Indonesia offers great opportunities to foreign investors due to the country’s large and young population, rising consumption, abundant natural resources, and cheap labour. Therefore, each year foreign direct investment (FDI) realization in Indonesia tends to grow. This section discusses the incorporation of a foreign investment limited liability company in Indonesia, known as Perseroan Terbatas Penanaman Modal Asing (abbreviated PT PMA). It is the legal entity through which a foreign investor can conduct commercial activities in Indonesia.
Based on Law No. 25/2007 regarding Investment (New Investment Law), a foreign investment in Indonesia is defined as an investing activity conducted by a foreign investor for the purpose of running a business within the territory of Indonesia. The legal entity through which a foreign person, foreign company, or foreign government body can conduct business in Indonesia (meaning generating revenue streams and profit) is the PT PMA. The establishment of a PT PMA is regulated by Law No. 40/2007 regarding Limited Liability Companies (Company Law). Such a company can be either 100 percent foreign-owned or partially foreign-owned.
It is important to stress that various sectors in Indonesia are closed, or partially closed, to foreign investment. To find out which sectors are open to foreign investment you need to access the Negative Investment List (Daftar Negatif Investasi), a list compiled – and regularly revised (!) – by the Indonesia Investment Coordinating Board (BKPM). In case a sector is partially closed to foreign investment, then the list states the maximum allowed percentage of foreign ownership. This means that you will need to have a local (Indonesian) partner in order to engage in business in that particular sector.
To recap, there are two basic questions a foreigner should ask oneself before investing in Indonesia:
1. What type of legal entity do I need? A company (PT PMA) or a representative office (KPPA)?
Do you plan to generate revenues, profit or engage in sales directly in Indonesia, then you need a PT PMA. Do you want to explore business opportunities in Indonesia for your foreign company (through market research, networking, etc.) without engaging in commercial transactions, then it is better to establish a representative office (if such research shows positive results then you can decide to establish a PT PMA later on).
2. Is the sector I want to invest in open to foreign investment? If yes, what is the percentage of ownership allowed to foreign investors?
For the answer, take a closer look at the Negative Investment List (latest revision done through Presidential Regulation No. 44/2016). If the sector requires partial domestic ownership, then you need a local partner.
Procedures for Setting up a Foreign Investment Company (PT PMA) in Indonesia
If, after considering the above questions, you decide to establish a foreign company in Indonesia, then you need to turn to the Indonesia Investment Coordinating Board (BKPM), which is the investment service agency of the Indonesian government and deals with foreign investment. Although the BKPM has recently improved its services, it can still be a hazardous undertaking for a foreigner (especially one who is new to Indonesia and is yet to learn the language and customs) to arrange all permits in a timely and smoothly manner. To avoid problems, most foreign investors prefer to use the services of a local company, one that is specialized in the setting up of a PT PMA or representative office, to deal with all procedures at the BKPM and other institutions (the foreign investor only needs to send all necessary documents to this local company). There are many local Indonesian companies that offer a “company establishment package” to foreign investors. Depending on sector, costs for the establishment of a PT PMA can vary, but generally such a package should cost around USD $3,000 and requires about ten weeks to be completed.
You do not necessarily need to establish a PT PMA from scratch. You can also decide to acquire an existing PT PMA or an existing Perseroan Terbatas (PT). Regarding the latter, as the PT is a local limited liability company, it needs to be converted into a PT PMA after acquisition.
Generally, the following licenses/documents are required for the establishment of a PT PMA in Indonesia:
Note: the licenses/documents listed above involve the general guideline for the establishment of a PT PMA. However, additional licenses and/or documents can be required in specific sectors. Therefore legal advice should be sought before engaging in investment activity.
Shareholders of the PT PMA
At least two shareholders are required (President Director and President Commissioner) for the establishment of a PT PMA. At least one of the shareholders needs to be a foreign individual (or foreign legal entity). The Director needs to reside in Indonesia to take care of all daily activities. The foreigner who works and resides in Indonesia is required to obtain a tax number (NPWP) and a work permit (KITAS).
Deed of Establishment of the PT PMA
In order to set up a PT PMA in Indonesia, the shareholders must present a deed of establishment which needs to be legalized by a public notary. The deed of establishment contains, besides the Articles of Association, the following additional information:
1. Regarding the Founders:
a. In case the shareholder is an individual, the name, date of birth, place of birth, current residence information and citizenship.
b. In case the shareholder is a legal entity, the domicile of the legal entity, including the full address, the date and number of legalization of the ministry.
2. Regarding Board of Directors and Board of Commissioners:
a. The name, date of birth, place of birth, current residence information and citizenship information of the members of Board of Directors and Board of Commissioners who are first appointed through the deed of establishment
3. Regarding the Shareholders (other than the founders):
a. The names, the number of shares and their issued and paid up nominal value.
Minimum (Paid Up) Capital Requirements for the PT PMA
For the establishment of a PT PMA, the foreign investor needs to comply with minimum capital requirements for foreign investment. Currently the minimum requirement stands at IDR 10 billion or the equivalent value in US dollars. The Indonesian government set a high requirement in order to attract large scale companies and investors, while protecting smaller sized local businesses.
Paid up capital is generally set at 25 percent of the minimum capital requirement (hence IDR 2.5 billion). In certain (capital intensive) industries paid up capital requirements are higher. In practice, however, it frequently occurs that a PT PMA is established without the foreign investor needing to transfer the paid up capital to an Indonesian bank account. The shareholders of the PT PMA can sign a Capital Statement Letter pledging that the paid up capital can be transferred (without ever transferring it). However, in specific sectors, such as the financial services sector, this is not possible.