Employee share plans in Indonesia: regulatory overview

A Q&A guide to employee share plans law in Indonesia.

The Q&A gives a high level overview of the key practical issues including, whether share plans are common and can be offered by foreign parent companies, the structure and rules relating to the different types of share option plan, share purchase plan and phantom share plan, taxation, corporate governance guidelines, consultation duties, exchange control regulations, taxation of internationally mobile employees, prospectus requirements, and necessary regulatory consents and filings.

To compare answers across multiple jurisdictions, visit the Employee Share Plans: Country Q&A tool.

This Q&A is part of the global guide to employee share plans law. For a full list of jurisdictional Q&As visit www.practicallaw.com/employeeshareplans-guide.

Lia Alizia and Harris S Toengkagie, Makarim & Taira S
Contents

Employee participation

1. Is it common for employees to be offered participation in an employee share plan?

It is not common in Indonesia for employees to be offered participation in an employee share plan. An issuance of shares to company employees is recognised under Law No.40 of 2007 on Limited Liability Companies (Indonesian Company Law) and there are several regulations that mention employee share plans, but only in relation to tax issues. However, there are no Indonesian laws or regulations that impose a procedure or requirements for employee share plans. Employee share plans are therefore regarded as a private matter between the company and the participant employees and are not generally restricted as to who may participate in the scheme.

The internal agreement between the company and the relevant employee regarding the share option plan should clearly regulate the rights and obligations of the parties and whether it the plan is a deemed a fixed allowance under Law No.13 of 2003 on Manpower (Indonesian Manpower Law). If a share plan constitutes a regular or fixed allowance, it must be included in the calculation of the employee's severance entitlement. To avoid additional legal liabilities, a company usually makes it clear that this type of benefit will not be considered as a fixed allowance, and provides for certain requirements for employees to be eligible for participation in and benefits from the share plan (for example, conditions on exercising an option).

If shares are transferred to employees, the employees theoretically become shareholders of the company and are entitled to all of the rights of a shareholder under the Company Law, including the right to:

  • Obtain a dividend.

  • Vote.

  • File a suit against the company if they believe the company has taken any unfair or unreasonable action due to a decision made by the general meeting of shareholders, board of directors or commissioners.

Most companies prefer to provide their employees a standard annual performance bonus, instead of a share plan.

 
2. Can employees be offered a share plan where the shares to be acquired are in a foreign parent company?

There are no specific requirements relating to employee share plans and this is regarded as a private matter. Therefore, employees can generally be offered a share plan where the shares to be acquired are in a foreign parent company and employees of a foreign parent company who are seconded to the subsidiary of an Indonesian private company can be given shares or share options. However, Indonesian companies or their overseas affiliated entities must satisfy certain requirements when offering share options or issuing shares within the territory of Indonesia, especially if the offer constitutes a public offering under Law No.8 of 1995 on Capital Market (Capital Market Law). If the offering constitutes a public offering, certain registration requirements under the Indonesian Capital Market Law must be complied with (see Question 29).

 

Share option plans

3. What types of share option plan are operated in your jurisdiction?

Share options are regulated under the Directorate General Tax issued Circular Letter No.SE-13/PJ.43/1999 dated 22 March 1999 on Tax on Share Options (SE-13). This defines a share option as a promise or an offer from a foreign company with its shares listed on a foreign stock exchange, to an employee or limited individual of a company in Indonesia who has a special relationship with the foreign company, to purchase its shares at a certain price within a certain period of time. If the employee exercises his option based on this offer, and the price of the shares has increased, the employee may either:

  • Sell the shares immediately at a profit.

  • Keep the shares as investment and sell later to obtain more capital gain.

This is the only regulation issued on tax matters which is specifically related to an employee share options. Offering share options in a company is generally regarded as a private matter and there are no particular fixed schemes which are officially recognised by Indonesian Law. Therefore, the company can use any scheme it chooses, although certain limitations can apply, depending on the type of company and/or its line of business.

In the absence of specific regulation governing the issue, a company who provides this benefit to its employees would clearly indicate that it is based on the company's consideration and discretion. The company usually includes a provision to make it clear who is responsible for the tax incurred.

