What Type of Entity Should We Use to Set Up Our Business?

A PT PMA is owned by shareholders (minimum two) and managed by directors (minimum one). The liability of each of the shareholders is generally limited to the total par value of their shares. The shareholders’ direct participation in company affairs is normally quite limited. It is the directors who are responsible for managing company affairs and who owe various fiduciary duties to the shareholders and the company (duty of care, duty of loyalty, etc.).

Representative Office

       The representative office structure is very different from the PT PMA structure. Unlike a PT PMA, a representative office is not allowed to earn income. Also, representative offices merely serve as extensions of their head offices overseas. They are not stand-alone legal entities. They are also strictly regulated to performing specific functions designated by statute on behalf of their head offices overseas.

        A representative office is managed by a Chief Representative Officer (CRO) who may be either a foreign or an Indonesian national, but such person must be appointed by the director(s) of the parent company abroad. Please note that both positions may not be filled by the same person. Indonesia recognizes the following types of representative offices:

1. The Representative Office of a Head Office Overseas

      A representative office may be established in order to perform only specific functions on behalf of its head office overseas. In this situation, the representative office is commonly referred to as a KPPA.

1. The Representative Office of a Foreign Trading Company

A representative office engage in trade in Indonesia in the role of a sales agent, manufacturing agent, or purchasing agent on behalf of their head office overseas (depending upon the head office specification). In this situation, the representative office is commonly referred to as a KPPPA.

1. The Representative Office of a Foreign Construction Service Enterprise

A license to operate a representative office of a foreign construction service enterprise (BUJKA) may only be applied for by large-scale foreign construction companies providing consultation, construction service, or both. The BUJKA license application must be submitted via the OSS integrated to the Ministry of Public Works’ system. After completion of the process, the license will be issued within 5 business days.

1. The Representative Office of a Foreign Oil and Gas Company

A representative office of a foreign owned oil and gas company is commonly referred to as a KPPA Migas. The license will be issued within 5 business days after completion of the application documents.

What are the Legal Issues Associated with the Start-Up of a Company?

1. Company Name

Reserving a name for a PT PMA can often be complicated in Indonesia. Reserving the company name occurs at the beginning of the company’s establishment process, with the shareholders being required to reserve the desired company name together with alternatives in the event the name has already been taken, with a notary. The notary will then check the availability of the name. If the name is available, the name reservation is valid for sixty days, during which the company’s registration process must be completed. Failure to complete the registration process will result in having to reserve the name again.

1. Articles of Association

The Articles of Association (AOA) is normally a standard template explaining the basic rules of the company which are subject to the shareholders’ agreements. The AOA will generally contain the following information:

1. Name and domicile of the company
2. Company incorporation period
3. Purposes, objectives, as well as the business activities of the company
4. Amount of authorized capital, issued capital and paid-up capital
5. Number of shares, shares classification (if any), including the number of shares for each classification, the rights attached to each share, nominal value of each share, shares certificates, and transfer of shares
6. Board of Directors and Board of Commissioners provisions, including their appointments, responsibilities and authorities, meeting rules, replacements, dismissals and etc.,
7. General meeting of shareholders provisions including the quorum, place and procedures for holding the meeting, etc.
8. Procedures for profit utilization and dividend distribution

1. Required Capital

The rules associated with registered capital of a foreign held company capital are set forth

1. Licenses/Permits

PT PMA will be required to obtain general licenses and operating licenses/ permits depending on its business sector, namely:

General Licenses:

1. Business Identification Number;
2. Tax Identification Number;
3. Company Registration Certificate;
4. Certificate of Domicile; and
5. Business License

Operating Licenses:

1. Operating Licenses;
2. Location Permit;
3. Environmental License;
4. Manpower Plan; and
5. Construction Permit.

What are the Legal Issues Associated with Operating as a Foreign-Held Company?

