Doing Business in Indonesia PMA-Company

Starting your own business in Indonesia Ever since Indonesia's independence, foreign companies have made major investments in Indonesia to develop its resources, build infrastructure, establish manufacturing facilities for export and/or provide products and services for the domestic market. The intricacies of setting up a company and making an investment in Indonesia are many. This article will serve as but a brief introduction to the topic. Setting up Business Activities and a Company in Indonesia To establish a business in Indonesia, if you do not require a local legal entity for the investment proposed, you could choose to appoint an Agent or Distributor, or set up a Representative Office. Many foreign investors at the early stage of entering the Indonesia market choose to set up an Agency Agreement or Representative Office, then later after the business starts to grow they will apply for a Foreign Direct Investment Company (FDI) status. This is referred to most commonly in Indonesia by its Indonesian acronym PMA, or Penanaman Modal Asing. Representative Office A Representative Office can be established depending upon the line of business and the necessary licenses issued by the related government department. The limitation of a Representative Office is that they are not allowed to conduct direct sales and cannot issue Bills of Lading. Representative offices are set up primarily for marketing, market research, or as buying or selling agents. The related government ministries are:

Representative Office from Ministry of Industry & Trade - for bilateral trade Representative Office from Ministry of Public Work - for consultant or contractor Representative Office from Ministry of Mining - for mining activities Representative Office from Ministry of Finance - for banking Representative Office from Investment Board (BKPM) - regional representative

To establish a Representative Office with permission from the Ministry of Industry and Trade, the company's head office needs to issue three letters:

Letter of Intent - stating the intention of the company to establish a representative office Letter of Appointment - stating the appointment of the chief representative

Letter of Statement - stating that the Chief Representative will follow Indonesian regulations

The three letters must be stamped by a notary public and approved by the Indonesian Embassy in the home country of the firm. Upon approval, the Indonesian Embassy will issue a Letter of Notification (Surat Keterangan). Upon completion of the four letters the process can continue to the related government ministry in Jakarta, to incorporate a fixed license for 2 years. Other ministries require different types of letters. Limited Liability Co or Perusahaan Terbatas (PT) Foreign Direct Investment, most often referred to by its Indonesian abbreviation - PMA, is governed primarily by the Foreign Capital Investment Law No. 1 of 1967, amended by Law No. 11 of 1970. As a legal basis, the law is fairly accommodative to various deregulatory policies and measures to date, and those that will be taken by the government in the foreseeable future. In addition to Investment Law No. 1/1967, PMA companies as well as other companies, in their business operations are still subject to sector/industrial policies as required by corresponding ministries. Incorporation of PMA Company The Investment Coordinating Board (BKPM), the government body which processes and handles FDI companies, issued an important deregulation package on PMA in May 1994 referred to as PP-20/1994. It was seen as a very significant step toward a much more conducive and attractive investment environment in Indonesia. The regulation:

Allows 100% FDI investment in selected areas of business Limits foreign direct investment to 95%, with a minimum of 5% ownership by an Indonesian Allows FDI investment with certain conditions Stipulates the sectors which are closed to FDI investment

You can obtain a copy of the FDI application in English from Indonesian embassies overseas or from the Investment Coordinating Board office either from the head office in Jakarta or from regional offices in the provinces. For those companies choosing to make a 100% foreign investment, there is a requirement that 15 years from the commencement of commercial operations, the 100% foreign shareholder must sell at least 5% of the firm to an Indonesian entity. A company which is initially 95% foreign owned is not subject to any divestment requirement. The amount of capital to be invested in a foreign-owned company is decided by the investing parties themselves, and the BKPM approval is based on the economics and scale of the project. Foreign investment companies are basically free to choose where in Indonesia they will set up operations, with the proviso that factories must be in areas zoned for industry or in an industrial estate. The life of foreign investment companies has been extended by allowing the renewal of the fixed operating license (IUT) for an additional 30 years. In

other words, the initial licenses are valid for 3 years (SPPP BKPM), plus 2 x 30 years, for a total of 63 years.

