In 2007, the Government of the Republic of Indonesia (“GOI”) enacted a new Investment law as Law Number 25 of 2007 concerning Investment (“Investment Act”) and made this Investment Act the legal basis of investment activities in Indonesia.
Under this Investment Act, the GOI determines basic investment policies which the foreign investor should pay attention to, that the GOI will give equal treatment to all investors, domestic or foreign, who invest in Indonesia and also ensures legal certainty, business certainty and business safety for investors starting from the licensing process to the termination of investment activities, but still all in accordance with the prevailing legislative regulations.
This Investment Act also regulates what are called Special Economic Zones (Zona Ekonomi Khusus) for which the GOI is entitled to establish separate investment policies. In practice, Batam-Bintan-Karimun have been determined as a Special Economic Zone where foreign investors who are interested in and intend to invest in those areas will attract investment policies such as the implementation of single export-import documents and different treatment in the application process whereby the foreign investor can directly apply to those areas for the investment instead of addressed it to the central government.
II. Sector Control of Foreign Investment: Encouraged, Permitted, Restricted and Prohibited Foreign Investment Categories
The Investment Act defines foreign investment as investment to do business in the territory of the Republic of Indonesia by a foreign investor by means of using all foreign capitalization or by engagement in a joint venture (JV) with a domestic investor. The form of business entity allowed for foreign investors is that forming a foreign investment company (“PMA Company”) in the form of a limited liability company, abbreviated to “PT” standing for Perseroan Terbatas (which is governed by the Limited Liability Companies Act, Law Number 40 of 2007 – “New Company Law”).
In principle, the Investment Act further regulates that all lines of business or types of business are open to investment activities unless they are declared closed or conditionally opened. The lines of business declared closed for foreign investors stipulated in the Investment Act are the production of weapons, ammunition, explosive devices, armaments and other lines of business which are explicitly declared closed under the law. As the implementation of those provisions, the GOI has determined that not all lines of business open for foreign participation/foreign investment in the form of a PMA Company.
A PMA Company may only be created or formed for business activities which are open for foreign investment. As an improvement of the previous so-called “Negative List”, the GOI under Presidential Regulation Number 36 of 2010 has issued a list of business fields closed and business fields conditionally opened to capital investment.
Under the Negative List, there are certain restrictions for foreign investments in certain lines of business which vary between absolutely closed for foreign investments, joint venture requirement, limitation on ownership percentage, requirement of partnership, requirement of particular location, and requirement of special permit.
This current Negative List will remain in effect for 3 years with the possibility that it will be reviewed depending on needs and development and will continue in effect unless changed by the GOI under a Presidential Regulation.
III. Setting Up a Foreign Investment (PMA) Company and Other Types of Investment Vehicles
As explained earlier, a PMA Company must be established in the form of a limited liability company (PT/Perseroan Terbatas) unless otherwise stipulated under an act.
A PMA Company can be set up by:
- establishing a new PT in a JV with other foreign investor(s) (100% foreign owned); or
- establishing a new PT in a JV with Indonesian partner(s); or
- purchasing shares in an existing PT (could be a PMA Company, a company established in the framework of the Domestic Investment Law (“PMDN Company”) or non PMA Company/PMDN Company).
The reason for this is that in improving the attractiveness of doing business in Indonesia for investors, it is necessary to simplify the capital investment service system. Also, basically potential foreign investors will need to obtain one license only, i.e. from BKPM (unless there are other special regulations on the relevant areas of investment), instead of being required to approach each Indonesian government institution which may have jurisdiction over the relevant areas of investment for approval to engage in activities in the particular areas. BKPM has to involve directly representatives of every sector and related regions together with the competent and authorized officials in conducting its duties and functions including one-stop integrated services.
In the current Investment Act, it is determined that domestic or foreign investors who make investments by forming a PT (limited liability company) are prohibited from entering into an agreement and/or statement confirming that the share ownership in that PT is for and on behalf of another party. The purpose of this provision is to prevent a situation where formally a PT is owned by one person but in fact the owner of that PT is another person (the so-called trust/nominee arrangement).
IV. Incorporation and Licensing Process for a 100% Foreign Owned PMA Company and JV Company
A PMA Company must be established in the form of a PT (limited liability company), and as a limited liability company, in line with the New Company Law, the PMA Company must have at least 2 (two) founders or shareholders. The decision on whether it will be incorporated as a 100% foreign owned PMA Company or as a JV Company (JV here means cooperation with Indonesian partner) will be based on the business fields the foreign investor will enter, and the above-mentioned Negative List will serve as the guidance for foreign investors in determining their shareholding composition of the PMA Company.
Both a 100% foreign owned companies and JV companies must have an approval from BKPM to obtain the status of a PMA Company. In addition to the above, recommendation from technical ministries or other related government agencies having tasks and responsibilities in certain sectors/lines of business will be required in obtaining investment approval from BKPM.
