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Trading companies played a great role during the early stages in setting up Indonesia’s commercial scenery. From highly being characterized by small enterprises operated by families, during the expansion of the economy, it became more diverse and sophisticated. Today, setting up a trading company in Indonesia thus bears a great deal of opportunity and potential problems, given its strategic location in Southeast Asia and large potential market that it holds.
Setting up a trading company in Indonesia requires adequate knowledge of local legislation, market dynamics, and ways of doing business. This article will outline what a trading company is and how to set up a trading company in Indonesia, from the perspective of legislation to market entry methods.
Key Takeaways:
- Today, setting up a trading company in Indonesia presents huge opportunities with potential challenges, considering the fact that Indonesia is strategically located in Southeast Asia and it comes with a highly promising market.
- According to Olegario Llamazares, the managing director of Global Marketing Strategies, in his various publications in Global Negotiator entitled ‘What is a Trading Company?’, a trading company specializes in handling the entire process of export and import operations, making cross-border trade easier since it will handle logistics, regulations, and market distribution.
- Trading companies tend to concentrate on high-volume product transactions-such as raw materials, chemicals, and generic pharmaceuticals-where economies of scale are an important determinant of profitability.
What is a Trading Company?
According to Olegario Llamazares, Managing Director at Global Marketing Strategies, in his serial publications entitled ‘What is a Trading Company?’ in Global Negotiator, trading companies are highly specialized in handling the entire operation process of export and import, thus helping cross-border trade to be rather easier by providing logistics, regulations, and market distribution. These companies purchase goods in one country and sell them in another, using an already developed distribution network to access international markets in most instances.
Trading companies also often specialize in products where high volume is exchanged, such as raw materials, chemicals, and generic pharmaceuticals, for which the economy of scale is a critical determinant of profitability.
In addition to buying and selling, trading companies may provide transportation, storage, and packaging services that add value for both the manufacturer and buyer.
These companies are very important in linking suppliers to international demand; they are a means for businesses to expand their territory beyond their native borders. From moving goods and managing sophisticated regulatory requirements, trading companies are very active participants in the global economy; they make international trade less cumbersome and more effective.
The major activities of a trading company involve the broad range of responsibilities that enable international trade to take place. This includes:
- Diversify from country to country and find suppliers capable of supplying enormous quantities of generic products at competitive prices.
- Negotiate the terms of sale and delivery with the supplier, consolidate an agreed price, timeline, and condition of sale and delivery for both parties.
- Financing and payment to the supplier-exporter, usually providing financial and legal guarantees with the aim of limiting financial risks for the parties.
- Logistical and transportation management: efficiently move the goods across borders.
- Customs clearance and overcoming international trade barriers by ensuring that all regulations are complied with in order to minimize delays.
- Distribution and sale of products through a well-organized retail network so that the products reach effective markets.
These activities also bring out the crucial role trading companies play in managing the complexities of global supply chains, right from sourcing to final distribution.
3 Different Structure of Trading Company in Indonesia
In Indonesian market, there are 3 types of trading company’s structure, such as distributor trading companies, export-only companies, and industrial companies.
Distributor Trading Companies
The most common structure among trading companies is the distributor company, which assists in the importation of several types of goods to Indonesia. There are, however, two major restrictions which a foreign investor should pay attention to, as cited from PNB Law Firm-a law firm based in Indonesia with legal services-below.
Foreign Shareholder Restriction
Under Indonesia’s Negative Investment List, the foreign ownership of a distributor trading company is limited to 67% of maximum shareholding. The remaining 33% of the shares, held by either Indonesian people or companies, shall be fully owned by Indonesian entities. Foreign companies or individuals can be foreign shareholders.
Distribution Restriction
In this case, foreign-owned distributor companies are allowed to operate only in wholesale trades and, therefore, cannot sell directly to consumers in Indonesia. Thus, the company would need to cooperate with a local Indonesian company if it wants to perform retail or sell directly to the end customers. Therefore, the provisions constitute that foreign investors develop partnerships with reliable local distributors.