The process of incorporation of a new foreign direct investment company: Step 1.Prepare and send the application with required documentation, compiled according to the investment plan. Set up a joint venture agreement if you are making the investment with Indonesian partners. Step 2. Obtain the Initial License (SPPP BKPM), valid for 3 years. Step 3. Incorporation of SPPP BKPM a. Establish Articles of Association with a Public Notary detailing proof of capital investment, and send it to the Ministry of Justice for approval and issuance of State Gazette b. Registration of company address with local council (domicile) c. IRD registration (NPWP + PKP) d. Registration with the Department of Industry and Trade (TDP) Step 4. Key expatriate positions (work permits) Fixed Operating License (30 years) Step 5. Prepare and send the 6-month report (LKPM) to the provincial BKPM office as well as UUG (HO) nuisance act to the regional office of BKPM Step 6. Incorporate facilities - Master list/APIT or property ownership Step 7. Provincial approval for Fixed Licenses (BAP) Step 8. Fixed License (IUT) for 30 years is issued A Limited Liability company is established either under foreign shareholders or through a joint venture with Indonesians or wholly owned by Indonesian shareholders and must be approved by the Ministry of Justice. It doesn't matter who is the owner of an Indonesian Limited Liability company, they must comply with Indonesian law and are considered an Indonesian company and the company can subsequently be changed or sold to the shareholders, foreign or Indonesian. Offshore Incorporation In some situations, it may be to an investor's advantage to incorporate their firm offshore, while operations are carried out in Indonesia. The advantages and disadvantages of offshore usually focus on the facilities offered by tax havens in nations like Mauritius and the Cayman Islands. Your management consultant can assist you in making this important decision.

Taxation and Labor Law Another important matter is the Taxation and Labor Law. It is compulsory to report taxes on a monthly basis and follow Indonesian labor law. As you can see from this very brief introduction, the process is a complicated and lengthy one and can be a virtual mine field to those who are unfamiliar with dealing with Indonesian ministries. It is essential to acquire the advisory services of a professional investment consultant which specializes in assisting foreign companies who want to establish businesses in Indonesia. Just as in your home country, joining a business association is a great way to learn more about what is going on in the local business community and to meet colleagues. In Jakarta, there are several well-established country-specific business associations with memberships of hundreds of business people.Staying informed, learning about how Indonesian government rulings are affecting business, meeting new people and widening your business contacts is perhaps even more important in a foreign posting where the conditions that affect business will be unknown to a newcomer. Becoming involved and setting up a good network will benefit you in many ways.

INCORPORATION OF COMPANY INDONESIA INCORPORATION OF COMPANY IN INDONESIA The Incorporation of a limited liability company is governed by the Company Law No. 1 of 1995 (the"Company Law"). Under the Company Law shareholders of an Indonesian company have limited liability in respect of the liabilities of the company once the Deed of Establishment (which contains the Articles of Association) of the company has been approved by the Minister of Justice and Human Rights("MOJ"). Upon signing the Deed of Establishment before a notary public, a company is considered to be established and can trade in its own name. However, in the period between signing the Deed of Establishment and the receipt of MOJ approval for the Articles Of Association, the company is considered to be a kind of unlimited liability company whose founders (shareholders) have unlimited personal liability for the actions and liabilities of the company. This personal liability is extinguished once the MOJ approval is obtained and a general meeting of shareholders is held to approve, ratify and adopt all prior actions and liabilities undertaken in the company's name. Directors also have personal liability during this "company in formation" period. Their personal liability remains longer, namely until the new company is registered in the Company Register maintained by the Department of Industry and Trade and published in the State Gazette. Accordingly, once MOJ approval has been obtained for the company's articles of association, shareholders in an Indonesian company are only liable for the company's obligations to the extent of their subscribed share capital, namely up to the nominal value of the shares held by them. The reference to "PT" in all Indonesian company names is an abbreviation for Perseroan Terbatas which means "limited (liability) company" and therefore equates to "Ltd". However, even after MOJ approval of the company's articles of association has been obtained, the Company Law provides that the benefit of limited shareholder liability may be lost in certain circumstances. Subject to certain restrictions, foreign persons may be shareholders in an Indonesian company with the prior approval of the Capital Investment Coordinating Board ("BKPM"). FOREIGN COMPANY A foreign direct investment company in Indonesia (known locally as "Penanaman Modal Asing" or PMA), can take the form of a 100% foreign owned limited liability company or

