Establishing Company in Indonesia

Indonesia is a developing country with promising potential for economic and business growth. Population, land area, median of age, and population distribution are vital indicators to measure the economic and business growth potential of a country. The Indonesian economy based on the size of the Gross Domestic Product (GDP) at current prices in the first quarter of 2023 reached IDR 5,071.7 trillion. Compared to the first three months of 2022, the Indonesian economy in the first quarter of 2023 grew by 5.03 percent. Indonesia is also projected to become the 4^th highest economy in the world by 2030.

Indonesia’s population is more than 281 million people in early May 2023 based on the latest UN data, equivalent to 3.51% of the total world population and the 4^th highest population in the world. Indonesia’s total land area is 1,811,570 km2 (699,451 sq. miles), of which 56.4% of the population are urban dwellers and the average age in Indonesia is 29.7 years. The largest population distribution of the 5 cities respectively is Jakarta, Tangerang, Surabaya, Medan, and Bandung. SW Indonesia operating offices are in Jakarta, Tangerang and Surabaya – with more than 250 professionals in auditing, taxation, business advisory and investment compliance area.

Foreign direct investment into Indonesia increased 20.2 percent year-on-year to a new record peak of IDR 177 trillion (USD 11.96 billion) in the first quarter of 2023, amid efforts by the government to ease business and licensing rules. Those figures excluding investment in banking and the oil and gas sectors. Base metals were the biggest recipient amid efforts to boost investment in processed minerals.

Investment from entities with country of domicile in Singapore was the biggest source of investment (USD 4.3 billion), followed by Hong Kong (USD 1.5 billion), China (USD 1.2 billion), and Japan (USD 1 billion). In total, Indonesia recorded IDR 328.9 trillion of foreign and domestic investment during the first quarter, up 16.5 percent from a year earlier, boosted by a rise in investment in base metals, transportation, and the mining sector. For 2023, the government has set a target to draw IDR 1,400 trillion (USD 95.5 billion) of investment from domestic and foreign sources.

Investment in Indonesia is an exciting opportunity because of the business environment, circumstances and conditions as described by the numbers in the paragraphs above. SW Indonesia offers a complete service that helps foreign investors starting from pre-entry studies, starting a business in Indonesia, secondment and initial recruitment of company personnel, search for office / factory locations, selection support: architects, interior designers, forwarding, warehousing and your logistics agency, as well as set-up of initial financial, accounting, taxation, information technology, and human resources systems for your company.

Like investing in other countries in general, once your company is established, it must comply with business administration. Monthly business compliance includes payroll, social security for employment, social security for health, taxation and preparation of financial reports. Quarterly business compliance is the preparation and submission of Investment Activity Report. Annual business compliance includes statutory audits on financial statements and submission of annual tax returns. Other compliance matters that must be considered are company secretarial aspects such as changes to the company’s articles of association and their periodic updates. SW Indonesia through its Business Process Outsourcing business unit is ready to support your business compliance.

Legal Hierarchy in Indonesia

The following official hierarchy of Indonesian legislation (from top to bottom) is enumerated under Law No. 10 Year 2004 on the Formulation of Laws and Regulations: 

1. Constitution 1945 (Undang-Undang Dasar 1945 or UUD’45). 
2. Law (Undang-Undang or UU) and Government Regulation in Lieu of Law (Peraturan Pemerintah Pengganti Undang-Undang or Perpu). 
3. Government Regulation (Peraturan Pemerintah or PP). 
4. Presidential Regulation (Peraturan Presiden or Perpres). 
5. Regional Regulation (Peraturan Daerah or Perda). 

In addition to the hierarchy above, in Indonesia’s legal practice there are Presidential Instructions (Instruksi Presiden or Inpres), Ministerial Decrees (Keputusan Menteri or Kep-Men), and Circulation Letters (Surat Edaran or SE), which sometimes conflict with each other. 

The Government of the Republic of Indonesia issued the Job Creation Act (UU Cipta Kerja or UU Ciptaker) in 2020 to minimize conflicts between these regulations, by synchronizing clusters of rules known as the omnibus law. The purpose of ratifying the Job Creation Act is to create a more conducive investment climate with legal certainty due to existing regulations already has been synchronised.

The Job Creation Act, officially Law Number 11/2020 on Job Creation (Law Number 11 of 2020 Concerning Job Creation, or Law 11/2020), was passed on 5 October 2020 by Indonesia’s People’s Representative Council (Dewan Perwakilan Rakyat or DPR), with the aim of creating jobs and raising foreign and domestic investment by reducing regulatory requirements for business permits and land acquisition processes. On 30 December 2022, the amendment of the law, Government Regulation in Lieu of Law No.2/2022, was signed by President. On 21 March 2023, the amended law, presented as the 2023 Omnibus Law on Job Creation, was passed. 

