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Company Incorporation in the Republic of Indonesia

Many Australians have an introduction to Indonesia through its holiday gateway of Bali.

Bali is to Indonesia what Shanghai is to China, a western friendly concession to a depth of little understood possibilities.

Many Australians are taking advantage of retirement and business opportunities in the growing people to people relations between Australia and Indonesia. The opportunities are underpinned by an outstanding broad-based transition from military rule to truly pluralist participatory democracy in a far-flung archipelago which makes Australia’s version of multiculturalism and tolerance look very white-bread in comparison.

Underneath this is a framework of law which is also pluralist: involving Dutch language civil code, Indonesian language statutes and active reliance upon religious or customary law with the status of law within its scope or particular ethnic group.

It is therefore clear that when respectable capital amounts become involved in such a system, it is important to understand the application of the legal system to the rights in corporate governance and operation and how to get the right advice for your clients.

Indonesia as one of the ASEAN countries which has promising economy growth has been attracting many investors to invest their resources in this country. Not only local investors but also foreign investors bring a source of funds to operate a business in Indonesia. Some of the most popular main small to medium size businesses are goods and services trading, production, villa and hotel management, retail, and property trading.

There are 3 types of company used by the investors to conduct their business in Indonesia. These are CV (Commanditair Vennotschapt), Local PT (Limited Liability Company), and PT PMA (Limited Liability Company with Foreign Direct Investment). However, from these 3 companies, the company which is only available for foreign investment is the PT PMA.

The PT PMA is the legal vehicle for a company which has foreign shareholders. The advantage of having a PMA company is that you can hold the shares in your name and that the regulations guarantee foreign investors the following rights:

 (i)                 Freedom from expropriation without just compensation;

 (ii)               Right to remit profits, capital gains, and dividends within the guidelines of the Bank of Indonesia;

 (iii)             Right to remit the proceeds of the liquidation of investments; and

 (iv)             Right to obtain foreign exchange to meet principal and interest payments on foreign obligations.

The point that needs to be noted is that not all of business activities can be conducted by a PMA Company. Some businesses might be restricted for a PMA Company, some business might be allowed for certain percentage of shareholding to be held by foreigner, and some business might be allowed up to 100% foreign capital. On that basis, the government of Indonesia had issued a Government Regulation (Peraturan Pemerintah/PP) number 36/2010 regarding The Negative List of Investment as a guidance for the foreign investor who wish to conduct a business in Indonesia. In this List the investors may find out the percentage of shares that can be held by them for their particular business prior to establishing a PMA Company.

In Indonesia it is important for potential investor to note that the Public Notary is not allowed to provide legal advice. The notary is a public officer who has an obligation to the transaction, to authenticate it and to ensure it is free from fraud. They do not give advice to a party to the transaction. The investor should have the services of reputable law firm to guide them through this process.

Establishing a PMA Company

The process of establishing a PMA Company may take 4-6 months to completion. The process is as follows:

(i) Checking the company’s proposed name to the Ministry of Law and Human Rights

The purpose of checking the name is to avoid two companies using the same name or using a name which has no relation to the company’s main business. It is helpful if the investor provides 3 preferences of the name. The approval of the name is solely the discretion of the Ministry and there is no guideline provided for the investors in regards to determining the company’s name. If the Ministry rejects the propose name, we need to propose another name until they approve it.

(ii) Making the application for Investment Approval from BKPM (Badan Koordinasi Penanaman Modal/ Investment Coordinating Board) and obtain SP (Approval Letter)

Once the proposed name is approved and booked by the Ministry, we need to make an Investment Application to be submitted to BKPM (Badan Koordinasi Penanaman Modal/ Investment Coordinating Board). In this Application we need to set out the capitalization, shareholding composition, the Board of Director and Board of Commissioner structure including their personal details, such as name, ID card number, address, and nationality, a concise summary of the activities that will be conducted by the company including the employing plan, location of the project, and location of the company’s office.

In regards to the location of the project and the company, we also need to provide a copy of lease agreement (if the premises is leased premises) or a copy of the land certificate (if freehold land or HGB (Hak Guna Bangunan/ Building Use Title)).

(iii) Engross the Akta Pendirian (Articles of Association) of the company before a public notary

After the SP PMA (Approval Letter) is issued, we need to draw up the Article of Association of the company before a public notary. The Article of Association will incorporate all details of the company including the mechanism of the corporate action that will be taken by the company.

The details of the company such as the name of the company, domicile of the company, the main business of the company, the capital amount and structure, the shareholding/ shares composition, Board of Director and Board of Commissioner structure as set out in the Article of Association. These included in the mechanism of the corporate action to be taken such as the process and terms of holding a Annual Shareholders Meeting and Extraordinary Shareholders Meeting including the rights and obligations of Director(s) and Commisisoner(s).

