FDI

Details on How to Set Up a Company in Indonesia

Trường Lăng

December 16, 2024

FDI

Details on How to Set Up a Company in Indonesia

Trường Lăng

December 16, 2024

Indonesia has emerged as one of the big business destinations for entrepreneurs willing to establish a strong foothold in Southeast Asia. It is strategically positioned between the Indian and Pacific Oceans, hence is one of the most vital hubs of international trade and commerce. As the largest economy in the region, Indonesia features a very wide and diversified market. Huge opportunities to meet consumer demand in growth are boasted of by the country. Having boasted more than 270 million citizens with a burgeoning middle class, it provides immense opportunities not only for domestic enterprises but for every international business with a desire for a foothold in the emerging market.

Besides its strategic location, Indonesia is a member of the ASEAN Free Trade Area and a number of global trade agreements, further sweetening its appeal to international business expansion. All these, with efforts by the government to cut red tape and improve infrastructure, create an enabling environment for investment. Indonesia provides a business-friendly climate, in addition to the advantageous trade relations, making it a perfect destination for firms anxious to take advantage of the growth trajectory of Southeast Asia.

The discussion will paint Indonesia as a destination of choice for company set-ups, and at the same time, take one through the process that will be necessary for setting up an enterprise in this booming market. This article summarizes how to get around Indonesia’s regulatory framework while at the same time pointing out advantages that make it a competitive choice both for entrepreneurs and investors.

Key Takeaways:

  • More than its strategic location, Indonesia is also part of the ASEAN Free Trade Area, besides a number of global trade agreements, which makes it even more attractive for international business expansion.
  • Besides this, Indonesia’s chase for a business-friendly climate, with privileged trade relations from other nations, makes Indonesia an ideal place for companies who want to leverage the growth trajectory of Southeast Asia.
  • This will also facilitate making it a lot easier for foreign investors to establish a company in Indonesia by means of investing in the country through a legal entity incorporated under Indonesian law.

What type of business is suitable for foreign investors?

setup company indonesia

The preferred route for any foreign investor looking to establish a company in Indonesia is investment through a legal entity incorporated under Indonesian law. This will take various forms depending on the strategy. For example:

PT PMA: Perseroan Terbatas Penanaman Modal Asing, or, literally, Limited Liability Company

Foreign investors often establish what is actually called in Indonesian a limited liability company, or PT PMA. That is the kind of entity in which foreign investors are allowed to have direct, full ownership. It can, therefore be the most feasible option to consider for investors who plan to work for a more extended period in the country. In this case, as it were, this company would be operated independent of the overseas holding company and can operate in almost all business sectors except those that the government prohibits the activities of foreign involvement.

Representative Office

When it would suffice, one has a much less complex and inexpensive organization without actual commercial activities, there is the Representative Office. A Representative Office represents the extension abroad of a foreign parent company; such a representative office can be used for market research, promotional activities, or business development but cannot generate revenues nor enter into contracts in Indonesia.

Branch Office

Setting up branch offices is possible in some cases; this channel is more narrow and usually reserved for very specific sectors, such as banking or insurance.

All foreign investment plans need to be approved by BKPM. BKPM also supports the investors in arranging meetings with relevant government ministries, gives access to information helpful in the decision-making process, and streamlines the approval process for investments. Thus, BKPM is a very important agency in ensuring smooth entry and operation of foreign business concerns in Indonesia.
You might also like: Challenges of Doing Business in Indonesia

Step-by-Step Process: Setting Up an Indonesian Company

Procedures, licenses, and regulations concerning the setup of business entities are needed in abundance to establish an entity in Indonesia. A step-by-step approach has been presented below for setting up business entities in Indonesia, cited from the book titled ‘Business Guide III: How to Set Up A Business in Indonesia’, by EU – Indonesia Business Network (EIBN) which was an initiative that aimed at strengthening the economic ties between the European Union (EU) and Indonesia (EI2).

1. Determine Legal Entity Type

You may establish various kinds of business entities in Indonesia, depending on the nature and object of your business.

