Investing in Indonesia’s Nongsa Special Economic Zone
The Nongsa Special Economic Zone (SEZ), located in the northeastern part of the Nongsa administrative region on Batam Island, is one of the island’s two newly approved SEZs by President Joko Widodo in 2021.
The government is seeking to leverage the region’s strategic position in the vicinity of Singapore and its secure location, digital connectivity, and beautiful natural landscape to develop key technology and tourism industries.
Situated just 20 kilometers from Singapore to the island’s northeast, Nongsa SEZ enjoys a unique geographic advantage. As a result, the majority of foreign investors in Batam—around 70 percent—are Singaporean.
The 166-hectare area that served the existing Nongsa Digital Park (NDP) was upgraded to SEZ status in 2021. The NDP, which opened in 2018, focuses on the development of digital industries, the construction of data centers, and the development of the IT industry.
The government aims to attract a total of 16 trillion rupiah (US$1 billion) to the SEZ and employ 16,500 people in the zone by 2040. As of August 2022, the total realized investment in the zone had reached 2.61 trillion rupiah (US$170.7 million).
The SEZ is host to various types of infrastructure supporting the growth of the tourism, film, and digital industries. This includes several resorts, golf courses, film studios, and a “movie town”. The zone also has international schools, commercial and residential areas, and data centers.
With its new status as an SEZ, Nongsa is poised to become a major destination for foreign investors and a hub for digital industries and talent. Below we discuss the SEZ’s main industry draws and fiscal incentives on offer for companies in the zone.
Main industries in the Nongsa SEZ
Digital technology and data centers
The Nongsa SEZ has been designated as a key area for the development of the digital economy, with a particular focus on cloud technology and data centers. The government has recognized the need to diversify Indonesia’s data center infrastructure, which is currently mostly concentrated in Jakarta, and Batam has been promoted as a hub for future development.
There are several factors that make the zone ideal for the creation of a data center hub. First, Nongsa has been labeled an “earthquake-free zone” as it is not situated along one of Indonesia’s fault lines, making it an ideal location for the construction of data centers.
Secondly, Batam is one of the most interconnected regions in West Indonesia. Nongsa has the “highest single count of landing stations and single route cables, according to the NDP, which includes 12 submarine cable systems connected to Singapore, Malaysia, and Jakarta.
The SEZ’s push to develop its data center industry has already borne fruit with several multinationals breaking ground on data center parks in the zone. In late 2021, Chinese data center developer GDS Holdings announced its first investment in data centers in Indonesia, which will comprise two new data center buildings in the NDP with a total of 28 MW of IT power capacity.
In February 2023, Princeton Digital Group, a Singaporean data center company, announced an investment of US$1 billion to expand its data center footprint to Batam, as well as Johor in Malaysia. The company already has a campus located in the Nongsa SEZ.
Beyond data centers, the NDP is already home to over 100 technology companies, both foreign and domestic.
Tourism and creative industries
Riau Province (which encompasses thousands of islands including Batam) is the second most popular travel destination in Indonesia after Bali. The Batam island welcomed around 1.9 million foreign tourists in 2019.
The Nongsa SEZ will seek to further capitalize on the existing tourist industry. The Nongsa administrative region is a well-known destination for international tourists, with famous beaches and mangrove forests. The area is also home to several major beach resorts, myriad hotels, and several golf resorts.
Besides tourism, the Nongsa SEZ aims to leverage its proximity to Singapore and access to tech talent to become a hub for Indonesia’s budding film and animation industry. The SEZ masterplan includes the proposed construction of a dedicated “Movie Town”, and it is currently home to Infinite Studios, Indonesia’s largest animation studio.
Fiscal incentives for companies setting up in the Nongsa SEZ
With the upgrading of the Nongsa NDP to an SEZ, companies setting up within the zone will be eligible for a broad range of fiscal incentives if they commit to a certain level of investment in the region.
This includes 100 percent tax holidays for primary activities conducted within the zone, depending on the amount and duration of investment. “Primary activities” in the Nongsa SEZ are tourism and digital technology.
Companies that invest 100 billion rupiah (US$6.56 million) for a period of 10 years will be eligible for a 100 percent reduction in corporate income tax (CIT). After this period, companies will continue to be eligible for a 50 percent reduction of CIT.
In addition, entrepreneurs can also enjoy a tax holiday of between 10 and 20 years, depending on the amount that they invest.
Companies may also be eligible for certain additional tax allowances for non-primary activities or primary activities that are ineligible for tax holidays. According to the Ministry of Investment, these tax allowances include:
- Deduction of net income of 30 percent from the actual amount invested in fixed assets and tangible assets, including land, which is charged for six years at 5 percent annually;
- Accelerated depreciation and/or amortization of eligible fixed and intangible assets;
- Lowering the withholding income tax rate for dividends paid to foreign taxpayers other than permanent establishments in Indonesia to 10 percent or lower, in accordance with the applicable double taxation avoidance agreement; and
- Compensation for losses of over five years and under 10 years under certain conditions.
Commercial stores that are located inside SEZs designated for the development of tourism, which includes the Nongsa SEZ, can also participate in a VAT refund scheme for foreign passport holders. In addition, the purchase of a residential home or residence is exempt from sales tax on luxury goods.
Value-added tax (VAT) is also not collected on the following types of goods and services within the Nongsa SEZ:
- Delivery of tangible taxable goods from other Indonesian customs areas, FTZs, and bonded zones to a business entity in the SEZ;
- The import of tangible taxable goods to a business entity in the SEZ;
- The import of consumer goods; and
- The delivery of taxable services and/or taxable goods in the same SEZ or other SEZs.
To be eligible for the tax incentives in the Nongsa SEZ, businesses will need to provide the following:
- Their business license;
- Evidence of being a domestic corporate taxpayer; and
- Approval received from the Indonesian Investment Coordinating Board based on the company’s standard industrial classification (KBLI), proof of location of the project, and proof of determination of the type of production or services to be conducted.
Exploring Indonesia’s Top Investment Sectors: Midyear Recap and FDI Exploration Guide
September 25, 2023 | 3:00 PM Jakarta / 4:00 PM China / 10:00 CET
In this webinar, our business advisory team will delve into Indonesia’s 2023 investment trends and will discuss the key considerations for investing in the country’s top investment sectors, the current situation on the business environment in the top investment locations, and touch upon the pathways available for foreign businesses to tap into these opportunities.
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