Doing business in Indonesia

It is interesting to see what has changed, and what has not, in the past 23 years, because 23 years ago, I was seconded to Jakarta by a law firm now widely known as ‘Dentons’. In those days, it was ‘Denton Hall’; and some years prior to that, when I joined them, it went by the even longer name ‘Denton Hall, Burgin & Warrens’!

Foreign lawyers working in Jakarta were then still a rare breed. They are nowadays much more ubiquitous.

My brief was to establish a presence in Indonesia, so that the firm could better service its corporate clients. This was cross-border work at its most exciting.

Nowadays, I and my legal consultancy company work closely with a good-quality affiliated practice in Jakarta, obviating the need to answer to a largely unsympathetic London office of a global law firm!

Nevertheless, the basics which commercial lawyers then needed in their armoury, are still key, though with one or two significant refinements now.

Then and now, the Indonesian governmental body known as the BKPM[1] was a major player in overseeing the activities of foreign business participants in Indonesia.

More recently, though, the process of registration and application for business licensing for foreign direct investment activities has gone ‘digital’, in that the so-called ‘Online Single Submission’ system[2] (or ‘OSS’) under the auspices of the BKPM, has been substantially streamlined. That said, some business sectors, for example downstream oil and gas, and mining activities, are still directly administered by the BKPM. Upstream oil and gas, for example, is directly administered by the Ministry of Energy and Mineral Resources (and the relevant supervising body).

My earliest work in Indonesia two or three decades ago, introduced me to the local concept of the ‘Negative Investment List’[3], though its meaning has changed a little since, as any business activity not on the Negative List, is presumed to be “100% open for foreign investment”.

The licensing requirements for would-be foreign investors; the requirement to obtain a business identification number, followed by a business licence (and in some cases a commercial licence also) is still a key requirement for the would-be foreign investor.

It is still the case that among the various kinds of investment or business ‘vehicle’ in use in Indonesia, by far the most common for purposes of foreign direct investment is the limited liability company[4]. In Indonesia, the limited liability company is referred to by the Indonesian language words, “Perseroan Terbatas”, abbreviated as “PT”. In the context of foreign direct investment, the PT company is referred to as “PT PMA”, where PMA stands for Penanaman Modal Asing, or ‘foreign (capital) investment.

Setting up a PT company, or for that matter a PT PMA is a standardised process, where the would-be foreign shareholder’s first question to itself should be, ‘Do any shareholding restrictions apply, to the business activity contemplated?’

Once the would-be foreign shareholder has crossed that bridge, establishing the PT company is relatively straightforward, involving first, the execution of a Deed of Establishment, followed by basic approval from the Ministry of Law & Human Rights.

Thereafter, the owners of the new PT company will apply for a certificate of domicile, and a taxpayer registration number for the new company; and finally, will open a corporate bank account in the jurisdiction.

Of course, the would-be foreign investor may not want to immediately establish a corporate business presence in Indonesia. It may be prudent in the circumstances to investigate the market first, over a period of time, being physically on-the-ground, but without the capital and regulatory commitments of a corporate business presence.

It would be better, in those circumstances, for the investor to open a representative office in Indonesia instead[5]. The only drawback of this would be that whilst the office would be entitled to carry out marketing and related activities, it would not be entitled to carry out ‘commercial’, revenue-earning business activities in Indonesia.

Setting up a Rep Office in Indonesia is a straightforward process, where the filing requirements are relatively simple. The investor’s main point of interface to facilitate this, is the Indonesian BKPM. The OSS portal is the typical way to process an application.

An obvious advantage of having a Rep Office though, is the fact that the foreign investor is entitled to own 100% of the relevant entity. Another obvious advantage, is the fact that the onerous capital contribution requirements of a PT PMA do not apply to the Rep Office.

Why would the foreign participant want to go the Rep Office route?

The foreign participant may want to familiarise itself with the local market, explore opportunities, and build up a database of contacts and potential clients or customers.

It may want to have a selling or manufacturing agent on the ground, albeit with market research, promotional or liaising responsibilities only.

The Rep Office is not restricted to locate itself in the capital city of the relevant province. Instead, in can be set up in any district or regency in Indonesia. That too, may have its clear advantages for the foreign participant.

In a follow-up post, I will look more closely at two particular types of representative office. The rep office for a foreign construction company (which crucially is entitled to carry out projects in Indonesia, through joint venture with a local construction company); and the rep office of a foreign oil and gas company.

This blog is for information purposes only. It is not intended to provide legal advice.

[1] Which stands for ‘Badan Koordinasi Penanaman Modal’, in English the Capital Investment Coordinating Board.

[2] Pursuant to Government Regulation No. 24 of 2018 on Electronically Integrated Business Licensing Services.

[3] In the Indonesian language, the ‘Daftar Negatif Investasi’ (see Presidential Regulation No. 44 of 12 May 2016 for the latest list).

[4] The basis of the regulatory framework for this is Indonesian Law No. 40 of 2007, typically referred to as the ‘Company Law’. See also Law No. 25 of 2007 on Investment.

[5] For further reference, see BKPM Regulation No. 5 of 2013.

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