  • Representative Office: KPPA, K3PA, or BUJKA is best for foreign companies needing to oversee Indonesian operations but do not plan on making money in-country. It is the fastest and of least commitment, but it cannot conduct any commercial transaction/ sale within Indonesia.
  • PT PMA: This is the option of choice for foreign investors who want to conduct business in Indonesia fully. A PT PMA is a Limited Liability Company with capital investment by foreign individuals or legal entities.

2. Set up Representative Office – KPPA

The Representative Office is the easiest and quickest way foreign companies can legally be present in Indonesia. However, this comes with strings because it cannot engage in direct sales or execute revenue-generating contracts.

Requirements

  • The overseas parent company must already exist prior to the application.
  • An appointed representative of the business is to be appointed, which may also be an expatriate.

How It’s Done

  • Preparation of Documents: Prepare all supporting documents such as proof of legal status abroad in the parent company, Articles of Incorporation, and a letter of appointment for the representative.
  • Application Letter: The application should be addressed to BKPM-Indonesia.
  • Domicile Letter: This shows proof of residence where the address of the office shall be set up.
  • Tax Registration NPWP: Get the taxpayer identification number.
  • Obtain the Company Registration TDP: It incorporates the representative office in Indonesia.
  • License Validity: The license is valid for 3 years and can be extended for 2 more years in tranches of 1 year. After 5 years, it is expected that the office will have grown enough to upgrade to a PT PMA if business growth is to be realized.

3. PT PMA – Establishing a Foreign Investment Limited Liability Company

A PT PMA can conduct business in a country, generate revenue, and sign contracts, in its fullest extent. This is also good to have if a person desires to do business in Indonesia for the long term.

How to Set Up:

  • Business Sector: Identify in which sector your company will fall under and verify that your proposed business complies with Indonesia’s Negative Investment List-the limitation or prohibition of foreign ownership in certain businesses.
  • BKPM registration: The investment plan is to be registered, including the shareholder structure and business activities, to BKPM.
  • Notarized Deed of Establishment: The notary is supposed to draft the Deed regarding the Shareholders, Directors, and the amount of capital of PT PMA.
  • Registration with the Ministry of Law and Human Rights: The deed of establishment shall be submitted for official approval to the Ministry.
  • Obtain a Domicile Letter: This will also be required, as in the case of a representative office, for verification purposes relating to your business location.
  • Tax Registration: Secure an NPWP.
  • Company Registration: Register the company as a legal operating entity in Indonesia (TDP).
  • Obtain Other Business Licenses: Subject to industry, certain activities will fall under further licensing, such as an environmental permit or sectoral operational license etc.

4. Post-Setup Compliance Issues

Once your company is set up, it needs to comply with Indonesian laws on corporate governance, employment, and tax. A few key points follow:

  • Annual Reporting: All companies need to furnish regular financial and tax returns.
  • Hiring Employees: You can hire both local and foreign employees. A KITAS (Limited Stay Permit) needs to be issued for a foreign worker.
  • Operational Limitations for Representative Offices: Where you have opened a representative office, remember that you are not allowed to sell or generate any income that is taxable locally.

5. Issues and Concerns

Foreign Investment Restrictions: The basic rule in certain fields: sectors closed to FDI or accessible only with local partners.

  • License Difficulty: License applications will be very long-drawn and bureaucratic with regard to certain business industries.
  • Preference for Locals: In some government contracts, the local is favored over foreign-owned entities.

6. Determinant of Business Structure and Investment Plan

setup company in indonesia

The minimum the shareholders of a PT PMA could be are two, either individual or corporate entities. For the company, at least one commissioner and one director shall be appointed to the company as provided under Indonesian Company Law.

  • Business Plan: Before incorporation, ensure that your business plan is aligned with the prevailing regulation, which checks whether your line of business is among those limited by the DNI.
  • Articles of Association: These have to be in Indonesian and with a local notary. These must state what kind of company this is, the shareholders, the responsibilities of commissioners and directors.

7. PT PMA Registration

After you have made the provisional arrangement, then you can go for the actual registration.

Step 1: Filing of Investment Plan

Next, the investment plan should be forwarded to BKPM and an application for a Principal License needs to be made. It legally provides your business with the right to begin operational activities. It is also required to open an Indonesian bank account and to perform the purchase of assets. Usually, it is issued in 3 years for manufacturing companies and within 1 year for either services or trading companies.

