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Foreign Investment Policy
 
General
Foreign investment is encouraged as an important step towards the revitalization of the Indonesian economy and continued development of the country in general. Foreign and domestic investment is administered by the BKPM. The BKPM Chairperson is also the Minister of State for Mobilizing Investment Funds and a member of Cabinet. The MOLHR is the primary board that regulates the Company Law and the Foreign Investment Law. These two pieces of legislation are of primary importance to foreign investors. The BKPM must approve newest foreign investment and expansion of existing projects. Foreign investment and expansion of existing projects in the industries of oil and mining, banking and non-bank financial institutions need the approval of industry-specific regulating bodies.

 
Foreign Investment Law
Indonesia’s previous Foreign Investment Law No. 1 of 1967 established the BKPM (and later its regional offices) to approve foreign and direct investment for all industries except (among others) the banking, insurance, mining, oil and gas industries where investment approval must be sought from other relevant government departments. The BKPM and its regional offices liaise with MOLHR, the Department of Finance and the Department of Manpower and Transmigration (Departemen Tenaga Kerja dan Transmigrasi) as well as regional and local authorities in respect of investment by foreigners and locals.

Regional autonomy laws enacted in 1999 have complicated the current situation with the BKPM and provincial and regency governments now both being authorized to approve foreign investment, which undermines the one-stop-shop concept of the BKPM (among others). In other words, besides processing approval in BKPM in Jakarta, investors now also have to process other investment-related licenses in regional BKPM offices where the investment will be located. If an investment is located in a cross-border region which involves more than two regions, investors must deal with all respective local governments, each of which may require different application procedures.

The new Foreign Investment Law came into effect in April 2007. Some of the key features of the new law are:

  • tax incentives and improved property rights for Indonesian investment companies, both domestic and foreign-owned
  • equal treatment of foreigners and locals, providing for compensation at market value in the event of nationalization of assets, and granting rights to transfer and repatriate profits
  • a host of government incentives (if certain criteria are met) such as reductions in corporate tax, exemptions and reductions in import duties and reductions in property tax for various qualifying investments such as projects in labor-intensive industries, infrastructure, promotion of technology transfer, and involving scientific research and innovation
  • granting stronger property rights to foreign investors; for example, subject to satisfaction of certain specified requirements, longer land title periods such as: The Right to Cultivate (Hak Guna Usaha) for up to 95 years (previously 35 years); and the Right to Build (Hak Guna Bangunan) for up to 80 years (previously 50 years)
  • prohibition against nominees holding shares on behalf of other parties
  • removal of the requirement for foreign investors to divest a portion of their shareholdings in Indonesian companies after 15 years
  • easier immigration procedures for obtaining residence permits and multiple entry visas
  • an enhanced role for BKPM which it is proposed will now serve as a one-stop licensing and service center for all investors
  • the introduction of special economic zones (Kawasan Ekonomi Khusus) to accelerate economic development in certain regions.

Restrictions on investment
The Indonesian government determines industries closed to foreign investment through the Negative Investment List (Daftar Negatif Investasi), which in theory is to be issued every three years unless revised earlier. The previous Negative List (Presidential Regulation Number 77 Year 2007 Regarding List of Business Fields Closed and Open to Investments on Certain Conditions as amended by Presidential Regulation No.111/2007) was recently replaced by a new Negative List issued on 25 May 2010 (Presidential Regulation No. 36/2010). This Presidential Regulation specifies business lines which are closed absolutely to all private investment, closed absolutely to foreign investment and open to foreign investment subject to restrictions. The new Negative List opens up certain industries to greater foreign investment whilst reducing or closing foreign investment in other sectors. The structure of the new Negative List has also changed. Under the new Negative List, prohibited or restricted activities are now categorized by reference to “sectors” as opposed to “business lines” under the old Negative List. Subject to the transitional provisions discussed below, the New Negative List applies to all investment in Indonesia on and from 25 May 2010.

Significantly, the new Negative List:

  • introduces new categories in respect of entities carrying out geothermal activities, including Geothermal Drilling Services, with a maximum 95 per cent foreign ownership, and Geothermal Power Plants, with a maximum 95 per cent foreign ownership
  • introduces a new category of Internet Service Provider with a maximum foreign investment of 49 per cent
  • increases foreign investment limits in respect of some categories of construction from 55 per cent to 67 per cent. However, there are a number of categories, including Construction Consultancy, which retain the maximum limit of 55 per cent foreign shareholding as set out in the old Negative List ·continues to prohibit both domestic and foreign investment in the alcohol production industry and gambling and casinos.

The new Negative List contains transitional provisions which, whilst somewhat unclear, provide that, to the extent that a company with foreign investors has already received an investment license from BKPM, the shareholders will not be required to divest shares to comply with the new restrictions on foreign investment. Our interpretation of this is that if a PMA has already obtained a permanent business license (Izin Usaha Tetap) (IUT), shareholders will be permitted to hold shares in accordance with the limits imposed under that IUT. However, if the PMA increases its capital and, as a result, its foreign investment exceeds the maximum limit imposed by its existing IUT, then within two years the foreign investor(s) must divest to the limit imposed by the existing IUT.
 
 
Nominee arrangements
Nominee arrangements have traditionally been commonly used in Indonesia where foreign investors wish to invest in areas that are closed to foreign investment. The concept of “trust” or “beneficial ownership” is not specifically recognized under Indonesian law. It has always been unclear, therefore, whether an Indonesian court would uphold a written agreement providing that an Indonesian shareholder holds shares on trust for a foreign investor. The idea of nominee arrangements is that the foreign investor obtains as much control as possible and is put in a position, insofar as it is possible, comparable to that of a registered shareholder.

