How to Set Up a Limited Liability Company in Indonesia

Posted by Written by Ayman Falak Medina Reading Time: 7 minutes

Establishing a foreign investment company or PT PMA, is the preferred structure for companies looking to have a legal presence in the country. Foreign investors will need to have a minimum paid-up capital equivalent of 10 billion rupiah (US$696,000), up from the previous 2.5 billion rupiah (US$174,135), as the government aims to attract more high-value investments into the country.

Prior to setting up, applicants should study the new Positive Investment List (PIL) to see which business sectors are unavailable or restricted for foreign ownership. The general principle under the positive investment list is that a business sector is open to 100 percent foreign investment unless it is subjected to a specific type of limitation. The regulation presents one of the greatest liberalizations in foreign ownership limitations in Indonesia since the negative investment list was first introduced in the 1980s.

Important sectors that had previous foreign ownership restrictions, which have now been lifted include, among others:

  • Telecommunications;
  • Transportation;
  • Energy; and
  • Distribution.

The Positive investment list

The government has classified business fields into four categories.

  1. Priority sectors – 245 business lines open for foreign investment;
  2. Business fields that stipulate specific requirements or limitations — 46 business lines open;
  3. Businesses fields open to large enterprises, including foreign investors, but are subject to a compulsory partnership with cooperatives and micro, small, and medium-sized enterprises (MSMEs) — 51 business lines open; and
  4. Business fields reserved for cooperatives and MSMEs (not open to foreign investment) — 112 business lines.

Priority sectors

To classify as a priority sector, business enterprises must meet the following criteria:

  • Must be labor intensive;
  • Must be capital intensive;
  • Must be part of a national project/program;
  • Must be export-oriented;
  • Must involve a pioneer industry (renewables, oil refining, metals, etc.);
  • Must utilize advanced technologies; and
  • Must implement research and development activities.

There are 245 business fields under this category that can be found under Exhibit 1 of the positive investment list. Moreover, businesses in priority sectors are eligible for a range of fiscal and non-fiscal incentives.

Fiscal incentives include a 50 percent corporate income tax reduction for investments between 100 billion rupiah (US$6.9 million) and 500 billion rupiah (US$34.8 million) for a period of five years and 100 CIT reduction for investments over 500 billion rupiah (US$34.8 million) for a period between five and 20 years.

In addition, there are tax allowances available in the form of a reduction in the taxable income of 30 percent of the total investment for six years, a special withholding tax rate on dividends of 10 percent, and tax losses carried forward for up to 10 years.

Examples of non-fiscal incentives are the provision of supporting infrastructure, simplified business licensing procedures, and the guaranteed energy supply or raw materials.

What are the advantages of a PT PMA?

There are several advantages of PT PMAs, including: 

  • Special financial and non-financial incentives, particularly in pioneer industries;
  • Incentives for setting up in special economic zones (SEZs);
  • Foreign investors can own as little as one percent and as much as 100 percent of the company (depending on the industry);
  • Able to participate in government-sponsored business tenders in the country;
  • Ease of processing for business licenses;
  • Ease of processing for work permits;
  • Lower tax and import duties;
  • Simple organization structure (requiring only one director, one commissioner, and two shareholders); and
  • Ability to sponsor foreign executives.

There are no restrictions on where the PT PMA can be set up in the country, but the business can only focus on one specific sector or area.

Set up requirements for a foreign investment company

According to the Investment Coordinating Board Regulation No. 4 of 2021 (BKPM Reg 4/2021), investors looking to incorporate a PT PMA need to adhere to the following requirements:

  • A minimum paid-up capital of 10 billion rupiah (US$696,000);
  • Appointment of two shareholders (these can be foreign individuals or corporations – the percentage of local involvement will depend on the foreign ownership limitation based on the PIL);
  • There must be minimum equity of 10 million rupiah (US$601) per share;
  • The appointment of at least one commissioner and a director (these can be held by foreign individuals); and
  • The director will be responsible for running the day-to-day activities of the company.

Set up process for a PT PMA

  1. Reserve a company name with the Ministry of Law and Human Rights (which should not be similar to the name of other companies or contain vulgar language), Further the company name shall consist of 3 words and can be in English;
  2. Establish a legal entity with the company’s activities stated in the Deed of Establishment (this must be done with a local notary and the Deed of Establishment will have to be ratified by the Ministry of Law and Human Rights);
  3. Obtain a taxpayer identification number from the local tax office and domicile letter from the district government (businesses establishing in Jakarta do not require a domicile letter);
  4. Obtain a tax registration certificate through the tax office where the business is domiciled;
  5. Obtain a Single Business Number (NIB) by applying through the Online Single Submission (OSS) system. The NIB applies as the company’s import identification number, customs ID, and registration certificate. Further, the NIB will also automatically register your company under the government’s health and social security scheme; and
  6. Some companies may need to apply for additional business licenses (such as for mining and fintech). Business licenses will now be issued based on the assessment of ‘business risk level’ determined by the scale of hazards a business can potentially create.

