Doing Business in Indonesia

Gain a better understanding of Indonesia’s business environment and structure by reading through this guide.

Establishing an entity

Foreign businesses may establish a Limited Liability Company (LLC) or a representative office. Due to the limitation of liability offered, the most common entity used by investors looking to earn profit/income is a LLC. In most cases, a representative office is not permitted to earn profit/income and therefore is only considered when the purpose of the entity is to provide services to an overseas head office (e.g. data collection, handling promotional activity, checking quality and/or providing after sales support). The trade representative acts as an advisory liaison between the principal and the Indonesian firm. License for representative office is given for 3 years and can be extended for 1 year, twice.

Many foreign investors entering the Indonesian market at an early stage usually choose to set up an Agency Agreement or a Representative Office. However, once the business starts to grow they will apply for Foreign Direct Investment Company (FDI) status.

The Limited Liability Company registration is a three-phase process. It requires a minimum of 2 share holders and upon registration of the company, the shareholders must pay a minimum of 25% of the Authorised Capital into the company. It is required for the company to be managed by a Board of Directors, which in turn should be supervised by a Board of Commissioners. Both Boards are appointed by the shareholders.

Foreign business restrictions

A foreign business is any business with even the smallest percentage of foreign shareholding. The type of business activity dictates the level of foreign ownership permitted.

The government of Indonesia opens foreign investment opportunities to a long list of industries, some of which may require local equity partnership or other conditions.

For some commercial activities that include tourism and mining, having an Indonesian partner is obligatory with the percentage of equity required varying across the different fields of activity.

Some activities permit 100% foreign ownership, others, less. There are some areas that are protected from foreign investment and reserved only for Indonesians, in particular small ventures that include agricultural, handcrafts and informal sectors. A more complete list of these areas can be found in the latest Negative Investment List in the Presidential Regulation of the Republic of Indonesia No. 44/2016 issued in May 2016.

Foreign capital investment is governed by the Indonesian Investment Coordinating Board (BKPM), which administers and approves foreign capital investment in the majority of economic sectors. Investments in oil and gas, mining, banking, finance and insurance industries also require approval from the related ministries. BKPM is the one-stop government agency for foreign investors regarding all approvals, licenses and permits required to establish a company. Once the Investment Approval is issued, the investor can set up an Indonesian company, which will usually take approximately 2 months to complete.

In 2015, the BKPM launched a 3-hour investment licensing service for foreign investors with a minimum investment in Indonesia of IDR 100 billion and/or a plan to employ more than 1,000 workers.

Investment incentives

The Law No. 25/2007 concerning investments stipulates the incentives that may be obtained by a foreign limited liability company. Incentives may take the form of:

Income tax through a reduction of net income to a specified extent based on the total investments made within a defined period;
Exemptions or relief on import duty of production capital goods, machines, or equipment not yet produced domestically;
Exemptions or relief on import duty of production raw materials or components for a finite period and with specified requirements

Work permits and visas

Visa to enter Indonesia

In 2015, Indonesia has implemented a large visa-waiver policy which has waived visa requirements for citizens of more than 150 countries. Citizens of those countries are eligible to enter and remain in Indonesia without a visa for a maximum of 30 days.

The full list of countries entitled to visa on arrival or free visit visa may be accessed by contacting your local Indonesian Embassy.

Temporary Residence Visa (KITAS)

KITAS is issued to work permit holders, students and dependents of Indonesian citizens or foreigners with a work permit. This visa, which requires a sponsor, is valid for up to 12 months. It is subject to authorization from the Immigration Office in Indonesia.

Business Visas

The government issues business visas for those visiting the country for normal business activities including attending a conference, provided their visit does not involve taking up employment or paid work. There are 2 types of business visas:

(1) Single Entry Business Visa

This visa is valid for a maximum stay of 60 days but can be extended up to 4 times on a monthly basis by the Immigration Department to give a total maximum stay of 6 months. This visa is easier and cheaper to obtain. It is also useful for buying trips, negotiations and consultations. The visa however, does not permit you to ‘work’ in Indonesia, the definition of which is as determined by the Immigration Office.

(2) Multiple Entry Business Visa (MEBV)

This visa is valid for 12 months and is more convenient if you have to travel to Indonesia on a frequent basis. You may enter and leave Indonesia at any point of time within the 12-month period, but you are required to leave the country every 2 months, which is the maximum stay permitted. It is issued by the Indonesian embassy in your country with the authorization of the Immigration Office in Indonesia. When applying, your business counterparts/sponsors in Indonesia must apply locally on your behalf.

Work Permit

Organizing a work permit in Indonesia can be a complicated and lengthy process. Company sponsorship is required for any foreigner who wants to work in Indonesia. In order to protect the local job market, there are strict guidelines to determine who can be issued a work permit. National, multinational or joint venture firms must submit a manpower plan to the Department of Manpower detailing their annual foreign labour requirements. A domestic company planning to hire a foreigner must submit an Expatriate Placement Plan (RencanaPenempatan Tenaga KerjaAsingorRPTKA). Once the RPTKA is approved, a work permit (IzinMempekerjakan Tenaga KerjaAsingorIMTA) and limited stay permit (KartuIzinTinggalTerbatasor KITAS) are issued. This requires payment of an annual Skill and Development Fund fee (DPKK) amounting to USD 1,200 per foreigner.

Taxation

The main business taxes in Indonesia are value-added tax (VAT), income tax and corporate income tax.

Indonesia’s VAT has also become a major source of revenue for the government. VAT applies to the import and delivery of most goods and services. Insurance and banking are not subject to VAT.

VAT is collected at a standard rate of 10% but for some services the VAT effective rate is 1%. In addition, luxury tax varies from 10% to 200%. For the exportation of goods, the VAT is zero. Taxpayers are required to file returns with details of all output and input VAT in the following month. The monthly VAT report must be filed by the end of the following month and net output VAT should be paid before filing.

Income tax is applied to resident corporations and individuals on most sources of increase in economic wealth. Income tax is collected both directly and at source through a wide range of withholding taxes. Individuals who are residents in Indonesia for more than 183 days in any 12-month period or who intend to settle in Indonesia are taxed on their worldwide income and are generally allowed a credit for taxes paid abroad. Non-residents are taxed only on their Indonesian-sourced income.

The corporate tax rate was reduced to 25% in 2010. Starting July 2013, micro, small and medium-sized business (MSMEs/UMKM) with turnover of up to IDR 4.8 billion (USD 370,000) are subject to 1% final income tax. Companies with a turnover of less than IDR 50 billion (USD 3.8 million) are categorised as MSMEs/UMKM and may have a tax discount from the tax rate of 25% depending on their revenues. Companies that list at least 40% of their shares on the Indonesian Stock Exchange will have a tax cut of 5% from the top rate. This provides an effective tax rate of 20%.

Audit and accounting

All public listed firms, state owned companies, firms handling public money (banks, insurance companies) and companies having a turnover above IDR 50 billion (USD 3.8 million), must have their accounts audited by a registered Indonesian CPA.

Indonesia’s stated policy is to maintain its national GAAP and gradually converge it with IFRS. As of 1 January 2017, Indonesia has converged to IFRS applicable as of 1 January 2016 (one year gap difference).

Country quirks

Accounts must be prepared in local language (Bahasa Indonesia) for tax purposes.