In regards to the company’s capitalization, it needs to be noted that for a PMA Company, the minimum total capital or investment to be put in the company is USD 250,000 (two hundred and fifty thousand United States Dollars). From this total investment amount, minimum 25% of the amount must be subscribed by the shareholders. But for main business which needs a large amount of capital such as a hotel project, the minimum capital or investment may be up to USD 1,000,000 (one million United States Dollars).

(iv) Obtaining licenses and permits.

After the Article of Association of the company is obtained, we need to procure the licenses and permits for the company as required by the government. Please note that licenses and permits for each main business may vary. The basic licenses and permits for a company are as follows:

- Company’s Domicile

This is a statement from the government about the domicile or address or location of the company’s office. This statement is signed by Head of Community, Head of Village, and Head of Suburb.

- Nomor Pokok Wajib Pajak (NPWP) or Company’s Tax Number, and also the Director’s Tax Number

- Legalization from Ministry of Law and Human Rights.

This Legalization is to legalize the Article of Association of the company and to legalize the company as a legal entity according to the laws of the Republic of Indonesia.

- Tanda Daftar Perusahaan (TDP) or Company’s Registration Number

The company then needs to be registered at The Trade Department and will be given this Registration Number.

- Surat Ijin Tempat Usaha (SITU) or Location Permit and Hinder Ordonantie (HO) or Nuisance Permit

This permit can be also called as SITU/HO. This permit is issued by The Head of Regency to allow the company to conduct its business in a certain premises and during a certain working hours.

- Ijin Usaha Tetap (IUT) or Permanent Operational License

This License is issued by BKPM (Foreign Investment Coordinating Board) in Jakarta. After obtaining this license, a company can start conducting their business in Indonesia.

- Share Certificates

This Certificate needed to identify the shares and the holder of the shares in the company.

- Publication in the State Gazette

The Publication purpose is to announce the establishment and the existence the company in Indonesia as a legal entity under the laws of the Republic of Indonesia.

For certain business, such as hotel project, will need any other licenses and permits to run its business. Those licenses are Ijin Mendirikan Bangunan (IMB) or Building Permit with hotel purpose, Hotel License, and UPL/UKL (Environmental Study).

(v) During the process of obtaining the licenses and permits the company needs to open a company’s bank account and deposit the capital of the company. The company’s bank account is needed not only for the funds circulation but also for tax purpose.

For the establishment process, there are some documents that need to be prepared and submitted to the government authorities, such as

  1. The copy of Article of Association of the Foreign Company (if one of the shareholders is a Foreign Company).
  2. Copy of Identity Card or Passport (if shareholders are foreigners) and KTP (if having an Indonesian citizen as shareholder).
  3. Copy of Passport of KTP of Director and Commissioner.
  4. Copy Certificate of the land where the premises are located or the Lease Agreement.
  5. Copy of NPWP Card (Nomor Pokok Wajib Pajak) / Tax Number card – if you have an Indonesian as shareholder.

After the establishment of the company has occurred, the company or the management of the company will have obligations to perform the following tasks.

  1. To report the income, profit/loss statement, and its tax monthly and annually to the Tax Department.
  2. To renew the permits and licenses every 5 years, such as SITU/HO (Location and Nuisance Permit) and TDP (Company’s Registration Number). All these permits are valid for only 5 years
  3. The company will need to fill in a form namely Wajib Lapor Ketenagakerjaan (Employee Report) to report the details of employees employed in the company under The Law Number 7/1981, and the company has to make the report every year to the Labour Department.
  4. If the company has more than certain number of staff / employees (as determined by the government regulation), the company needs to register all of its employees to Jamsostek (Jaminan Sosial Tenaga Kerja or Labour Social Insurance) and the company must provide the Company Regulation to be legalised by the Labour Department.
  5. The company will need to fill out the LKPM (Laporan Kegiatan Penananam Modal or Report on the Investment Activities) every three months (if the company has not obtained its IUT or Permanent Operational License) and every six months (if the company has obtained its IUT or Permanent Operational License). This LKPM then need to be reported to The BPM (Local Foreign Investment Board).

For all of the above process lawyers from a reputable law firm in Indonesia are able to carry out all the steps.

Be wary of using agents, friends, non-lawyers, or a service company to establish your company because there is a danger that you may expose yourself to risks under both Indonesian law and Australian law which operates extra-territorially or may deny deductibility to certain expenditure undertaken by agents.

The law as known to lawyers is increasingly robust and enforced as the days of military privilege and discretion recede into history.

Considering the long process of establishment, the investors have to bear in mind that investing and establishing a company in Indonesia is a continuing process and strictly supervised by the government. Once they establish a company that means they are not only followed by rights and profits but also obligations to the government and the environment. This is to ensure the continuance of their investment so that it will comply with Government regulations and the local culture.

Greg Finlayson is a member of the Lawasia committee of the Law Society of South Australia. He is fluent in the Indonesian language and able to liaise with Indonesian practitioners and firms with specialist expertise in a range of areas. The core content of the above article is provided by Austrindo, a Bali based commercial firm affiliate.