Indonesia is open for foreign to do business in Indonesia. Indonesian government has accommodated the foreign investment business activity by enacting an Investment Law Number 25 year 2007 (the “Investment Law”). This article would explain about general issues related to Foreign Investment in Indonesia that an Investor should know.
I. Foreign Investment Company
Foreign Investor may conduct its business activities in Indonesia by establishing a legal entity called Limited Liability Company (Perseroan Terbatas) (Article 5 paragraph (2) of Investment Law). Limited Liability Company is an Indonesian legal entity, and in the Foreign Investment practice is known as a Foreign Investment Company.
Besides establishing a Foreign Investment Company, foreign investor may enter Indonesian market to do business activity through an acquisition of an existing Limited Liability Company in Indonesia.
According to Investment Law those who are considered as a Foreign Investor shall include foreign citizen, foreign legal entities, or foreign government. This provision means that not only foreign legal entity and foreign government, a foreign individual who wishes to open a business in Indonesia should follow the provision of the Investment Law and its implementing regulation. This also means that a foreign individual wishes to do a business in Indonesia should be done through a Foreign Investment Company.
Considering that Foreign Investment should be done through a Limited Liability Company, there are some points that must be understood about the nature of Indonesian Limited Liability Company, among others:
- A Limited Liability Company is established by minimum of two founders. This also means that there should be minimum two shareholders.
- The Capitalization structure of the Limited Liability Company consists of Authorized Capital, Issued Capital, and Paid-Up Capital. The issued and Paid-up capital amounts to minimum of 25% of the total Limited Liability Company’s Authorized Capital.
- These capitals shall be divided into shares. The minimum value of a share may be determined by the Founder.
- The Organs of the Limited Liability Company consist of the General Meeting of Shareholders (GMS), Board of Directors, and Board of Commissioners. The Board of Directors is the organ that has the authority to represent the Limited Liability Company in and outside of the court.
- The Limited Liability Company is regarded as a separate entity from its shareholders and the Limited Liability Company may have its own assets or property that is separated from the asset or property of its shareholders. Besides, the liability of the Limited Liability Company is separated with the liability of the shareholders. The Shareholders shall not be liable for the loss incurred by the Limited Liability Company. However, in a certain condition the Shareholders may still be held liable for the loss suffered by the Limited Liability Company.
Minimum Capital for Foreign Investment
In general the minimum capital for Foreign Investment is regulated under the Regulation of the Investment Coordinating Board (Badan Koordinasi Penanaman Modal – “BKPM”) Number 5 Year 2019 regarding the amendment of the BKPM Regulation Number 6 Year 2018 regarding the Procedures and Guidelines for Licensing and Investment Facility (“BKPM Regulation No. 5/2019”), in Article 6 paragraph (3), that is with the total investment value of more than Rp 10,000,000,000.00 (ten billion Rupiah), as a side note that this value does not include the land and building value. Minimum of 25% or in the minimum amount of Rp 2,500,000,000.00 (two billion five hundred million Rupiah) becomes the issued and paid-up capital. The minimum value of a share for each shareholder is Rp 10,000,000.00 (ten million rupiah). However, for specific sector the law may stipulate a higher minimum capital requirement.
Open and Closed Business Sector for Foreign Investment
Although foreign business is open for business activities in Indonesia, but according to the Article 12 of Investment Law, not all business sectors are open for foreign investment. For example, The Investment Law clearly stipulates that the weapon production, gunpowder, explosives, and military equipment is closed for foreign investment.
Further, although a business sector is open for foreign investor, there might be further requirements and/or limitation for foreign investor to conduct business in such sector. Such requirements or limitation may be in the form of shares ownership limitation for foreign party or other requirements that needs to be met by the Foreign Investment Company. Indonesian Government has issued a regulation that stipulates what sectors that is open for foreign investment, that is the Presidential Regulation regarding the List of Business Sectors that are Closed of Open with requirements for Investment, or more familiar with the Negative List of Investment.
Considering the existence of this requirements then a foreign investor that intends to conduct business activities in Indonesia should first find out whether such business sector is closed or open, either with or without requirements/limitation, for Foreign Investment.
II. Representative Office of a Foreign Company
Besides conducting business activity through the establishment of Foreign Investment Company in Indonesia, specifically for foreign legal entity, it may open a representative office in Indonesia. It must be noted that the activity that the representative office may performed is limited. According to the BKPM regulation No. 5/2019, activities that a Representative Office may perform shall be limited to:
- As a supervisor, liaison, coordinator of, and manage the interest of the parent company or its affiliates;
- preparing the establishment and development of the Foreign Investment Company in Indonesia or in other country and Indonesia;
- Located in office building in the provincial capital city;
- Prohibited to receive income from sources located in Indonesia and including prohibited from engaging in an activity or entering into obligation/transaction of sale and purchase or service that is commercial in nature with any company or individual in Indonesia; and
- Not engaging in any form of management in a company, subsidiary or branch, in Indonesia.
From the above mentioned limitation, we may conclude that a Representative Office is prohibited to conduct commercial business activities in Indonesia. Therefore, in order to conduct commercial business activity in Indonesia, Foreign Investor may only do that through a Foreign Investment Company.
Thus we convey and hope it is useful.
FREDRIK J PINAKUNARY LAW OFFICES
This article is prepared by our associate Gerald Saratoga Sarayar.
This article is also available in Bahasa Indonesia: Penanaman Modal Asing di Indonesia.