Like most developing and emerging countries, Indonesia continuously seeks to find a balance between ensuring the maximum benefit from foreign investment for the local economy, attracting capital and expertise, and protecting local companies against foreign competition. Driven by political pressures, the regulations on foreign investment occasionally change.
Indonesia's consumer market, abundant workforce, growing economy, changing society and strategic position as a potential hub for ASEAN, places the nation among Asia's top investment destinations. In recent years, various administrations have recognised Indonesia's potential for foreign investment, while simultaneously being cautious of opening up the market. Overall, recent policy strategies indicate that Indonesia is not ready to give up on, or reduce, the burden of its complex foreign investment regulations. Foreign companies are not allowed to invest in certain business sectors and in most cases the procedure of licensing products and services remains a complex matter. Measures have been taken to facilitate procedures related to foreign-owned businesses and investment. This has been witnessed in the re-structuring BKPM's mandate (Investment Coordinating Board of the Republic of Indonesia) and in the progressive deregulation and liberalisation of some sectors of the economy.
These are signs that Indonesia is taking a strong stance towards fulfilling its long-term goals, namely to establish itself as Southeast Asia's leading economic powerhouse and to become the 7th largest world economy by 2030.1
Business Entities for Foreign Investors
According to expert's experience, the easiest way for a foreign company to establish an economic presence, or to do business in Indonesia, is by direct investment in the form of a legal entity incorporated under Indonesian law.
This legal entity can be either established as a legally independent subsidiary of the foreign company, in the form of a Representative Office (KPPA or K3PA) if the branch is merely an extension of its foreign mother company, or a limited liability company (PT PMA). Any plans by foreign (and domestic) investors need to be approved by BKPM, the government agency that has been given authority by most of the ministries to review and approve investment. BKPM is able to facilitate meetings with representatives of the ministries and to ensure that companies can gather the necessary information to be ready for a face-to-face conversation.
Investment Coordinating Board of Indonesia (BKPM)
BKPM is a non-departmental government institution commissioned to formulate government policy in the field of both domestic and foreign investment in a wide range of sectors. BKPM was established by the Investment Law of 2007. Previously, investment plans in the financial, energy and mining sectors have been reviewed separately by other entities, but now they are being gradually transferred and integrated within BKPM authority.
The service and speed of the approval process have generally improved in recent years. Some of the ministries are, however, trying to regain some control over the investment procedures in their sector by instructing the BKPM to incorporate additional requirements. These requirements sometimes include a consultation with a ministry before an approval can be issued. As a result, these additional administrative hurdles can complicate the procedure and result in delays.
In order to simplify Indonesia's investment procedures BKPM has launched a one-stop-shop integrated service (PTSP) and an electronic automation platform for investment licenses and non-investment licenses (SPIPISE-NSWi). Please refer to our Resources and Contacts section.
Investment Laws and Restricted Industries
Indonesia's Coordinating Investment Board (BKPM) is the main implementing agency with consulting and policy formulating functions in the area of investment.
Even though Indonesia has formally replaced its investment approval system with an investment notification system, notaries in the country will not establish companies with a foreign share if there is no approval from BKPM. Therefore, practice dictates that every foreign investment requires the approval of BKPM. Approvals are issued in the form of a Principle License (Izin rinsip).
Foreign ownership restrictions are regulated by the Investment Law No. 25/2007 and the Presidential Decree No. 39/2014.
Indonesia's Negative Investment List, determines a large number of sectors that are either wholly or partially banned to foreign investment, but with some exceptions for SMEs and cooperatives. If the business activity is not mentioned in the list, 100% foreign ownership is allowed. The Codes for Standard Classification of Indonesia Business Sectors (KBLI-codes) are the crucial indicator to determine the categorisation and possible foreign ownership restriction that applies to a proposed investment.
Taxable business profits are calculated on the basis of normal accounting principles and modified by certain tax adjustments. Since 2010, a flat rate of 25% applies for the purposes of corporate income tax.
Permanent establishments are subject to a branch profits' tax of 20%, or a lower rate under a tax treaty on net after-tax profits, in addition to corporate income tax.
Most expenses incurred in deriving business income may be deducted, including wages, fees, interest, rent, royalties, travel expenses, bad debts, insurance premiums, administration costs and levies, depreciation and amortization, operating losses and contributions, and approved pension funds. Non-deductible items include the payment of dividends, unapproved reserves, fringe benefits, charitable contributions and the income tax itself.
Losses can only be carried forward for five years, although it may be extended to 10 years in certain sectors and regions. The carry-back of losses is not permitted. For investments in certain sectors and regions, as well as in Integrated Economic Development Zones (KAPET), BKPM may also recommend that the tax office provide additional tax incentives to an investing company, such as a deduction of 30% of the invested amount from the taxable profit over a period of six years, as well as accelerated depreciation schemes.
As mentioned above, the periodic payment of tax liabilities to the State Treasury must be made through a designated tax-payment bank (bank persepsi), and relevant tax returns must be filed through a tax office. Depending on which tax obligation, the payments and tax returns filing for a particular tax must be undertaken monthly and/or annually. These payments and filing obligations can also be conducted electronically.
In recent years, various administrations have recognised Indonesia's potential for foreign investment, while simultaneously being cautious of opening up the market. Overall, recent policy strategies indicate that Indonesia is not ready to give up on, or reduce, the burden of its complex foreign investment regulations. Even though Indonesia has formally replaced its investment approval system with an investment notification system, notaries in the country will not establish companies with a foreign share if there is no approval from BKPM. Indonesia's Negative Investment List, determines a large number of sectors that are either wholly or partially banned to foreign investment, but with some exceptions for SMEs and cooperatives. The Codes for Standard Classification of Indonesia Business Sectors (KBLI-codes) are the crucial indicator to determine the categorisation and possible foreign ownership restriction that applies to a proposed investment.
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