely on internal economic power is not an appropriate option and can raise detrimental impact.

Due to this consideration, Indonesia government finally determined to switch its investment policy to attract foreign investor to invest in Indonesia. That’s why, since that time foreign investment perceived as inevitable option contributing to fix economic malaise.

In order to improve investment’s climate and guarantee that foreign investors can run their business in Indonesia smoothly, Indonesia government then tried to formulate an appropriate law that could bridge the interest of both parties (Indonesia as “Host Country” and investors). The first and foremost effort to codify investment law begun in 1967 and 1968 when Indonesia government respectively enacted the Law No 1 year 1967 (Foreign Investment Law) and the Law No 6 Year 1968 (Domestic Investment Law).

40 years later, due to aspiration to amend the laws, House of Representative and Indonesia Government then agreed to enact revised investment law by promulgating the new version of investment Law No 25 year 2007. In contrast to previous laws distinguishing foreign and domestic investment, the new one incorporated both kinds of investments into an integrated legal framework.

 

Domestic & Foreign Investment

According to Investment Law, domestic investment is defined as an investing activity to do business in the territory of the state of the Republic of Indonesia that is carried out by a domestic investor by use of domestic capital whereas foreign investment is defined as investing capital activity to run business by foreign investor. Afterward, Article 1 (6) and (5) define foreign investor and capital as follow:

ü  Foreign Investors are individuals of foreign citizen, foreign corporation, and / or a foreign government making an investment in the territory of the Republic of Indonesia.

ü  Foreign Capital as capital owned by foreign country, individual of foreign citizen, foreign company and/or Indonesia legal entity partially or wholly owned by foreigners.

 

Legal Framework

As mentioned above, legal basis regulating investment activity in Indonesia is codified in Investment Law and its implementation regulations. However, because of complexity of investment activity, Investment law is not sufficient enough to adjust all aspect of investment measures. Anyways, the law only regulates direct investment in term of general not specific branch of investment, such as in the field of banking, insurance, securities, multi-finance, leasing, factoring, credit card, consumer finance and venture capital. Those branches of investment are regulated in specific legal framework. For instance, banking is regulated in the Law No 10 of 2010 and insurance in Law No 2 of 1992.

In international level, Indonesia also has shown its commitment to secure investment activity by participating in some international conventions. By doing so, it hope that Indonesia can retain its reputation as “Friendly Investment Country”. Those conventions are listed as follow:

  1. Agreement Establishing the World Trade Organization (Ratified by the law no 7 year 1994).
  2. Convention Establishing the Multilateral Investment Guarantee Agency (Ratified by the President Decree No 31 of 1986.
  3. Convention on the Recognition and Enforcement of Foreign Arbitral Award (ratified by President Decree No 34 of 1981).
  4. Convention on the Settlement of Investment Disputes between States and National of Other States (ratified by the law No 32 of 1968).
  5. Other bilateral and regional investment treaties.

 

Recent Applicable Law and Regulations

Due to unpredictable changed concerning to investment policy, we need to make sure that whether applicable law and regulation still come into effect or not. Here we insert recent applicable law and regulations:

No

Categories

Law/Regulation

1

Investment

Law Number 25 Year 2007 Regarding Investment

2

Negative Investment List

Presidential Regulation Number 44 Year 2016 Regarding List Of Business Fields Closed To Investment And Business Fields Open With Conditions To Investment

3

Principle License

Chairman Of BKPM Regulation Number 6 Year 2016 Regarding The Amendment Of Chairman Of BKPM Regulation Number 14 Year 2015 Regarding Guidelines And Procedure Of Investment Principle License

4

Investment Licensing and Non-Licensing

Chairman Of BKPM Regulation Number 15 Year 2015 Regarding Guidelines And Procedure Of Investment Licensing And Non-Licensing

5

Investment Facilities

Chairman Of BKPM Regulation Number 16 Year 2015 Regarding Guidelines And Procedure Of Investment Facility Service

6

Investment Supervision and Controlling

Chairman Of BKPM Regulation Number 17 Year 2015 Regarding Guidelines And Procedure Of Investment Supervision And Controlling

7

Tax Allowance

Chairman Of BKPM Regulation Number 18 Year 2015 Regarding The Amendment Of Chairman Of BKPM Regulation Number 8 Year 2015 Regarding The Procedure Of Submission Of Tax Allowance Facility

8

Tax Holiday

Chairman Of BKPM Regulation Number 19 Year 2015 Regarding The Amendment Of Chairman Of BKPM Regulation Number 13 Year 2015 Regarding The Procedure Of Submission Of Tax Holiday Facility

 

What makes foreign investor interested to invest in Indonesia?

According to Indonesia Investment Coordinating Board (BKPM), there are some factors that make foreign investors fascinated to invest in Indonesia. Those factors including abundant natural resources, sound economy, political stability, demographic bonus, a young and technically trained work force and a large and growing domestic market combined with an improving investment climate and a higher global profile.

Besides factors mentioning above, there is another factor attracting foreign investor to invest in Indonesia. The so-called factor is Indonesia global influence. It is proven by the fact that Indonesia supporting role in global affairs and active voice for developing world’s concerns.

 

Realization of Domestic & Foreign Investment in Indonesia

According to data obtaining from BKPM, Investment realization for both (domestic and foreign) investment in Fourth Quarter of 2016 is Rp. 159,4 Trillion. Overall, from January-December 2016, total realization achieved was about Rp. 612,9 Trillion. Compared to foregoing achievement in 2015, it rose 12,4%.[1]

Who administer Investment Activity in Indonesia?