1. Managing Shareholder Relationship

Many times a foreign investor will be required to join with a local party whereby the foreigner is the minority shareholder in order to engage in the desired business activity therefore making maintaining control over the company a challenge for the foreign investor. However, note that majority share ownership is not always an indicator of control in a company.

1. Negative List of Investment

Every PT PMA with foreign shareholders is subject to the Negative List of Investment. Depending on its business activities, certain businesses are fully opened, some fully closed and some opened with a foreign ownership percentage limitation.

1. Capital Requirements

PT PMA capital are classified as authorized, subscribed, and paid up capital. Subscribed and paid up capital must be deposited into the company’s bank account amounting to at least 25% of the authorized capital by each of shareholders based on its shares percentage contribution. PT PMA’s authorized capital should be in the amount of more than IDR 10 billion (approx. $720.000 US), excluding land and premises. However, please note that the above represents the minimum requirement and different minimum capital requirements may apply depending on the business sector. If two or more founding shareholders are Indonesian legal persons, the Indonesian shareholder(s) should, also, contribute at least IDR 10 million (approx. $720 US).

1. Articles of Association

 The requirements for the company’s AOA are stated in Chapter 20. Note that subject to the shareholders agreement, a foreign investor, although not owning a majority of the shares in the company, many times will attempt to have certain reserved matters related to its interests set forth in the AOA.

What is the Process to Obtain a Work Permit?

The process of obtaining a work permit in Indonesia can be a difficult, confusing process or be fairly straightforward depending upon the situation of the employer company and foreign employee. Below is an explanation of the applicable procedures and requirements for both employers and employees.

1. Employer Requirements

In order to hire foreign nationals, the employer must satisfy each of the below listed requirements.

1. Obtain Foreign Manpower Utilization Plan

The employer is required to prepare a Foreign Manpower Utilization Plan (“Utilization Plan” also referred to as a “RPTKA”) and have it approved by the Ministry of Manpower or the appointed authority.

The employer shall submit the RPTKA application and all relevant documents through the Foreign Manpower Online Services (Sistem Online Pelayanan Tenaga Kerja Asing –“TKA Online”), at tka-online.kemnaker.go.id. For this purpose, the employer must first register itself at TKA Online.

1. Obtain Notification and Pay Compensation Fee for Hiring Foreign Employee

The employer is required to obtain an approval notification from the Directorate General of the Development of Manpower Placement and Expansion of Employment Opportunity. In order to obtain the notification, the employer must also pay a non-tax state income payable by the employer for every foreign national hired in by the employer (“DKP TKA). The amount of the DKP TKA is USD 100 per month.

1. Annual Reporting Concerning the RTPKA Plan

The employer must report the implementation of the Utilization Plan or RPTKA annually. Should any change occur within the year (e.g. change in job title/ role, etc.), the employer must report the change to the Directorate General of the Development of Manpower Placement and Expansion of Employment Opportunity.

1. Include Foreign Employee in Insurance Package

Employers must ensure that all employees are insured including its foreign employees with a minimum employment contract of 6 months. The insurance provider must be an Indonesian based company authorized by the Financial Services Authority.

1. Include Foreign Employee in Social Security Program

Similar to the above, the employer must ensure that its foreign employees with a minimum employment contract of 6 months must also be included in its Social Security Program.

1. Appoint and Train Designated Indonesian Co-Worker

For every foreign employee hired, the employer must designate an Indonesian national as the foreigner employee’s co-worker with the purpose to accelerate the transfer of knowledge/skills while gradually reducing the need for foreign employees. The employer must, also, conduct the necessary training and education for the designated co-workers.

1. Facilitate Indonesian Language Training

Employers must facilitate necessary teaching /training of the Indonesian language to foreign employees

1. Only Hired for Permitted Positions

Foreign nationals are only allowed to hold certain positions in Indonesia. The Indonesian government only allows foreigners to hold certain positions/job titles. The Ministry of Manpower specifies various job titles closed to foreign employees. Generally speaking, these job titles are within the area of human resources/personnel management and workplace safety.