Grant

4. What rules apply to the grant of employee share option plans?

There is little specific regulation of employee share options plans (see Question 3). However, Article 6 of the Indonesian Manpower Law prohibits discrimination among employees by the employer. Therefore, an employee can file an objection if he did not obtain the same treatment as the other employees at the same level.

For increases in share capital, see Question 29.

See also Question 11.

 
5. What are the tax/social security implications of the grant of the option?

Income tax normally only becomes due on the realisation of a profit after sale of the shares (see Question 9).

Vesting

6. Can the company specify that the options are only exercisable if certain performance or time-based vesting conditions are met?

There is no specific regulation on employee share option plans. Offering shares in a company is regarded as a private matter and therefore, any requirements can be imposed by the company, as required.

 
7. What are the tax/social security implications when the performance or time-based vesting conditions are met?

Income tax normally only becomes due on the realisation of a profit after sale of the shares (see Question 9).

Exercise

8. What are the tax/social security implications of the exercise of the option?

Income tax normally only becomes due on the realisation of a profit after sale of the shares (see Question 9).

Sale

9. What are the tax and social security implications when shares acquired on exercise of the option are sold?

The general position under Regulation of the Directorate General of the Tax Office No.PER-31/PJ/2012 dated 28 December 2012 (PER-31), is that income tax is due on income obtained from the work, services and activities of a party in or outside Indonesian territory which includes his:

  • Salary.

  • Wage.

  • Remuneration.

  • Allowance.

  • Other payments in any form related to work or office, services or activities.

Under Article 23 of Law No.7 of 1983 as amended by Law No.36 of 2008 on Income Tax (Income Tax Law), any dividend paid, available to be paid to or payment of which is due from a government institution, national taxpayer (subjek pajak badan dalam negeri), event organiser, permanent establishment or representative of a foreign company to a national taxpayer or permanent establishment, is subject to 15% tax.

The income the shareholder derives from the sale of shares derived from a share option plan can be in the form of a dividend or a capital gain. Profits from selling shares at a profit are considered a capital gain and are subject to income tax.

The tax implications of share schemes must be considered on a case-by-case basis, depending on the specific scheme the company applies. It is therefore essential for the company to discuss with its tax consultant on their proposed scheme.

 

Share acquisition or purchase plans

10. What types of share acquisition or purchase plan are operated in your jurisdiction?

There is no specifically recognised form of share acquisition scheme. Shares can either be sold to the employee or be granted as a bonus in lieu of cash (see Question 1).

Acquisition or purchase

11. What rules apply to the initial acquisition or purchase of shares?

In general, the Indonesian Company Law requires any shares issued to increase a company's capital to be offered to the shareholders first. However, this requirement can be waived if the shares are to be transferred to the company's own employees. There are no requirements to provide shares to all the employees or only to certain employees. If shares to be granted will be new shares to be issued by the company, the capital increase procedure would have to be followed (see Question 29).

There are some issues which need to be considered for a grant of shares, as no funds would be paid into the company's account. In some cases, the share plan is provided as a bonus in lieu of cash. Therefore, even though the shares are granted to the employee, it is considered to have been actually purchased by the employee in exchange for a cash bonus.

The formal requirements for a grant of shares under the Indonesian Civil Code also must be considered (for example, the requirement for a notarial deed).

There is no specific regulation on non-employee participation. If the plan is offered to non-employees or consultants (who are not considered as employees), it is viewed as a normal shares transaction. The company are not entitled to a waiver under Article 43(3) of the Company Law, therefore the shares issued to be increased the company's capital must first be offered to the shareholders.

See also Question 4.

 
12. What are the tax/social security implications of the acquisition or purchase of shares?

Income tax normally only becomes due on the realisation of a profit after sale of the shares (see Question 9).

Vesting

13. Can the company award the shares subject to restrictions that are only removed when performance or time-based vesting conditions are met?

There is no specific regulation on employee share plans. Offering shares in a company is regarded as a private matter and therefore, any requirements can be imposed by the company as required.

 
14. What are the tax and social security implications when the performance or time-based vesting conditions are met?

Income tax normally only becomes due on the realisation of a profit after sale of the shares (see Question 9).

Sale

15. What are the tax and social security implications when the shares are sold?

Income tax normally only becomes due on the realisation of a profit after sale of the shares (see Question 9).

 

Phantom or cash-settled share plans

16. What types of phantom or cash-settled share plan are operated in your jurisdiction?

There is no specifically recognised form of phantom or cash-settled share scheme (see Question 1).

Grant

17. What rules apply to the grant of phantom or cash-settled awards?

Phantom or cash-settled share schemes are not specifically regulated (see Question 1).

 
18. What are the tax/social security implications when the award is made?

Income tax normally only becomes due when the award is paid out (see Question 9).

Vesting

19. Can phantom or cash-settled awards be made to vest only where performance or time-based vesting conditions are met?

There is no specific regulation on phantom or cash-settled share schemes. This would be regarded as a private matter and therefore, such requirements can be imposed by the company as required.

 
20. What are the tax/social security implications when performance or time-based vesting conditions are met?

Income tax normally only becomes due when the award is paid out (see Question 9).

 
21. What are the tax and social security implications when the phantom or cash-settled award is paid out?

Income tax normally only becomes due when the award is paid out (see Question 9).

 

Corporate governance guidelines, market or other guidelines

22. Are there any corporate governance guidelines, market rules or other guidelines that apply to any of the above plans?

There are no specific requirements relating to employee share plans and this is regarded as a private matter (see Question 1).

 

Employment law

23. Is consultation or agreement with, or notification to, employee representative bodies required before an employee share plan can be launched?

There is no requirement for consultation or agreement with employees, unless it has been agreed otherwise under the employment agreement, company regulations or collective labour agreement.

Any change to the existing company regulations requires an agreement between the company and the employees' representatives. Similarly, any amendment to a collective labour agreement requires an agreement between the company and the labour union(s).

 
24. Do participants in employee share plans have rights to compensation for loss of options or awards on termination of employment?

Participants have no right to compensation, unless it has been agreed otherwise.

 

Exchange control

25. How do exchange control regulations affect employees sending money from your jurisdiction to another to purchase shares under an employee share plan?

Banks must report all transfers in or out of Indonesia of more than US$10,000 (or its equivalent in other currencies) to Bank Indonesia (Second Amendment to Circular Letter of Bank Indonesia No.13/33/DSM dated 30 December 2011 on the Reporting of Foreign Exchange Flows by Banks).

Bank Indonesia Regulation No. 16/16/PBI/2014 dated 17 September 2014 (PBI-16) also requires banks in Indonesia to obtain the following documents from their customers if they wish to purchase foreign currency (defined as US$) against IDR and the total amount will exceed US$100,000 (or its equivalent in other currencies) per month per customer:

  • A copy of the underlying document providing the purpose of the foreign exchange transaction.

  • The Tax Registration Code.

  • A statement from the bank's customer:

    • that the underlying document is a valid document;

    • giving the purpose of the foreign exchange transaction, the approximate amount and date on which the foreign currency will be used.

 
26. Do exchange control regulations permit or require employees to repatriate proceeds derived from selling shares in another jurisdiction?

There are no exchange control regulations permitting or requiring employees to repatriate proceeds derived from selling shares in another jurisdiction. However, income tax may become due (see Question 9).

Bank Indonesia regulation PBI-16 also requires banks in Indonesia to obtain the following documents from their customers if they wish to sell foreign currency (defined as US$) against IDR through a forward or option transaction and the total amount will exceed US$100,000 (or its equivalent in other currencies) per month per customer:

  • A copy of the underlying document.

  • A statement from the bank's customer:

    • that the underlying document is a valid document;

    • on the use of the underlying document; and

    • giving the source of the funds, the amount to be sold, and the date on which the foreign currency was received, if the underlying transaction document is only based on an estimate.

 

Internationally mobile employees

27. What is the tax position when an employee who is tax resident in your jurisdiction at the time of grant of a share option or award leaves your jurisdiction before any taxable event affecting the option or award takes place?