Because Indonesia separates direct and portfolio investment, there is no single body administrating investment in Indonesia. The former is administrated by Indonesia Investment Coordinating Board (BKPM) while the latter is administrated by BAPEPAM-LK. According to Article 2 of Investment Law, it only comes into effect solely to direct investment, not portfolio one.

To regulate investment activity, not only does central government has the power to administer it, but also it involves the role from local government (Pemerintah Daerah). The rationale behind this is caused by the fact that investment itself is correlated with other aspects that need to be controlled by local government as to in the field of environmental, labor, license permit, etc. To fulfill those adjustments, central government has delegated its power to local government to establish sectorial laws. By doing so, it will create efficient bureaucracy.

 

How to Invest in Indonesia?

In terms of foreign investment, Article 5 (2) Investment Law entails that foreign investment must be conducted in form of Limited Liability Company. Such requirement inevitably must comply with the Law No. 40 of 2007 (Limited Company Law). In contrast to foreign investment, domestic investment may be made in the form of a legal entity (Limited Company/PT), non-legal entity (such as Firm or CV) or sole proprietorship in accordance with provisions of laws and regulations. In addition, domestic limited company itself is divided into two categories, PT Local and PT PMDN. The difference between those is that the letter may enjoy certain regulatory or tax advantages that the former is not eligible for.

Before deciding to set up company in Indonesia, Foreign Investors also have to ascertain whether their core business is not listed in negative list for investment regulated in Presidential Regulation Number 44 of 2016 Regarding List of Business Fields Closed to Investment and Business Fields Open with Conditions to Investment.

The most fundamental differences between foreign and local company are pertaining to shareholders and capital amount. In respect of shareholder, foreign investment company may either consist of partial (by joining with local shareholder) or full participation. In terms of authorized capital, for foreign investment it must be deposited at least Rp. 10 Billion (Chairman of BKPM Regulation Number 15 Year 2015).

 

How to set up company in Indonesia?

Establishment of company in Indonesia is regulated in Chapter II of the Law No 40 of 2007. In general, as preliminary procedure, there will be at least 5 main steps that need to be done before setting up company in Indonesia. 

1)      It must be lodged at least by 2 person;

2)      The Deed of Establishment must be issued by not Public Notary;

3)      It must be written in Bahasa;

4)      Each founder must own the share; and

5)      The Deed of Establishment must be approved by Ministry of Law and Human Right (MOLHR).

For establishment of Limited Liability Company of domestic owned company (PT Local), it mainly follows general procedure. Limited company itself is divided into 3 categories, Small, Medium and Large Company. Each of those has specific requirement and it usually depends on the need of the owner’s choose and which one is suitable for the core of business conducted. In contrast to the establishment of local company, establishment of foreign own company entails (PT PMA) requires specific procedure regulated in other regulation as to Presidential Regulation No. 36/2010 pertaining to list of business field closed to investment and business field open with condition to investment, Regulation of chairman of investment coordinating board No. 12/2009 (Annex I) which contains application form for establishment of company.

Here is the exhaustive procedure for establishment foreign owned company:

 

Prohibition of Nominee Agreement (Saham Pinjam Nama)

Because Indonesia’s Law prohibits foreigners to set up local company/PMDN, there is only one possibility that can be chosen, that is by setting up foreign company (PMA). Sometimes to set up foreign company in Indonesia is regarded as a burdensome for the investors. Strict requirement and large capital amount must be deposited make them seek another alternative. So far, according to Indonesia practices, if the foreigners want to set up local company, the remaining possibility is by making nominee agreement with Indonesia citizen. But, this practice explicitly prohibited by Article 33 of Investment Law. If it still exists, its existence will null and void.

 

License permit & its procedure

To make sure that your company can operate steadily, having a valid license is unavoidable requirement. According to Indonesia’s law, license needs to be registered to specific institutions having the power to do so. In short, the procedure of license permit for foreign investment company is almost the same with procedure fo local/domestic company one. Most of licensing permit is administrated by PTSP, a system construed to manage simply process of licensing and to provide licensing and non-licensing services by receiving the delegation of authority from institutes or agencies having the licensing and non-licensing authority, ranging from the process of applying for licenses to the process of issuing documents in one place. It provides simple, fast, transparent and integrated procedure.

To invest in Indonesia, the investors must acquire specific license and non-license permit. According to Regulation of Chairman of the Investment Coordinating Board No. 15 of 2015 pertaining to The Guidance and Procedure of Investment Applications, the type of license and non-license permit including:

No

License Permit

Non-License Permit

1

Licensing for various business sectors

Use/employment of Foreign Workers

2

Expansion licensing for various business sectors

Importer identification number

3

Licensing for Company Merge of investment for

various business sectors

Technical recommendations for various business

sectors

4

Amendment business licensing for various

business sectors

-

5

Representative Business Licensing

-

6

Operating licensing for various business sectors

-

 

For more information about how to invest in Indonesia, our legal experts are ready to help those needing our service either to set up company or to acquire license or non-license permit. So, if you need our help please do not hesitate to contact us through our email: info@lhrplaw.com

 


[1] Badan Koordinasi Penanaman Modal, “Realisasi Penanaman Modal PMDN – PMA Triwulan IV dan Januari-Desember Tahun 2016”, 25 Januari 2017.

 

Sources:

David Kairupan, Asek Hukum Penanaman Modal Asing di Indonesia, Kencana Prenada Media Group, Jakarta, 2013.

www.bkpm.or.id

The Law No. 25 Year 2007 on Capital Investment

Regulation of Chairman of the Investment Coordinating Board No.12 /2009 on Guidelines and Procedures for Investment Principal License