Risk Based Business Licensing

To determine the risk level, the government will conduct a risk analysis of each application before deciding on issuing a business license. This will comprise of:

  1. Identifying the relevant business activity;
  2. Assessing the hazard level;
  3. Assessing the potential occurrence of hazards;
  4. Determining the risk level and business scale rating; and
  5. Determining the type of business license.

Based on the aforementioned risk analysis, the businesses activities undertaken by the applicant company will be classified into one of the following risk-level types:

  • Low-risk businesses;
  • Medium-low risk businesses;
  • Medium-high risk businesses; and
  • High-risk businesses.

Based on this risk-based approach, the lower the business risk, the simpler the business licensing requirements will be.

What sectors are impacted?

The government will undertake the risk-analysis for business activities in the following sectors:

  1. Maritime affairs and fisheries;
  2. Agriculture;
  3. The environment and forestry;
  4. Energy and mineral resources;
  5. Nuclear energy;
  6. Industry;
  7. Trading;
  8. Public works and housing;
  9. Transport;
  10. Health, medicine, and food;
  11. Education and culture;
  12. Tourism;
  13. Religious affairs;
  14. Post, telecommunications, broadcasting, and electronic system, and transactions;
  15. Defense; and
  16.  

What are the requirements to obtain a business license?

The requirements vary depending on the risk level of the business with those in the high-risk categories requiring more permits and licenses.

The first stage of the process is obtaining a business registration number (Nomor Induk Berusaha – NIB) through the OSS system. To register for a NIB, businesses will need to provide the following information:

  • Taxpayer number (Nomor Pokok Wajib Pajak– NPWP);
  • Business activity code according to the KBLI;
  • Business profile;
  • The capital structure of the business; and
  • The proposed location of the business.

Furthermore, the OSS system will be linked to all relevant ministries, such as the Ministry of Finance, the Ministry of Home Affairs, and the Ministry of Law and Human Rights.

Low-risk business activities

Low-risk business activities are only required to obtain an NIB to commence their operations. In addition to serving as the formal identity of the business, the NIB also serves as a company’s import identification number, as well as the number for registering with the national social insurance program.

Medium-low risk business activities

Business activities in this category must obtain a NIB and Certificate of Standards before beginning operations. A Certificate of Standards is a statement of the fulfillment of certain business or product standards, which must be filled in through the OSS system.

The NIB allows the business to conduct activities from ‘preparation to the ‘commercial stage’.

The preparation stage includes:

  • The procurement of tools or facilities;
  • Land acquisition;
  • Recruitment of manpower;
  • Feasibility studies;
  • Financing operations for the construction phase.

The commercial stage includes:

  • The production of goods/services;
  • Distribution of goods/services;
  • Marketing of goods/services; and
  • Other commercial activities.

Medium-high risk business activities

For medium-high risk business activities, companies will need to obtain a NIB and Certificate of Standards. However, the certificate will need to be verified by the central or regional government.

A company with a NIB and an ‘unverified’ Certificate of Standards are only permitted to conduct activities deemed in the preparation stage of operations.

Once the central or regional government is satisfied the business has fulfilled the specific business standards, they will issue the ‘verified’ certificate and the company can begin the commercial stage of operations.

High-risk business activities

High-risk business activities will require a NIB and a license to operate. The license will be issued once the business has fulfilled certain conditions and verifications set out by the central or regional government, which may include an environmental impact analysis.

The NIB, however, allows the business to conduct activities in the preparation stage of operations.

Depending on the products or services being provided, businesses may have to obtain other supporting licenses to conduct commercial activities regardless of what risk level their activities are classified as.

A note on the local limited liability company 

Foreign investors who want to operate a local limited liability company (PT PDMN) should understand that this can carry legal uncertainties as a PT PDMN can only be owned by Indonesian citizens.

According to Article 33 of the Investment Law of 2007, foreign investors are prohibited from making an agreement that states the share/ joint ownership in a company is on behalf of another party. Also known as a ‘nominee agreement’, foreign investors have used such arrangements to avoid regulations and requirements that apply to them.

This carries inherent risks as the local shareholders will have full control of the business and the foreign investors’ rights will not be recognized by the law.

Foreign investors who cannot afford to establish a PT PMA can engage in joint ventures or partnerships with domestic firms. This will also enable investors to enter industries that are restrictive for foreign ownership without having to face the legal ramifications.

Another option would be to buy an established PT PDMN, but this entity would need to be converted to a PT PMA. This would also mean having paid-up capital of 10 billion Rupiah (US$696,000).

This article was originally published on September 19, 2018, and was updated on August 10, 2021.

 


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ASEAN Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia and maintains offices throughout ASEAN, including in SingaporeHanoiHo Chi Minh City and Jakarta. Please contact us at asia@dezshira.com or visit our website at www.dezshira.com.

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