Procedures in Investment Licenses in Indonesia
When it comes to speaking about procedures for investment licenses in Indonesia, the talk can be endless. Not only it is not an easy matter, the rules and regulations in Indonesia may change every year. This does not only have something to do with the economic growth. Political stability between countries also plays a major role in this.
There are five (5) things that need to be considered regarding the procedures for investment licenses in Indonesia. These five (5) things include:
- The foreign investment in Indonesia.
- Indonesia’s foreign investment law.
- Indonesia’s foreign investment policy.
- Indonesia’s foreign investment negative list.
- Indonesia’s investment opportunities.
I. The Foreign Investment In Indonesia.
What is the foreign investment in Indonesia like lately? Despite the political instability in some countries around the world, plenty of foreign investors still find Indonesia an ideal place to grow their business. This can be seen from the growing number of the rising digital startup businesses, most especially in cities like Jakarta and Bandung.
According to Tempo.co (December 17, 2017), IDX, revealed the growth of the stock that the foreign investors owned. If the last two months in 2016 had only shown almost close to IDR 1.700 trillion, then 2017 increased up to IDR 1.878 trillion.
What does this show? The Chairman of BEI, T. Sulistio, said that the ownership value also increased. When it comes to the stock market in the domestic area, foreign ownership has increased, which also indicates the strength of Indonesia’s economic fundamental that is still there.
Although the funds from the foreign investors have not yet been released, several parts of the profit have been realized. Still, T. Sulistio also believed the better development was ahead, so it is best to be optimistic about it.
So, how do you start your foreign investment in Indonesia? The first thing is basically the same: check out the latest trends in the business development. For example: since fintechs (financial technologies) have been ruling 2017 in the world of digital startups, chances are they will still be needed in 2018. There are so many people in need of access to a business loan without too many restrictions.
The second thing to do is to find out how everything works in Indonesia. There are three (3) ways to register your foreign business in Indonesia, which are:
Local company (PT).
PT stands for Perseroan Terbatas or Limited Company. This type of company is actually strictly for Indonesian business people only. However, if you would like to set up your foreign business in Indonesia this way, there are certain situations that can make this happen. To be clearer, you might want to check out Indonesia’s foreign investment negative list.
Foreign-owned company (PMA).
PMA stands for Penanaman Modal Asing or Foreign Investment. This type of company is the most suggested for foreign investors who would like to start and grow their businesses in Indonesia. The rules and regulations here can be demanding if your business is still new.
However, once you have your PMA settled, then you will not have to worry about work permits, because your company is already legal to run in Indonesia.
The best thing about having a representative office for your foreign business in Indonesia is to make your investment get easier here. There are two (2) things that a representative office can do, which are: obtaining work permits for expatriate managers and getting multiple entry visas for expatriate personnel. (Of course, this includes an exemption from exit-tax.)
II. Indonesia’s Foreign Investment Law.
So, how does Indonesia’s foreign investment law work here? Among foreign investors wanting to open and grow their businesses in Indonesia, knowing about the “Company Law” is a must. The “Company Law”, which is actually Indonesian Law No.40 of 2007.
Besides the “Company Law”, there is also the “Investment Law”. The “Investment Law” is actually Indonesian Law No.25 of 2007 on Capital Investment. With this “Investment Law”, foreign investors can see how direct investments in all sectors can be embraced. The key issues faced by all investors starting their businesses in Indonesia are addressed too.
Besides the laws above, there are also some common myths regarding starting and growing a foreign business in Indonesia. Based on Indonesian Expat (December 5, 2017), some of these myths are:
The local shareholder myth.
As mentioned in the first chapter, not all foreign businesses in Indonesia require a local shareholder or a local partner. In fact, there are some foreign businesses that are fully-controlled and managed by the foreign owner(s). Then again, this is related to business classification, and you must refer to Indonesia’s foreign investment negative list.
Business through partnerships.
No, this is not only the “local partner” intended in the previous paragraphs. At first, it seems legit and safe to register your foreign business under your spouse’s name. However, if things do not work out (whether it is a breakup or a divorce), you may lose your business altogether, and your local ex gets to keep it all.