The current investment regulations do not regulate the minimum capital of a PMA Company. In practice, a PMA Company should be established with a feasible/workable paid up capital according to the line of business it is to engage in. BKPM usually evaluates a PMA Company by how much its investment would be for the line of business it wishes to engage in (not by its paid up capital). However, recently the BKPM has an internal policy to have a minimum of IDR 10,000,000,000 as an investment value. Investment (value) means capital plus any loans with a normally maximum acceptable ratio of 1:3.
The above is under the consideration that such certain fields would only require small paid up capital but on the other side BKPM might impose a higher minimum equity and different equity to loan ratio. In essence, BKPM will approve the investment that is considered “normal” in the industry that the investors are applying for.
All of the Directors and Commissioners of a PMA Company, whether a 100% foreign owned company or a JV Company, may be foreigners, as long as none of them is a “personnel” director. This position of personnel Director is still reserved for Indonesian citizens. Please note, however, that if there is an Indonesia shareholder in the PMA Company, BKPM might suggest that at least one director an Indonesian national.
Guidelines and procedures for applying for a PMA Company are regulated by Regulation of Head of BKPM No.12 of 2009 which comes into effect on 23 December 2009 (“BKPM Regulation”).
As we said earlier, a foreign investment must be in the form of a PT (a limited liability company) and a PT can be said to be a legal entity once it has obtained ratification from the Indonesian Minister of Law and Human Rights (“MOLHR”). The prevailing New Company Law regulates that if within 60 calendar days after the deed of establishment and it is not followed by the application for obtaining ratification from MOLHR then the deed of establishment becomes null and void and the company which has not yet obtained status as a legal entity is dissolved by operation of law. However, if the intended sector for investment requires certain recommendation from the technical ministry then additional time will be needed to obtain the recommendation concerned.
V. Shareholding Structure and Land Ownership
The participation of a foreign investor in a PMA Company depends on the relevant business sectors of the intended investment. In business sectors which have a limitation on foreign ownership in a PMA Company, the shareholding structure can vary from 49% foreign participation up to a maximum foreign ownership of 95%. Where the Negative List is silent on the limitation on foreign participation but the relevant regulation requires the cooperation with a local partner, the participation of the Indonesian party must be at least 5% of the total paid-up capital at the company’s establishment.
Regarding land ownership related to investment activities in Indonesia, the GOI once gave simplified services and/or permission on land titles under the provisions on the Investment Act, by granting land titles together all at once for Right to Cultivate Land (Hak Guna Usaha – HGU), Right to Use of Building (Hak Guna Bangunan – HGB) and Right to Use (Hak Pakai), i.e. a total period of 95 years (initial grant 60 years and 35 years renewal period), 80 years (initial grant 50 years and 30 years renewal period) and 70 years (initial grant 45 years and 25 years renewal period) respectively. However those provisions have been declared to have no binding legal effect by Decision of the Constitutional Court of the Republic of Indonesia (Mahkamah Konstitusi Republik Indonesia) Number 21-22/PUU-V/2007 decided on 25 March 2008, where certain applicants requested judicial review of the Investment Act. The regulation concerning the period of time for land ownership related to investment activities in Indonesia has therefore returned back to the provisions stipulated under the Agrarian law. Please note, however, that the revoked provisions relate only to giving the grant and extension for holding land titles all at once in advance, while other provisions remain in effect, including the provisions stating that simplified services and/or permission on land titles may be given and extended and are renewable upon the application of the investor concerned. This at least can give a kind of certainty for any investor that the Government of the Republic of Indonesia will simplify the process and/or licensing in applying for land titles in the form of HGU, HGB and/or Hak Pakai.
VI. Post Incorporation Legal Matters and Compliances Issues
Beside the above approvals/documents, there are other licenses/approvals/documents required. The licenses/approvals/documents required are among others, as follows:
- Approvals for tax and custom facilities (which depend on the line of business the PMA Company might be granted) on imports of capital goods or raw materials;
- Producer Importer Identification Number (if the PMA Company will be importing goods by itself);
- Approval of the Foreign Manpower Plan and other related approvals/documents (if the PMA Companies hiring expatriates);
- Location Permit (if the PMA Company will be acquiring land);
- Nuisance Permit (if the location and the line of business of the PMA Company will cause a nuisance to its surroundings);
- Building Permit (if the PMA Company is going to erect a building).
VII. Acquiring Shares in an Ordinary PT Company and Converting into a PMA Company
In converting an ordinary PT into a PMA Company by means of acquiring shares in an ordinary PT, there are several matters that the foreign investor must pay attention to, namely:
- business sector of the ordinary PT to be acquired, whether it is opened, closed or has limitations on the foreign investor participation as regulated in the Negative List,
- procedures for acquisition under the New Company Law,
- procedures for converting an ordinary PT into a PMA Company under the BKPM Regulation issued by BKPM; and also
- requirements on the relevant regulations in relation to the acquisition shares issued by the government agencies whose tasks and responsibilities are in the business sector concerned.
Source : http://www.hplaw.co.id/general-overview-of-foreign-direct-investment-in-indonesia ( Hanafiah Ponggawa & Partners Law Firm)