The Foreign Investment Law now prohibits agreements whereby one party declares that it holds shares on behalf of another. This is clearly an attempt to abolish nominee structures. It is not yet clear whether this will result in loan/security structures, which are designed to have the same effect as nominee arrangements but do not refer expressly to one party holding shares on behalf of another, being struck down.

 
Franchising in Indonesia
The concept of franchising has been known in Indonesia since the 1970s, although laws on franchising were enacted only in recent years. In the early 1990s there was a boom for foreign franchisors in Indonesia. In the absence of any Indonesian franchise laws, however, foreign laws were used in franchise agreements, which were perceived as both unfair and at times incomprehensible to Indonesian franchisees and which Indonesian judges were reluctant to apply in the event of disputes. Further, in a highly bureaucratic society where multiple licenses and permits may be required from various government departments for almost any conceivable form of business activity, some confusion existed as to which department had ultimate control over a franchise arrangement. As a result, the government enacted the first franchise law in 1997. In 2007, the Franchise Law was changed with the introduction of Government Regulation No. 42 of 2007, which has since been supplemented by the Regulation of the Minister of Trade No. 31/ M-Dag/Per/8/2008.

The objectives of this law are to establish certainty, protection for Indonesian franchisees and, where possible, to foster local business development. While the Franchise Law now requires a franchise agreement to be executed in the Indonesian language, governed by Indonesian law and to include specific matters, ultimately the commercial arrangements remain a matter for negotiation between the parties. To prevent exploitation of a local franchisee, however, the Minister of Trade and Industry is granted authority under the Franchise Law to request changes be made to a franchise agreement. The elucidation to the Franchise Law provides that the franchisor is obliged to “nurture, guide and train” the franchisee. Assistance and facilities offered to the franchisee by the franchisor include financial assistance, marketing assistance, book-keeping assistance and work guidelines.

Foreign franchisors are now required to register a prospectus with respect to the franchise at the Department of Trade before execution of the franchise agreement (which replaces a former disclosure statement requirement). Information about the franchisor and its business including the profit and loss statement for the last two years and experience and details of past and current franchise arrangements must be disclosed as well as details of proposed technical assistance and intellectual property rights. Evidence of the identity of corporate franchisors obtained from the authorities in the country of incorporation must also be provided. The disclosure requirement is intended to provide particular protection to the franchisee as opposed to the franchisor.

The Department of Trade and Industry will issue a Certificate of Franchised Business Registration once all disclosure and documentary requirements have been fulfilled. While the Department now has ultimate authority in relation to the registration and deregistration of franchises, in practice multiple licenses must still be obtained by franchisees from various government departments with jurisdiction in the area of the franchisee’s business. On termination of a franchise arrangement, the Department will not deregister a franchise until it has received a written statement signed by the franchisor and franchisee confirming that all obligations between the parties have been settled.

Under the Franchise Law, the franchisors are required to give priority to small and medium-scale enterprises as franchisees and sub-franchisees and/or suppliers. Franchises are only permitted in provincial capitals and other particular cities or places in second-level regions as the Minister of
Trade and Industry will stipulate from time to time, which is intended to promote small industry.

Government initiatives and incentives
A broad range of deregulatory and de-bureaucratization measures have been taken by the Indonesian government to enhance the investment climate. Licensing requirements have been streamlined and a new raft of legislation has addressed various long-standing concerns of the business community and provides new legal certainty in areas such as franchising, intellectual property and bankruptcy. Furthermore, the Negative List has been amended, increasing the number of sectors open to foreign investment. Import and export sectors now enjoy reduced tariffs and duty exemptions in certain circumstances. There is no formal minimum capital requirement for company incorporation in Indonesia, although in practice the BKPM will undertake its own examination of the capital adequacy of the project and generally requires a minimum issued capital of US$250,000. There is unlimited transfer of foreign capital and, as discussed above, 100 per cent foreign-owned companies are now permitted.

A number of governments provide investment guarantees to foreign investors in their countries. In most cases, these guarantees cover compensation in case of nationalization or expropriation, damages or losses caused by incidents of war, revolution or insurrection and payments for any approved remittance pursuant to the investment in case of non-convertibility of currency of the host country.

To provide security for foreign investment, the government of Indonesia has concluded investment guarantee agreements with ASEAN governments. In addition, Indonesia has signed bilateral investment promotion and protection agreements with 60 countries, namely: Argentina, Algeria, Australia, Bangladesh, Belgium, Luxembourg, Bulgaria, Cambodia, Chile, People’s Republic of China, Croatia, Cuba, Czech Republic, Denmark, Egypt, Finland, France, Germany, Hungary, India, Iran, Italy, Jamaica, Jordan, Kyrgyzstan, Laos, Malaysia, Morocco, Mauritius, Mongolia, Mozambique, the Netherlands, North Korea, Norway, Pakistan, the Philippines, Poland, Qatar, Romania, Singapore, Slovak Republic, South Korea, Spain, Sri Lanka, Sudan, Suriname, Sweden, Switzerland, Syria, Tajikistan, Thailand, Tunisia, Turkmenistan, Turkey, Ukraine, United Kingdom, Uzbekistan, Venezuela, Vietnam, Yemen and Zimbabwe.

To create a favorable international investment climate, Indonesia has also signed multilateral agreements to promote foreign direct investment in Indonesia. Indonesia is now a member of the Multilateral Investment Guarantee Agency, which will protect investment against various political risks. To deal with foreign investment disputes, Indonesia has become a signatory member of the International Centre for Settlement of Investment Disputes and is a party to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards.