Investing in Indonesia
A Q&A guide to investing in Indonesia.
This Q&A gives an overview of the key factors affecting inward investment, including information on the jurisdiction's legal system; key laws and regulatory authorities; investment restrictions; and details of international treaties, customs and monetary unions. The guide also provides information on investor individuals; visa permits; restrictions on foreign ownership; transfer pricing and thin capitalisation rules; imports and import duties; safety regulations and standards for commercial goods and services; structuring and tax incentives; investment guarantees; recent developments and proposals for reform.
To compare answers across multiple jurisdictions, visit the Investing in... Country Q&A tool.
This Q&A is part of the Investing in… Global Guide. For a full list of contents, please visit www.practicallaw.com/investingin-guide.
Foreign investment in Indonesia has been recognised since the Foreign Investment Law was initially passed in 1967. This law has evolved over the years and was most recently amended and consolidated into the new Investment Law, which revoked the 1967 law.
Indonesia attracts foreign investment in large part due to its vast natural resources and population.
The government of Indonesia has continuously reformed the regulations affecting foreign investment. The most recent reforms were included in the economic policy package in February 2016. Serious attempts have also been made to eradicate corruption, which has plagued the country in the past.
Given its location, Indonesia is in direct competition with countries such as Vietnam and Myanmar.
Indonesia intends to improve its position on the list of countries attracting foreign investment.
The government is currently targeting foreign investment for its infrastructure projects (such as ports, railways, mass rapid transit, toll roads, power generation, construction and telecommunications).
In addition to government projects, foreign investment is also focused towards the needs of private individuals (for example, in relation consumer goods, pharmaceuticals, food, consultancy services, as well as the banking, insurance and finance sector).
Typically, foreign investors have their main office in Jakarta (the capital city). However, having a local presence where projects are located can also be beneficial.
Inward investment is still strong. While it is necessary to attract foreign investment to Indonesia, there are still actions to protect small and medium Indonesian businesses.
There has been a decline in investment in natural resources due to the current situation with commodities' market. However, renewable energy is likely a focus of investment. E-commerce is booming and special attention is being given to the creative industries.
Although electricity is quite unstable in islands other than Java, Indonesians are very active on social media, which has become a lifestyle in Indonesia, translating to the boom in local e-commerce businesses.
Indonesia is a constitutional republic and follows a civil law system. The primary legal authority is the Constitution (known as the 1945 Constitution (as amended). The five principles (Pancasila) (that is, the belief in the one and only God, just and civilised humanity, unity of Indonesia, democracy guided by consensus arising from deliberations among representatives, and social justice for all people of Indonesia) provides a framework for the Constitution and directs political life.
Indonesia has direct legislative and Presidential elections. Mr Joko Widodo is the current President, with Mr Jusuf Kalla the Vice President. The Presidential term is for five years and the current President will remain in office until 2018. The President is advised by a Presidential Advisory Council (Dewan Pertimbangan Presiden).
Ministers are appointed to assist the President in establishing a peaceful, prosperous, secure, and democratic nation with good corporate governance as its main principle.
The Central Government of the Republic of Indonesia (government) is located in Jakarta, on the island of Java. The government co-operates with other government institutions to arrange state affairs. These institutions include the:
People's Consultative Assembly (Majelis Permusyawaratan Rakyat (MPR)).
House of Representatives (Dewan Perwakilan Rakyat (DPR)).
The MPR comprises the DPR and the Regional Representative Council (Dewan Perwakilan Daerah). The President and the DPR form the country's legislative power.
Independent from the executive and legislative branches, the Supreme Court serves as the country's judicial power. Indonesia's judiciary is comprised of the:
District Courts (also known as the Courts of First Instance) for each district.
High Courts of Appeal, for each province.
Supreme Court, the highest court in the country.
A Constitutional Court was established in 2003, with the power to review the constitutionality of laws (among other things).
The key laws governing foreign investment in Indonesia are:
Law No. 5 of 2007 regarding Investment, the Negative Investment List (Negative Investment List).
Presidential Regulation No. 39 of 2014 Regarding List of Business Fields That Are Closed and Business Fields That Are Open With Requirements For Capital Investment (23April, 2014) (Closed Business Regulation).
Regulations from the Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal (BKPM)), including BKPM Regulation Nos. 14 and 15 of 2015.
The Negative Investment List provides the areas in which investment are prohibited for foreign entities and areas that have certain investment restriction for foreign entities.
In addition to the Negative Investment List, the relevant laws and regulations governing the conduct of the particular business sector must be reviewed to determine whether the business sector is open for foreign investment, and if so, whether the foreign investment company established to conduct business in that sector is wholly or partially-foreign owned.
If a particular business sector is not listed within Article 3 of the Closed Business Regulation, it will be open to 100% foreign investment without any conditions. However, in practice, investors must further confirm this with the BKPM and other technical ministries before providing any investment.
The Negative Investment List is organised by reference to the characterisation of business activities described in the Indonesian Business Fields Classification issued by Indonesia's Central Statistics Body (Badan Pusat Statistik).
The main regulatory body for foreign investment is the BKPM. However, depending on the business, specific industry regulators may require the foreign investor to acquire an operating licence. It is always advisable for foreign investors to get a full picture of the required licences in the early stage of investment.
In 2015, President Joko Widodo suggested that Indonesia should join the Trans-Pacific Partnership (TPP).
Various free trade agreements (FTAs) have been entered into by Indonesia. For example, as a member of the Association of Southeast Asian Nations (ASEAN), Indonesia has entered into the various FTAs, including the:
ASEAN Free Trade Area (AFTA).
ASEAN-Australia and New Zealand.
In addition, there is the:
Indonesia-Japan Economic Partnership Agreement.
Indonesia has so far entered into double tax treaties with 65 countries. Indonesia also has Tax Information Exchange Agreements with:
Isle of Man.
Some of these agreements are waiting to be ratified.
Indonesia has signed the Mutual Administrative Assistance in Tax Matters. However, Indonesia has allowed the bilateral investment treaties to lapse and is renegotiating for better provisions.
Foreign individuals need a business visa to enter Indonesia for business purposes. Indonesian business visas can be issued either at the Indonesian embassy, or for specific countries such as the US, can be processed upon arrival. The procedure, requirement, timing and costs differ from one embassy to another.
If the visa is to be obtained on arrival in Indonesia, it can be obtained directly at certain airports and seaports regardless of the purpose of the visit (that is, whether the visit if for business, tourist or social). The general requirements for visa on arrival are as follows:
The expiration date of the applicant's passport must be at least six months at from the date of entry.
There must be at least one blank visa page.
The individual must have a round-trip airplane ticket.
The required visa must be paid for on arrival.
The fee arrival ranges from US$15 to US$35, depending on how long the individual intends to stay in Indonesia.
Under Indonesia's tax regulations, there are domestic taxpayers and foreign taxpayers.
Foreign individuals who reside or are present in Indonesia for more than 183 days in a 12-month period or who are present in Indonesia and have the intention to live in Indonesia are deemed domestic taxpayers. The 12-month period is based on the current date going back 12 months: it is not a calendar year. The "intention" to live in Indonesia can be proven through actions such as:
Applying for a work permit.
Owning or renting a house for an extended period.
Bringing family members to Indonesia.
The threshold for the period can differ based on the prevailing tax treaties.
The Indonesian personal taxation system is based on worldwide income. This includes the following (whether the source of the income is onshore or offshore):
Any salary paid to the foreign individual.
Dividend and interest income.
Capital gains from sale of property.
There are no tax advantages for high-net worth individual investors entering and/or investing in Indonesia.
Restrictions on foreign investment are regulated by the Closed Business Regulation. There are lists of industries for which foreign investment is open (up to a certain percentage of its capitalisation), for example:
A construction services business is open for up to 67% foreign investment.
A distribution business is open for up to 33% foreign investment.
An insurance business is open for up to 80% foreign investment.
Before conducting business, approval must be obtained from both:
The Capital Investment Coordinating Board.
Any other relevant agency for the particular business sector (for example, approval from the Financial Services Authority must be obtained before foreign investment can be made in finance companies, insurance companies and banks).
The limitation on foreign investment will start to apply from the date of processing the relevant approvals.
A golden shares arrangement exists for certain public listed companies that were historically owned by the state (for example, for Indonesian companies such as PT Telekomunikasi Tbk and PT Indosat Tbk). The government retains control and/or majority shareholdings for state owned companies and/or regionally owned companies.
Certain strategic industries, such as weapons and firearms, are exclusively controlled by the government.
The government recently passed a regulation allowing foreign individuals to purchase property of a certain value depending on the location. For example, foreign individuals can only purchase a house with minimum value of INR10 billion in DKI Jakarta, and such value will differ in other provinces. Other than value of the property, the foreign individual must meet the requirements set out in the Ministry of Agrarian's regulations.
For investment purposes, foreign investors must establish a Foreign Investment Company (PMA Company) under the rules of the Capital Investment Coordinating Board (see Question 20). Therefore, the PMA Company will hold the land title instead of the foreign investor. Different titles to land can be held by Foreign Investment Companies. These are:
Right to Build. This is the most common title for foreign investment company to hold for its business.
Right to Use. This is commonly used for foreign investment in, for example, plantation businesses.
The minimum capital requirements for foreign investment differ from one industry to another.
In general, the minimum capital requirement for foreign investment is at least IDR2.5 billion. However, specific industries can have higher capital requirements, for example:
The insurance sector has a minimum IDR10 billion capital requirement.
The construction implementation business has a minimum IDR50 billion net worth requirement.
Commercial banks have a minimum IDR3 trillion capital requirement.
There is no applicable exchange control. However, there are certain currency regulations.
The Bank of Indonesia issued Regulation 17/3/PBI/2015 which requires any cash transactions and non-cash transactions in Indonesia to use the Indonesian currency (the Rupiah (IDR)), with certain exemptions. There is a restriction to remit Indonesian Rupiah abroad.
There is no restriction on the remittance of profits abroad.
There are certain restrictions on the importation of commercial goods, depending on the particular goods/products.
For example, the import of sugar requires a special licence and no sugar import licence was issued by the government in 2015. This restriction was imposed to protect Indonesia's domestic sugar industries.
There are also restrictions on the import of certain species of shrimp and hazardous waste.
Indonesia has its own Indonesian National Standard for commercial goods to be distributed in Indonesia. This standard is formulated using the World Trade Organization (WTO) Code of Good Practice. Further, to reduce the barrier for imported commercial goods, Indonesia has entered into the:
Agreement on Technical Barrier to Trade (TBT).
Agreement on Sanitary and Phytosanitary Measures (SPS).
In most cases, separate safety regulations apply to highly regulated goods, such as imported drugs.
Commercial importers must be aware of certain regulatory applications for certain industries to avoid delays or issues in importing such commercial goods.
Structuring and tax
Foreign Investment Company (PMA Company)
Companies investing in shares and loan capital. Typically, the foreign investors become the shareholders in the Foreign Investment Company. There should be paid-up capital made by the foreign investor depending on their shareholding. Dividend distribution (if any) is payable to the shareholders and subject to withholding tax with the rate of 20%, except when reduced by the relevant tax treaties.
In addition to capital, shareholder loans can be provided to the Foreign Investment Company. However, any shareholders' loan arrangement is usually subordinate to the commercial loans entered into by the Foreign Investment Company and any third parties.
Individuals investing in shares and loan capital. The same structure applies for individuals (see above, Companies investing in shares and loan capital). In addition to the benefits referred to Questions 23 and 25, there is benefit in the form of exemptions and/or suspension of import duties for capital goods, raw materials or other goods imported as part of the manufacturing process. This benefit requires approval from the Capital Investment Coordinating Board.
A business becomes liable to pay tax in Indonesia when it qualifies as a domestic taxpayer. This would be applicable when the business operates in Indonesia under the framework of a:
Foreign Investment Company (see Question 20).
In general, the corporate tax rate is 25%. Corporate domestic taxpayers must file the annual tax return by the end of April each year.
Withholding taxes are applicable for employers. Tax must be withheld from to withhold from:
Employees' salaries (monthly).
Certain payments (such as the purchase of specific lubricants).
Auctions of imported goods.
A final withholding tax is also required for certain payments such as:
Rents for land and buildings.
Fees for certain construction work performance.
Payment of income (dividend, interest and royalties) for domestic and foreign taxpayers.
There is 10% VAT due on events involving the transfer of taxable goods or provision of taxable services in the Indonesian Customs Area.
There is no tax for the issuance of shares. However, there is a withholding tax with effective rate in the amount of 5% of the transfer price for the transfer of shares between foreign shareholders.
Stamp duty of IDR6,000 is affixed to documents with value of more than IDR1 million. This typically includes agreements relating to notarial deeds, land documents, securities and commercial papers.
Luxury Goods Sales Tax applies to the delivery or import of certain manufactured taxable goods. These goods and the applicable rates are provided for under the Indonesia Customs Tariff Book.
In general, the benefits of tax treatment for foreign investors are regulated in the tax treaties. Reduced withholding rates can usually be applied to the payment of dividends, interests, and royalties based on the tax treaties. Several benefits are available applicable to certain businesses. For example, a reduction to corporate income tax may be available to certain pioneer industries (see Question 25).
Permanent establishments that reinvest their after-tax profits in Indonesia within the same year or no later than the following year are exempt from branch profit tax on these profits. This benefit is subject to further qualifications.