1. Employee Requirements

The employee must obtain the following in order to work in Indonesia.

1. Obtaining Temporary Stay Permit Visa

Upon being engaged for employment by the Indonesian employee while in the foreign employee’s home country, the employee must apply for a limited stay permit visa (“VITAS”) in the foreigner’s home country Indonesian consulate general/ embassy. Within 7 days of arrival in Indonesia, the foreign employee must then convert his/her VITAS into an ITAS card. The ITAS card allows the foreign employee to live in Indonesia for 1 year and may be renewed annually up to 2 times.

1. Obtaining Exit/Re-Entry Permit

Should an ITAS card holder intend to temporarily leave Indonesia, the foreign employee must apply for an exit/re-entry permit from the Immigration Office. The application process usually takes one day and requires the applicant to write a letter requesting to leave the country. The permit is stamped along with the ITAS card in the foreigner’s passport.

It is highly recommended to always have a valid multiple re-entry permit stamped on the passport in case of an emergency.

1. Obtaining Visa for Dependents

Obtaining a dependent visa allows the employee’s family members to stay in Indonesia. However, it does not entitle the family members to work in Indonesia. The validity period of the dependent visa is similar to the employee’s visa.

1. Obtaining Taxpayer Registration Number

A foreign employee registered in the employer’s RPTKA and has been working for a minimum of six months in Indonesia must obtain a Taxpayer Registration Number (Nomor Pokok Wajib Pajak/NPWP) from the Tax Office.

1. General Requirements for Foreign Employees

The general requirements for a foreign employee to be hired in Indonesia are: (i) Educational Background The candidate must hold bachelor’s degree or higher. If the position requires specialized education, then a relevant degree (e.g. in education or engineering) is required; (ii) Recommendation/Track Record A recommendation letter from the previous employer, demonstrating that the employee has worked for at least five years.

What Incentives Are Available to Foreign Investors by the Government?

The Indonesian government offers various incentives to investors engaging in certain promoted projects. The incentives available to these investors depend on the type of industry, location of the project in Indonesia, type of investment, as well as other factors. The government body in charge of processing investment promotion applications and granting incentives is the Indonesia Investment Coordinating Board. This chapter highlights these available incentives as well as applicable requirements.

1. Corporate Income Tax Holiday

Below is an explanation of the types of projects eligible to receive tax holidays and the applicable requirements.

1. Tax Allowance Facility

In addition, investors investing in certain industries and/or less developed areas are potentially eligible for tax reductions.

1. Additional net income reduction up to a maximum of 30% of the amount of investment in tangible fixed assets, subject to an annual 5% rate for 6 years;
2. Accelerated depreciation and amortization;
3. Loss carry-forward period extension up to 10 years (with additional years eligible subject to certain requirements);
4. Tax withholding on dividends distributed to a non-resident shareholder at 10% (unless the applicable tax treaty stipulate a lower rate).

1. Import Tax Exemption

The BKPM also offers import tax exemptions incentives to investors engaging in manufacturing of goods to be exported.

1. Special Economic

Zones The Indonesian government has designated several regions to be Special Economic Zones (“KEK”). Companies operating in a KEK can apply for corporate income tax exemptions/reductions., Value Added Tax (“VAT”) exemption/reductions, and import tax exceptional reductions.

1. Bonded Zones

The Indonesian government defines a bonded zone as an area designated for processing goods and materials, construction designing, engineering, sorting, performing preliminary inspections, performing final inspections, and packing of imported goods and materials originating from other areas within the Indonesian Customs Territory, mainly for export purposes.

What are the Legal Issues Associated with Foreign Ownership of Land?

Ownership Rights In general, there are two ways for foreign investors seeking to obtain rights to land in Indonesia: by establishing a foreign limited liability company (referred to as a PT PMA) and by residing and working in Indonesia.