First, there is the requirement for local shareholders; second, the requirement to cooperate with a local company. Both the foregoing requirements introduce additional risks for business conducted by foreign investors. Hence, trust in partners is very important. To enable foreign investors to reduce the risk arising from the aforesaid grounds, some law firms, like PNB Law Firm, extend nominee shareholder services that allow foreign investors to appoint one of their controlled entities as the local shareholder, giving full control over the company and reducing the risk of future shareholder disputes.
Export-Only Companies
Foreign investors who would like to export goods or commodities only from Indonesia can establish a distributor company for export activities. For this type of business, foreign ownership of 100% is allowed with less strict regulations compared with the ones applied to businesses whose products are sold in the local market.
On the other hand, export-oriented companies cannot sell their products in Indonesia and must address their entire production to foreign markets only.
Industrial Companies
Generally, industrial companies in Indonesia are always more cumbersome to set up due to supplementary regulatory requirements. Some common requirements that would normally apply to an operating industrial company include:
Operational Licenses
Industrial companies are supposed to apply for special operational licenses from relevant ministries related to a particular kind of industry and ways of production.
Land and Building Licenses
Every manufacturing plant has to obtain land and building permits issued by local governments. In the given case, it is essential that those licenses be granted to ensure lawful operation of the factory.
Environmental Licenses
Industrial companies must obtain an environmental license before starting activities. The type of environmental license required will differ depending on the size and type of factory. In general, the majority of licenses will be issued through an environmental assessment process.
Typically, for industrial companies, there is flexibility in terms of ownership for foreign investors, whereby foreign investors can own 100 percent of the shares, which provides greater flexibility than the distributor trading companies.
General Requirements for Establishing a Foreign Investment Trading Company in Indonesia
The Indonesian government has set a range of requirements which apply to foreign investment companies, referred to as PT PMA, who are trading in the country. A brief overview of the conditions set can be seen below.
Minimum Paid-up Share Capital
The PMA has to be founded with the minimum paid-up share capital of IDR 2.5 billion. While it is an obligation, in practice, it works more as an administrative requirement. Under the current law, the government does not require the entire capital to be deposited into the bank account of the company at the time of establishment.
Minimum Investment Value
BKPM obligates all foreign investment companies to invest at least IDR 10 billion in the economy. The above investment does not include an allowance for land and building purchases. In order to follow up on the execution of such investments, or to make sure that compliance is met on a continuous basis, the company needs to submit what is called an LKPM-Quarterly Investment Activity Reports.
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Characteristics of Trading Companies
There is a number of features that distinguish trading companies from other forms of business organizations. According to Bakrie University, some of the main characteristics of trading companies include the following:
No Production and Distribution Role
Trading companies are not involved in the manufacturing process. They are only concerned with buying and selling goods. In essence, a trading company is usually considered a critical distribution point that enables goods to move from the manufacturing company to retailers and eventually to consumers.
Inventory Management
Trading companies always maintain an inventory of goods that are saleable at any time. A very important characteristic of the trading company is managing this inventory correctly in shipment and distribution from the manufacturers or wholesalers to the customers with much efficiency.
Sales-Oriented Operations
The trading company has a vast concentration on sales as its objective. All the activities in the business are related to the selling of the products to generate maximum profitability.
Strategic Relationships with Suppliers and Customers
The trading companies need to establish and nurture solid relationships with suppliers and customers for an excellent functioning. The trading entity also sells its products directly to consumers either through physical retail space or through an online medium, in order to be more accessible and serve the consumers better.
How To Start A Company in Indonesia
Starting a company in Indonesia can be done within a few steps. Some of the explanations of each step are given below.
Step 1: Determining the Type of Company
It is necessary to decide, before incorporating a company, the type of company to be opened. It’s a basic decision, as this would give the foundation for the requirement for capital, the risk in the business, and also the structure through which the operations of the company will be held. This will help in projecting the financial requirements, assessing the risks involved, and laying out the roadmap for how the company will be run in the future.
In this respect, steps will be brought out on how to establish a Limited Liability Company, PT, being one of the common structures.