The definitions of related parties under the Income Tax Law are as follows:
The taxpayer has capital participation directly or indirectly of at least 25% on another taxpayer (or relationship between two or more taxpayers).
The taxpayer controls the other taxpayer, or two or more taxpayers are under the same control (either directly or indirectly).
There are family relationships between the taxpayers (either blood relationship or by marriage) in vertical and/or horizontal lineage of one degree.
Transactions between related parties must be consistent with the arm's length principle. If the arm's length principle is not followed, the Director General of Tax (DGT) is authorised to recalculate the taxable income or deductible costs arising from such transactions applying the arm's length principle.
Under the General Tax Provisions and Procedures Law, the government requires specific transfer pricing documentation to prove the arm's length nature of related party transactions. If this is not provided, the DGT may recalculate the taxable income arising from the transaction.
A reduction to corporate income tax is available to pioneer industries with a capital investment plan of IDR500 billion to IDR1 trillion. Pioneer industries generally relate to firms which:
Have a wide range of connections.
Provide additional value and high external output.
Introduce new technologies (for example, in relation to industries such as upstream metal, oil refinery, sea transportation and/or processing).
Have strategic value for the national economy.
A corporate income tax reduction of 10% to 100% can be given over the next five to 15 years (from the start of commercial production). The period can be extended to 20 years if deemed necessary for the national interest.
A maximum reduction of 50% can be provided to telecommunications and information companies with a capital investment plan of IDR500 billion to IDR1 trillion.
Expropriation exists under the Investment Law. If expropriation is needed, it only can be done through the passing of a law. The passage of such a law in Indonesia must be under the approval of the DPR (House of Representatives) and the government. Any expropriation should be followed by compensation based on market value, as further elaborated in the Investment Law. In the event of a dispute over such compensation, the dispute must be settled through arbitration.
However, we believe that the government will not use this policy unless it is necessary. We are aware that expropriation was made in 1958 and 1962, before the passing of the 1967 Investment Law.
Indonesia does not recognise judgments from foreign courts.
Although Indonesia recognises foreign arbitration awards, any such award must first be registered with the Central Jakarta District Court to be enforced. The Indonesian Arbitration Law provides that the arbitral award must be final and binding. However, in practice, there is always challenge by the losing party in the form of a civil lawsuit filed in the district courts in Indonesia to stall the enforcement. In addition, if the foreign arbitral award is considered against public order in Indonesia, the Central Jakarta District Court may not enforce such award.
Recent developments and proposals for reform
Main investment organisations
Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal)
Main activities. Government agency that attempts to provide a one-stop service for foreign investment approvals.
PT Indonesia Infrastructure Guarantee Fund (PT Penjaminan Infrastruktur Indonesia)
Main activities. State owned company responsible for appraising, structuring, processing claim payment and providing government guarantees for infrastructure Public-Private Partnership (PPP) projects in Indonesia.
PT Sarana Multi Infrastructure
Main activities. State owned company responsible for facilitating infrastructure financing as well as preparing projects and serving an advisory role for infrastructure projects in Indonesia.
Indonesian Chamber of Commerce (Kamar Dagang Indonesia)
Main activities. Organisation that introduces Indonesian business to potential business partners, including foreign investors and available business opportunities.
Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal)
Description. Official BKPM website maintained by BKPM.
Description. SSEK Indonesian Legal Consultants blog profiling the latest regulations in Indonesia. Maintained by SSEK.
Rusmaini Lenggogeni, Partner
SSEK Indonesian Legal Consultants
Professional qualifications. Indonesia
Areas of practice. Corporate mergers and acquisitions; foreign investment; capital markets; construction; project finance; employment; taxation.
Professional associations/memberships. Indonesia's Advocate Bar Association (Peradi); Market Legal Consultants Association (HKHPM).
Syahan Z Aziz, Partner
SSEK Indonesian Legal Consultants
Professional qualifications. Indonesia
Areas of practice. Corporate merger and acquisitions; foreign investment; natural resources; power generation; renewable energies and project finance.
- Acting for the foreign investor in acquiring shares in an Indonesian company that engages in cargo business.
- Acting for state owned company in acquiring shares in an Indonesian company that engages in oil and gas refinery.
- Acting for pharmaceuticals in establishing trade representative office in Indonesia.
- Acting for foreign investor in establishing informal education in Indonesia.
- Acting for international food production company in its operation and other investments in Indonesia.
- Acting for foreign investor in investigation of alleged misconduct by its employees.
Professional associations/memberships. Indonesia's Advocate Bar Association (Peradi).
Languages. Indonesian, English