There are 11 cluster of Job Creation Act, some of which are employment and taxation cluster. Employment cluster ensure worker’s right such as social security, severance pay, and minimum wages. Moreover, employment cluster is important to increase job opportunities. Taxation cluster brings legal certainty and incentive for entrepreneur to attract investment whether from local or foreign investor. An Example form of incentive given are diminishing of dividend tax which reinvested in Indonesia.

Types of Legal Entities for Foreign Investors in Indonesia

In order to comply with regulation for doing investment in Indonesia, there are several form of legal entities that exist in Indonesia: 

1. Indonesian Foreign Investment Limited Liability Company (PT Penanaman Modal Asing or PT PMA)

PT PMA is defined as an investment activity to conduct business in the territory of the Republic of Indonesia carried out by foreign investors, either using fully foreign capital or the results of joint ventures with domestic investors. PT PMA require Investment value exceeds IDR 10,000,000,000 with a minimum paid in capital of 25% of the investment value or a minimum of IDR 2,500,000,000. PT PMA has various advantages such as allow up to 100% of foreign ownership, able to employ foreign workers, and has full authority to register products.

PT PMA establishment process are not much different from the steps in establishing limited liability company (PT). The establishment steps start from obtaining approval regarding the name of PT PMA to obtaining various legal documents with the following details:

1. Obtaining approval regarding the name of PT PMA.
2. Cooperate with a notary to obtain a deed of establishment.
3. Obtaining approval from the Ministry of Law and Human Rights.
4. Make an application to obtain a domicile letter.
5. Application for Business Identification Number (NIB) through OSS.
6. Tax number (NPWP) registration to fulfill tax obligations.
7. Other related license applications, such as location permit, business license, and other licenses.

2. General Representative Office (Kantor Perwakilan Perusahaan Asing or KPPA)

KPPA is an office headed by an individual Indonesian citizen or a foreign citizen appointed by a foreign company or a combination of foreign companies abroad as representatives in Indonesia (BKPM Regulation Number 13 of 2017). Licenses obtained for KPPA given to foreign business actors are for 3 years, which can be extended 2 times for a period of 1 year. KPPA offers opportunity to explore the Indonesian market prior to commencing any commercial operations. KPPA suitable for non-sales activities like reaching out to potential clients, customer service support, and conduct marketing and brand awareness campaigns.

These are steps to establish KPPA in Indonesia:

1. Approval from Capital Investment Coordinating Board (BKPM) for license.
2. Obtain a domicile letter.
3. Application signing by the lawyer.
4. NPWP registration.
5. Obtaining Company Registration Certificate (TDP).

3. Representative Office for Business Trading (Kantor Perwakilan Perusahaan Perdagangan Asing or KP3A)

KP3A is an office headed by an individual Indonesian citizen or a foreign citizen appointed by a foreign trading company or a combination of foreign companies abroad as representatives in Indonesia (BKPM Regulation Number 13 of 2017). In contrast to KPPA, KP3A can be divided into 3 forms, including:

• Selling Agent to do cooperation and promotion.
• Manufactures Agent for market survey activities.
• Buying Agent to carry out the functions of supervision and cooperation.

In addition, KP3A can be opened in provincial capitals and regencies/cities throughout the territory of the Republic of Indonesia, thereby supporting the role of KP3A in introducing, promoting, and marketing goods produced by the parent company.

Basically, the establishment process of KP3A is not different from KPPA. The first license application will be temporary. After all steps are complete, we may request a permanent KP3A license.

4. Representative Office for Construction Business (Badan Usaha Jasa Konstruksi Asing or BUJKA)

BUJKA is a business entity established by law and domiciled in a foreign country, having a representative office in Indonesia, and equated with a limited liability company that is engaged in the construction services business (BKPM Regulation Number 13 of 2017). In contrast to the other two forms of representative office, BUJKA allows foreign business actors to carry out projects in Indonesia with local construction companies through joint operations (forming joint operation ties with Construction Services Business Entities (BUJK)).

There are several procedures to establish BUJKA as follows:

1. Application review and government tax payment.
2. Obtaining a BUJKA license.
3. Application signing by the lawyer.
4. NPWP registration.
5. Obtaining Company Registration Certificate (TDP).