Step 2: Requirements to Establish PT
According to Article 7, Paragraph (1) of Law No. 40 of 2007, a Limited Liability Company is a company which is founded by at least two persons or more, either individuals or legal entities, in the form of a written agreement. The beginning of its title shall be named “Perseroan Terbatas” or abbreviated as PT. In that respect, the establishment of the PT should be executed in the form of an authentic deed before a notary, who then will draw up an authentic deed of incorporation.
The authorized capital for the establishment of the PT shall at least be IDR 50,000,000, as stated in Article 31 of Law No. 40 of 2007. For certain sectors, however, minimum capital requirements differ according to the particular regulatory law of that industry.
Step 3: PT Registration
The process of the registration of establishment of PT is documented through some formalities, each of which is vital for the legality of the company. The steps to be followed in the process of registering a PT in Indonesia are highlighted below.
Submission of Company Name
The name of the proposed company shall be submitted through the SABH system by mentioning the name to the Ditjen AHU. It has to suit Indonesia’s regulations and shall not be similar or used by another registered company.
Company Domicile
Domicile is the legal address-headquarter of the company. The domicile must be indicated in the deed of incorporation, also referred to as the statutory domicile of the company. All legal questions regarding the PT shall be performed here.
Purpose and Objectives
Article 3 of the deed of incorporation designates the purposes and objectives that PT will pursue. Based on this, it should be indicated in this article what kind of business activities will be performed by the company. Accordingly, in trying to determine those activities, the following shall be brought into consideration:
- The company is entitled to freely choose any business activity to conduct so long as it is not prohibited by law.
- The activities should be named in the constitution deed.
- The business activities that are going to be carried out must match the KBLI.
- Certain industries, for instance, restaurants, need to get additional licenses, such as a restaurant license.
Capital Structure
The PT capital structure must be articulated in the deed of establishment, comprising authorized capital, issued capital, and paid-up capital. This is legally and operationally important because this would give the financial structure of the company.
Notarized Deed of Incorporation
The notary has to prepare the deed of incorporation, which will legalize the establishment of the company together with its articles of association, capital structure, and shareholders.
NPWP of Founders
The founders should provide the NPWP in the name of the founders of the PT during incorporation.
Business Domicile Certificate (SKDU)
Business Domicile Certificate, SKDU, must be obtained from the head of the local sub-district. This document should prove the legal address of the company and will be used for further registration.
Founders Identification Documents
The founders will be required to provide legal identification documents in ID card format during the registration process.
Registration of Deed of Incorporation with Ditjen AHU
The draft deed of incorporation, once ready, shall be registered with Ditjen AHU under the Ministry of Law and Human Rights via the SABH system. Upon registration, it will get a Decree of Establishment or an Approval, which legalizes the company.
NPWP of the Company
The NPWP will be automatically generated once the registration process is done via the SABH system. It integrates with the DG Tax system. Later, the NPWP card can be printed from the local tax office which covers the place where the company is domiciled.
Business Licensing through Online Single Submission (OSS)
The last step is to obtain licenses for the sector in which the firm will operate through the OSS system. The OSS is integrated with the SABH system in such a way that the business activities of the PT are aligned with its licensing. In this respect, the OSS shall grant the firm a NIB, as well as other permits if required, with respect to the needs of its sector.
Conclusion
Starting a trading company in Indonesia can be quite fulfilling because the market is both lively and multivariate in its sets of opportunities. These steps in this article provide the base from which any business should take off and subsequently sail through the intricacies of the trading landscape. Understanding legal requirements, market research, formulation of a business strategy, to establishing partnerships-all these steps have equal relevance to your success.
Whichever way one considers, professional advice is bound to give good insight and probably see you through those trying times and support making the right decisions. Let Viettonkin Consulting guide you professionally to meet your needs. Our team will support you with our regulatory experience, develop your business strategy further, and help you contact the most relevant industry players.
Once ready and raring to go with your trading company, take a leap into the vibrant economy of Indonesia. Establish a profitable business, for oneself, yet one that sincerely serves the wheel of contribution at the local level and beyond, by commitment and with an approach proper to the end.
Please do not hesitate to contact Viettonkin Consulting for further information and personal advice. We want to stand by your side at every step in starting your business. For further details about Vienttokin Consulting, please click here.
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