Income tax normally only becomes due when the award is paid out (see Question 9).

 
28. What is the tax position when an employee becomes tax resident in your jurisdiction while holding share options or awards granted abroad and a taxable event occurs?

Income tax normally only becomes due when the award is paid out (see Question 9).

 

Securities laws

29. What are the requirements under securities laws or regulations for the offer of and participation in an employee share plan?

If a share plan involves the issuance of new shares, the company would have to use the increase of capital procedure in order to issue the new shares to be provided to the employees. This means that the increase in capital must be approved by the general meeting of shareholders. The quorum for increasing the authorised capital is at least two-thirds of all issued shares with voting rights and the proposal must be approved by at least two-thirds of all the votes cast in the general meeting (unless the articles of association require a higher quorum and voting requirement). If new shares are to be issued to the company's employees, they do not have to be offered to the existing shareholders according to their respective shareholdings.

A capital increase also requires approval from the Minister of Law and Human Rights (MOLHR). If the company only increases its issued and paid-up capital (so that it stays within its authorised capital), the increase only needs to be reported to the MOLHR and does not require approval. For a foreign investment company, any change to the company's capital structure must be reported to the Indonesian Investment Co-ordinating Board.

An offer of securities (including, shares, bonds and their derivatives) can constitute a public offering if the securities are offered by an issuer for sale to the public through the mass media (either domestic or foreign) within the territory of Indonesia or to Indonesian citizens outside Indonesia. An offer of securities through any other media other than the mass media is also a public offering if it is offered to more than 100 parties or sold to more than 50 parties (the term parties here refers to persons residing in Indonesia (whether foreign or Indonesian) and Indonesians residing outside of Indonesia). The law's definition of mass media includes letters, brochures and other printed materials distributed to more than 100 parties. If the offering constitutes a public offering, certain registration requirements under the Indonesian Capital Market Law must be complied with.

 
30. Are there any exemptions from securities laws or regulations for employee share plans? If so, what are the conditions for the exemption(s) to apply?

In general, the Indonesian Company Law requires any shares issued to increase a company's capital to be offered to the existing shareholders first. However, this requirement can be waived if the shares are to be transferred to the company's own employees.

 

Other regulatory consents or filings

31. Are there any other regulatory consents and filing requirements and/or other administrative obligations for an offer of and participation in an employee share plan?

There are no other formal requirements for an employee share plan (see Question 1).

 
32. Are there any data protection requirements or obligations for an offer of and participation in an employee share plan?

There is no a specific regulation on employees' data protection, or data protection requirements or obligations for an offer of and participation in an employee share plan. Data Protection is generally covered in Law No.11 of 2008 on Electronic Information and Transactions Law. The Law requires parties to obtain prior approval from a person before using his personal data in electronic media. The employer should therefore have the employees sign a statement consenting to the employer's use of their personal data.

 

Formalities

33. What are the applicable legal formalities?

Translation requirements

Law 24 of 2009 on the National Flag, Language, Emblem, and Anthem requires the Indonesian language to be used in, among other things, agreements entered into by Indonesian parties. If an agreement involves foreign parties, it can be executed in a dual language (bilingual) version (that is, in Indonesian and the language of the foreign parties and/or English). However, no implementing regulation has yet been issued and, pending further clarification, the legal impact of having an agreement executed in English only to which an Indonesian entity is a party remains unclear. However, to avoid unnecessary claims of non-compliance with the law, in practice, most parties opt to enter into a bilingual version of the agreement.

E-mail or online agreements

Electronic contracts (a contract made through an electronic systems, such as a computer network) are recognised under the Electronic Information and Transactions Law. Therefore, the employees can agree to participate online.

However, the Electronic Information and Transactions Law does not apply to documents which law must be drawn up as notarial deeds. For example, under Article 1682 of ICC, a grant of shares must be drawn up in a notarial deed and the Company Law requires a written agreement for a transfer of shares in a company.

The Electronic Information and Transactions Law recognises a digital signature, defined as a signature which consists of digital information which is attached, associated, or related to other digital information which is used as a verification and authentication tool.

