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.