To avoid or at least minimise the possible damage in the future, it is best that you still rely on a professional consultant or a lawyer. After all, rules and regulations in Indonesia can change, whether it is caused by the political situation or else.
- The land and property ownership.
Again, this is where you must consult with Indonesia’s foreign investment negative list. Based on the Basic Agrarian Law No.5 of 1960, foreigners are not allowed any piece of land and property ownership. This is why when starting and growing a foreign business in Indonesia, registering your business under PMA is still the safest choice.
Despite being aware of Indonesia’s foreign investment law, do not forget three (3) lethal things that can still possibly burn your business to the ground:
- Lack of demand.
- High competition.
- Poor management.
If that is how the law goes, then what about Indonesia’s foreign investment policy? What can be done to help foreign investors to start and grow their businesses in this country?
III. Indonesia’s Foreign Investment Policy.
Indonesia’s GDP had grown about 5% in 2016. That fact alone has been one of the many attractions to foreign investors. The year 2016 also marked the growth of young, middle-class population, with a strong domestic demand and stable political situation. The conservative macroeconomic policy was also another attraction for the foreign investors to start considering Indonesia as their next big thing.
Yes, Indonesia has all the potential, but there are still some issues that need to be dealt with. Some of the issues include:
- Vague and conflicting regulations.
- Poor infrastructure.
- Rigid labor laws.
- The confusing contract issues.
It is nothing new that the last bit has been the most dangerous issue that has badly affected the economy. Not only that, the lack of trust regarding one’s own fellow countrymen (and women) has made local businesses turn to foreign investors for better assurance. This is a sad fact that should actually no longer be ignored.
Indonesia’s foreign investment policy (based on the “Company Law” and the “Investment Law” – plus legal entities like PMA and Representative Office) do not only help foreign investors to start and grow their businesses here. Based on the issues mentioned above, Indonesia can also learn from other countries when it comes to running a business with clearer regulations, fairer labor laws, and better existing infrastructure.
As part of Indonesia’s foreign investment policy, procedures in investment licenses in Indonesia also include import and export licenses in Indonesia. Of course, once your PMA or permanent business license has been obtained, then the next step is to apply for these. (It depends on your business category, though.)
If your company involves importing (or exporting) goods over to Indonesia, you’d better not miss or skip this step. Although limited to a particular industry, this does not mean that you cannot use these licenses to import or export goods that are not part of business matters.
For import licenses, you can apply for:
- API-U or General Import License.
Applying for this may take a month, but you can use this license to import fully-made product to Indonesia. You can even use this to trade goods and import finished products with the help of a third party.
- API-P or Producer Import License.
As long as you do not use this license for selling or distribution, it is no problem. You can only use this license for production or manufacturing use process.
- API-T or Limited Import License.
If this license is what you use to import goods, the goods imported will be a subject to a reduced withholding tax. The rate is 2.5%. This license is obtained through the Indonesian Investment Coordinating Board (BKPM or Badan Koordinasi Penanaman Modal).
For export licenses, you can apply for:
- Exportable Goods Individual.
This license requires Taxpayer Identification Number or NPWP (Nomor Pokok Wajib Pajak) and other documents according to the rules and regulations regarding exporting goods.
- Restricted Goods Institution.
This license requires more, from ET (Registered Exporters), SPE (Export Permits), LS (Surveyor’s Report), COO (Certificate of Origin), and other documents according to the rules and regulations regarding exporting goods.
IV. Indonesia’s Foreign Investment Negative List.
From the name itself, Indonesia’s foreign investment negative list may sound unpleasant. In general, this means some business fields that are specifically off-limits to foreign investors. They are still allowed to open and start their businesses in Indonesia, as long as they go by the rules and can benefit the people of Indonesia too.
However, foreign investors know the boundaries. There are certain business fields in Indonesia which they are not allowed to be a part of. They cannot even try to get it by working with a local partner. Well, even if they do, then the business will never be theirs. The business strictly belongs to the local partner, since according to this law, they earn more rights to keep it.
So, what are the business fields that are part of Indonesia’s foreign investment negative list? Check this list out so you will not make the same mistakes next time you want to start a business in Indonesia.
