Indonesia: another frequently asked question answered

How to do business in Indonesia? Just open a company! Indonesia offers attractive opportunities for foreign investors due to its large and young population, growing consumption rates, abundant natural resources and accessible labor force.

Due to these advantages, the inflow of foreign direct investment into Indonesia is rapidly increasing year after year. Let us look at the process of setting up a foreign investment company limited by shares in Indonesia, known as Perseroan Terbatas Penanaman Modal Asing (abbreviated as PT PMA). This legal entity allows foreign investors to conduct business activities in Indonesia and, depending on the type of activity, allows the foreign investor to have full control over the company.

Let's start with a little background:

Based on Law No. 25/2007 on Investment (New Investment Law), foreign investment in Indonesia is defined as an investment activity carried out by a foreign investor for the purpose of doing business in Indonesia.

The legal entity through which foreign individuals, foreign companies or foreign government agencies can conduct business in Indonesia is PT PMA.

The establishment of PT PMA is regulated by Law No. 40/2007 on Limited Liability Companies.

It is important to note that various sectors in Indonesia are closed or partially closed to foreign investment. To find out which sectors are open to foreign investment, you need to refer to the Negative Investment List (Daftar Negatif Investasi), which is compiled and regularly updated by the Indonesian Investment Coordination Bureau (BKPM). In case of a sector being partially closed to foreign investment, the list specifies the maximum percentage of foreign ownership that is allowed. This means that you will need a local (Indonesian) partner to do business in that sector.

Before you start setting up a company, ask yourself two questions:

• What type of legal entity do I need? Company (PT PMA) or Representative Office (KPPA)?

If you plan to conduct full-fledged commercial operations, you will need a PT PMA.

If you want to explore business opportunities in Indonesia for your foreign company (through market research, networking, etc.) without engaging in commercial operations, it is better to establish a representative office.

• Is the sector I want to invest in open to foreign investment? If so, what percentage of ownership is allowed to foreign investors?

For the answer, please refer to the Negative Investment List (latest revision made through Presidential Regulation No. 44/2016). If the sector requires partial local ownership, you will need a local partner. If you do not have a suitable local partner, you can always try to find one.

Procedures for setting up a foreign investment company (PT PMA) in Indonesia

First, you should contact the Indonesian Investment Coordination Bureau (BKPM), which is the investment service of the Indonesian government and deals with foreign investments. But I admit that despite the fact that BKPM has partially undergone digital transformation and the service has become much more convenient and understandable, it is still more like an adventure for a foreigner (especially for someone who has just arrived in Indonesia and does not yet know the language and local customs) to obtain all the permits on time and without problems.

To avoid problems, most foreign investors prefer to use the services of a local company specializing in the formation of PT PMA or a representative office to handle all the procedures at BKPM. Depending on the sector, the cost of setting up a PT PMA can vary, but typically such a package starts from US$3,000 and takes about ten weeks (if you are lucky) to complete, usually including a year’s rent for the legal address.

You do not necessarily have to set up a PT PMA from scratch. You can also decide to purchase an existing PT PMA or an existing Perseroan Terbatas (PT). For the latter, since the PT is a local limited liability company, it must be converted into a PT PMA after acquisition.

Founders of a PT PMA

A minimum of two shareholders (President-Director and President-Commissioner) are required to set up a PT PMA. At least one of the shareholders must be a foreign person (or foreign legal entity) it is important to note that there is no regulation on the shareholding ratio.

The director must reside in Indonesia and be engaged in day-to-day operations. A foreigner working and residing in Indonesia is required to obtain a tax number (NPWP) and a work permit (KITAS).

One of the benefits of opening a company in Indonesia is the ability to obtain an Investment Visa (Investment KITAS) as per the latest changes in the BPM Presidential Decree No. 5/2019, Indonesia offers additional benefits to investors residing in Indonesia. Previously, investors were required to obtain a Work KITAS (index code 312) along with a work permit worth US$1,200 per year. As a result of this change, work permits are no longer required for Investor KITAS holders, saving US$100 per month or US$1,200 per year on the visa. To qualify for this type of KITAS, your stake in the company must be at least 11.5%.

To establish a PT PMA in Indonesia, shareholders must submit a memorandum of association, which must be legalized by a notary. The Memorandum of Association contains, in addition to the Charter, the following additional information:

• About the founders:

If the shareholder is an individual, the name, date of birth, place of birth, information about the current place of residence and citizenship are indicated.

If the shareholder is legal entity, the location of the legal entity is indicated, including the full address, date and number of legalization by the ministry.

• About the Management Board and the Board of Commissioners:

The name, date of birth, place of birth, current residence information and nationality of the members of the Management Board and the Board of Commissioners who are initially appointed in the Memorandum of Association are indicated.

• About other shareholders (except the founders):

The names, number of shares and their par value are indicated.

Capital Requirements

To establish a PT PMA, a foreign investor must meet the minimum paid-up capital requirement for foreign investment. Currently, the minimum requirement is IDR 10 billion or the equivalent amount in US dollars. The Indonesian government has set high requirements to attract large companies and investors, while protecting small local businesses.

Paid-in capital is usually 25% of the minimum capital requirement. In some (capital-intensive) industries, the paid-in capital requirement is higher. However, in practice, it is often the case that a PT PMA is established without the need for a foreign investor to transfer the paid-in capital to an Indonesian bank account. PT PMA shareholders can sign a written capital statement stating that the paid-in capital can be transferred (without actually transferring it).

Once you have all the necessary documents in hand, the last step in opening a PT PMA is a current account.

To simplify the procedure for opening a current account, I recommend appointing a nominee director of an Indonesian citizen at this stage, this will save you time and there will be no strict requirement to be present in the country.