Step 2: Notarial Deed of Establishment

The notarial deed then needs to be legalized by the Ministry of Law and Human Rights as proof that the company has been legally set up in Indonesia.

Step 3: Domicile Certificate

Domicile Letter, which must be obtained from the local government office, with regard to the existence of its operational address in Indonesia.

Step 4: Tax Identification Number (NPWP)

Get the tax identification number, NPWP, from the Indonesian tax authorities, as this must be in possession of every company operating within the country.

Step 5: Company Registration

The final step is the registration of this company into the registry of companies for official recording as an operational entity in Indonesia.

8. Capital Requirements

The minimum capital, under Indonesian law, which can be used to establish all types of PT PMAs is IDR 10 billion or its equivalent in United States dollars. This capital threshold shall protect the local small and medium enterprises from competition with foreign firms.

  • Initial Capital Investment: Initial capital investment, in relation to the total investment plan, which shall be at least IDR 10 billion, obliges you to deposit only 25% of it as initial capital. You would need to prove your capital by using a notarial statement stating that you have the capital.
  • Capital Contribution: This could include machinery and equipment but land or buildings.

9. Permanent Business License (IUT)

Once it reaches 80% of your planned investment program, it can apply to BKPM for an IUT. An IUT is a license that allows the company to officially begin production activity in Indonesia or provision of service and is inclusive of other licenses like:

  • Import License (API): In the case of businesses dealing with imports.
  • Construction License: If this falls under the construction industry.

10. Corporate Compliance and Reporting Obligations

Once operational, a PT PMA must also comply with some corporate compliance requirements.

Investment Activity Report (LKPM)

At the initial stage, when the process of incorporation is not yet complete, an Investment Activity Report shall be filed every 3 months to BKPM. In case the company has already formed itself as a fully established one, then it needs to be submitted once every 6 months. The report shall consist of mere basic information regarding:

  • Company structure and address
  • Licensing and investment activities
  • Investment in a realization
  • Employment

Tax Compliance

The PT PMAs shall file a monthly or annual tax return, whichever is applicable, depending upon the tax obligation, and pay the tax liabilities through appointed banks. It is also desirable that the companies appoint any person in charge of filing such reports and maintaining compliance with the requirements applicable to it.

Restructuring and Shareholder Changes

Any changes that may happen within the shareholder composition of the company require formal endorsement from BKPM and the Ministry of Law and Human Rights.

11. Validity of Principal License and Extensions

Once issued, the Principal License will grant the Company the right to legally commence its operational activities. However:

  • The principal license for manufacturing companies shall be granted for a period of 3 years in total.
  • Service or trading companies, generally will be issued for a period of 1 year, but also dependent on business scope.

In case of failure during that period, the Principal License is to be renewed or extended at any moment during which requirements for Permanent Business License (IUT) are not met.

12. Operations after Incorporation

The moment all licenses are granted, it would mean proper registration, hence permission from the law to operate in Indonesia. This means opening a corporate bank account, hiring both local and foreign employees, and conducting full-scale operations.

It is, therefore, a process of well-articulated procedures for setting up a PT PMA in Indonesia, making an investment plan, obtaining licenses, observing the capital requirements, and further conformity with all tax and regulatory impositions. In this way, the foreign investor secures a compliant and stable business presence in Indonesia.

Conclusion

The more the Indonesian market thrives, the more foreign businesses want to create their own company in Indonesia. By understanding the law under the process of building a company in Indonesia, the foreign investor is able to finally start arranging a strategy for his or her business in Indonesia. It is difficult to independently conduct this process without the help of Viettonkin Consulting.

Helping companies set their foot in Indonesia, Viettonkin Consulting is a multidisciplinary group of consulting firms. Our staff includes experts who can help provide specific assistance in developing strategic decisions for the growth of the company.Ready to set your business up in Indonesia? Contact Viettonkin for professional advice to smoothen your way in building your own company in Indonesia. Find out more here.

Also read: Why Invest in Indonesia?

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