Indonesia is an agricultural country. Despite that, there is still lack of maintenance regarding the growing of food and other agricultural purposes. However, as a foreigner, you can still work closely to this field. For example: research and development on modified organisms.
Construction and high installation of high voltage electricity.
In 2016, Indonesia’s foreign investment negative list is open to allow a 49% for foreign investment.
Marine and fisheries.
In 2016, Indonesia’s foreign investment negative list also removes this, so it is still possible for any foreign ownership. However, sea sand quarrying is an exception. It is not open anymore for foreign ownership. To utilize corals, you should ask for the Minister of Environmental an Forestry’s recommendations.
Crumb rubber industry.
Back then, this field was still part of Indonesia’s foreign investment negative list. In fac, foreigners were not allowed to have any of that at all, alias 100%. In 2016, they can do that.
Energy and mineral resources.
Thanks to the new regulations, The Scale Power Plants is > 10 MW. The tax return is also 100%.
For the year of 2006, the changes in Indonesia’s foreign investment negative list include:
- Construction services.
- Construction consultancy services.
- Water drinking supply.
Biomass Pellet and Producing Industry.
From being part of this negative list, this field is now 100% foreign investment allowed.
The foreign shareholders now are allowed to have maximum 67% ownership in this field, which is for distributors and warehousing.
In 2016, the changes made in this field include:
- Land Terminal Construction for Public and Good Facilities.
- Vehicle Testing.
- Passenger Transportation Overland.
All three mentioned above allow foreign shareholders to have maximum 49% ownership.
V. Indonesia’s Investment Opportunities.
After having read them all above, then what are Indonesia’s investment opportunities like? According to The Jakarta Post (June 21, 2017), the government stated that Indonesia was set to revise the country’s negative list. The technical meeting had been postponed by the Coordinating Economic Ministry.
However, the Coordinating Economic Ministry of Indonesia, Darmin Nasution, had also stated that there would be no changes in the manufacturing sector. Still, some of the results (including the removal of some sectors from the negative list) have shown that Indonesia is slowly becoming more open towards foreign investors opening more businesses in this country.
Still, from The Jakarta Post (this time on December 5, 2017), The World Bank’s 2018 EODB survey has put Indonesia in the 72nd position. For the past couple of years, Indonesia has moved up 34 points. The World Bank’s 2018 survey has even named Indonesia as “The Top Reformer in Asia”.
What does this mean? According to many business speculators and strategists, this is still the perfect time to invest in Indonesia. There are still many Indonesia’s investment opportunities here. Still based on EODB’s rating, Indonesia has been considered quite successful in growing businesses because of these past accomplishments:
- Trading across borders.
- Getting electricity.
- Paying taxes.
- Registering property.
- Starting a business.
- Getting credit.
- Enforcing contracts.
Electricity – including a wireless fidelity or wifi connection – has become cheaper. Because so many people rely on wifi (or a mifi, which is smaller and more portable), there is no more old-fashioned internet modem which will take up more electricity. Access to credit is also far easier, especially with the existing of new credit bureaus and fintechs or financial technologies.
More digital transactions have reduced the time and energy to prepare, process, and deliver important documents. Imagine this, you get to save time from 133 hours to 119 hours. Your productivity is increasing. You also have more time to do anything else and finish many things. Your business runs wherever you go, and you do not have to get stuck at work all the time.
Indonesia, especially in big cities like Jakarta, Bandung, Yogyakarta, Surabaya, Medan, Tangerang, Semarang, and many more, continues to grow. This is why more Indonesia’s investment opportunities will still be going on. Digital startup companies are still on the rise, because more Indonesians are looking for ways to make their lives easier.
To open, start, run, and grow your business in Indonesia is nothing new. Once again, as long as you are aware of what the people may need (by checking out the latest business trends) and get familiar with the procedures in investment licenses in Indonesia, then you are already good to go.
Another thing that you need to constantly pay attention to is the rules and regulations in Indonesia. Since they can change quickly depending on the political stability, it is also best that you check out the latest news regarding the politics and economy. That way, you know what to do when things do not stay the same, including the procedures in investment licenses in Indonesia.
We hope this article is useful.