can be established as a limited liability company through a joint venture with Indonesian partners. Foreign Company, most often referred to by its Indonesian abbreviation- PMA, is governed primarily by the Foreign Capital Investment Law No. 1 of 1967, amended by Law No. 11 of 1970 and the Company Law No.1 of 1995. The Corporate Law requires that there are at least two shareholders in a PMA company, or any limited liability company. The shareholders can be two individuals, two companies, or a mixture of both. Therefore, in the case of a PMA company with full foreign ownership, the foreign investor initially planning the investment in Indonesia must invite another foreign party to participate in shareholding of the proposed company. INCORPORATION OF PMA COMPANY The Investment Coordinating Board (BKPM), the government body which processes and handles FDI companies, issued an important deregulation package on PMA in May 1994 referred to as PP-20/1994. It was seen as a very significant step toward a much more conducive and attractive investment environment in Indonesia. The regulation: 1. Allows 100% FDI investment in selected areas of business 2. Limits foreign direct investment to 95%, with a minimum of 5% ownership by an Indonesian 3. Allows FDI investment with certain conditions 4. Stipulates the sectors which are closed to FDI investment One can obtain a copy of the FDI application in English from Indonesian embassies overseas or from the Investment Coordinating Board office either from the head office in Jakarta or from regional offices in the provinces. For those companies choosing to make a 100% foreign investment, there is a requirement that 15 years from the commencement of commercial operations, the 100% foreign shareholder must sell at least 5% of the firm to an Indonesian entity. A company which is initially 95% foreign owned is not subject to any divestment requirement. The amount of capital to be invested in a foreign-owned company is decided by the investing parties themselves, and the BKPM approval is based on the economics and scale of the project. Foreign investment companies are basically free to choose where in Indonesia they will set up operations, with the proviso that factories must be in areas zoned for industry or in an industrial estate. The life of foreign investment companies has been extended by allowing the renewal of the fixed operating license (IUT) for an additional 30 years. In other words, the initial licenses are valid for 3 years (SPPP BKPM), plus 2 x 30 years, for a total of 63 years.

The process of incorporation of a new foreign direct investment company: 1. Step 1. Prepare and send the application with required documentation, compiled according to the investment plan. Set up a joint venture agreement if you are making the investment with Indonesian partners. 2. Step 2. Obtain the Initial License (SPPP BKPM), valid for 3 years. 3. Step 3. Incorporation of SPPP BKPM Establish Articles of Association with a Public Notary detailing proof of capital investment, and send it to the Ministry of Justice for approval and issuance of State Gazette i. Registration of company address with local council (domicile) ii. IRD registration (NPWP + PKP) iii. Registration with the Department of Industry and Trade (TDP) Step 4. Key expatriate positions (work permits) and Fixed Operating License (30 years) Step 5. Prepare and send the 6-month report (LKPM) to the provincial BKPM office as well as UUG (HO) nuisance act to the regional office of BKPM Step 6. Incorporate facilities- Master list/APIT or property ownership Step 7. Provincial approval for Fixed Licenses (BAP) Step 8. Fixed License (IUT) for 30 years is issued

5. 6. 7. 8. 9.

A Limited Liability company is established either under foreign shareholders or through a joint venture with Indonesians or wholly owned by Indonesian shareholders and must be approved by the Ministry of Justice. It doesn't matter who is the owner of an Indonesian Limited Liability company, they must comply with Indonesian law and are considered an Indonesian company and the company can subsequently be changed or sold to the shareholders, foreign or Indonesian. To get license of Change of Capital and Change of Owner the applications should be submitted to BKPM. According to BKPM, there's no charge to arrange licences.