Under Article 11 of the Electronic Information and Transactions Law, a digital signature is valid if it satisfies the following requirements:

  • The data of the digital signature is only related to the signee.

  • The data of the digital signature at the time of signing is only in the possession of the signatory.

  • Any amendment to the digital signature after the signing can be identified.

  • Any amendment to the digital information related to the digital signature after the signing can be identified.

  • A certain procedure can be followed to identify the signatory.

  • A certain procedure shows that the signatory has provided his/her acknowledgement of the digital information.

All parties involved in the digital signature process must provide maintain the security of the digital signature.

Witnesses/notarisation requirement

Under the Company Law, a transfer of shares requires a deed of transfer, which can be a private agreement or a notarial deed.

If the shares are transferred through a grant, a notarial deed is required.

Employees' consent

The employees' consent should be secured, especially if a certain amount is to be deducted from their salary to participate in the programme, or their personal details are to be transmitted overseas (see above and Question 32).

 

Developments and reform

34. Are there any current trends, developments and reform proposals that have or will affect the operation of employee share plans?

The Capital Investment Supervisory Body - Financial Institution (Badan Pengawas Pasar Modal – Lembaga Keuangan)(BAPEPAM-LK) plans to issue a specific regulation on employee share plans but this has not yet been issued.

 

Online resources

Hukum

W www.hukumonline.com

Description. Hukumonline is a private website which provides a database of Indonesian laws/regulations.

Bank Indonesia

W www.bi.go.id

Description. The official website of the Indonesian Central Bank. Regulations and circulars letter issued by Bank Indonesia can be found in this website.



Contributor profiles

Lia Alizia, Partner

Makarim & Taira S

T +62 21 2521272
F +62 21 2522750-51
E lia.alizia@makarim.com
W www.makarim.com

Professional qualifications. Solicitor, Indonesia

Areas of practice. Corporate and Commercial Law and Litigation, including foreign investment, restructuring companies, mergers and acquisitions, labour, competition law, compliance issues and intellectual property rights.

Recent transactions

  • Handling various cases, including mass terminations of employment (more than 300 employees) in various industries.
  • Resolving disputes and enforcing Intellectual Property Rights (IPRs).
  • Assisting several major multinational companies by reviewing and updating their employment documents.

Languages. English and Indonesian

Professional associations/memberships.

  • Member of the Indonesian Advocates Association (PERADI).
  • Committee of the International Relations Department of the Indonesian Advocates Association.
  • Member of LAWASIA (The Law Association for Asia and the Pacific).
  • Registered Intellectual Property Rights Consultant, 2006.
  • Registered Sworn Translator for English – Indonesian language under Decree of Governor of DKI, 2006.

Publications.

  • Co-contributor of the Indonesian Chapter in the 2nd edition of Global Legal Insights – Employment and Labour Law (Global Legal Group, Ltd., London, December 2013).
  • Co-contributor of the Indonesian Chapter in the 2nd edition of Global Legal Insights – Litigation and Dispute Resolution (Global Legal Group, Ltd., London, August 2013).
  • LAWASIA Update in 2010.
  • World Copyright Law Report publication.
  • Britcham Newsletter on Employment Law (June 2007).

Harris S Toengkagie, Senior Associate

Makarim & Taira S

T +62 21 5200001
F +62 21 2521830
E harris.toengkagie@makarim.com
W www.makarim.com

Professional qualifications. Solicitor, Indonesia

Areas of practice. Civil and Commercial Law Litigation, Competition Law, Employment

Recent transactions. Handling various civil litigation cases, including termination of employment and competition law cases.

Languages. English and Indonesian

Professional associations/memberships. Member of the Indonesian Advocates Association (PERADI)

Publications.

  • Co-contributor of the Introduction to the Indonesian Legal System in the Yearbook of Islamic and Middle Eastern Law, Volume 13, (published by BRILL, 2006-2007).

  • Co-contributor of the Indonesian Chapter in the 2nd edition of Legal Insight - Employment and Labour Law (Global Legal Group Ltd., London, December 2013).


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