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Types of Business entities
General

The foreign investment company (Penanaman Modal Asing or PMA) is the most common vehicle for foreign investment (see below under PMA). Other vehicles used by foreign investors in Indonesia include:
  • branch of a foreign company
  • representative office
  • regional representative office.
Branch of a foreign company
A foreign company wishing to establish a branch in Indonesia will only be authorized to do so in certain circumstances. In practice, only banks and oil and gas companies have been able to establish branch offices. The majority of branch office operations in oil and gas are based on “production sharing contracts”. The production sharing contract is a business agreement between a foreign company and an Indonesian company where revenues are divided according to the agreement and the Indonesian company develops and manages the project.

Representative office
With exceptions (including banks which must apply to Bank Indonesia for a representative office permit), foreign companies may establish a representative office in Indonesia after obtaining a license from the Department of Trade (Departemen Perdagangan) or from BKPM. This type of business entity cannot conduct business or receive income and it does not have the authority to contract on behalf of its foreign parent. A representative office is restricted to promotional, quality control or procurement work. This type of business entity is a good option for a foreign corporation testing the Indonesian market or for raising local awareness of its goods and/or services.

Regional representative office
Application for the establishment of regional representative offices (Kantor Perwakilan Wilayah Perusahaan Asing) must be made to BKPM. Multinational corporations may establish regional representative offices.
Foreign investment company Indonesian law recognizes three (3) forms of companies;

1. General Indonesian companies (Perseroan Terbatas Biasa), these are 100 per cent Indonesian-owned and subject to the MOLHR company regulatory regime.

2. Domestic capital investment companies (Penanaman Modal Dalam Negeri or PMDN), these are 100 per cent Indonesian-owned, able to take advantage of taxation facilities, and            subject to the MOLHR and the Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal or BKPM) company regulatory regimes.

3. PMA companies (Penanaman Modal Asing), these are wholly foreign-owned or may be established as a joint venture and partly owned by foreigners and Indonesians. A former limitation of 30 years on business licenses for PMA companies has recently been abolished and a business license is generally perpetual, subject to the PMA company continuing to operate its business, able to take advantage of taxation facilities, and subject to the MOLHR and BKPM company regulatory regimes.

BKPM must approve most foreign investments in Indonesian companies. Where the PMA is 100 per cent foreign-owned, previous foreign investment rules required divestment of an unspecified percentage of shares to Indonesian interests within 15 years (as a rule of thumb, 5 per cent was considered acceptable).

The Foreign Investment Law No. 25 of 2007 (Undang Undang Penanaman Modal Asing) abolishes the divestment requirement. However, it has not yet been settled as to whether this applies only to newly incorporated companies or extends to companies which were incorporated under the previous regime.

PMA companies are permitted to establish subsidiaries. However, the parent PMA company cannot merely act as a “holding company” and must conduct a business in its own name.

PMA and PMDN companies are subject to regulation by both the MOLHR and the BKPM and industry-specific company regulatory regimes. As such, the PMA company, as distinct from general Indonesian companies, is subject to different obligations and enjoys different incentives, although the stated policy of the government is to eventually have one regulatory regime for all companies.

The PMA company may take advantage of taxation facilities offered to PMDN and PMA companies (this relates mainly to exemptions from duties on import of equipment, referred to as “Master List” equipment), and must submit a report on its business activities (Laporan Kegiatan Penanaman Modal or LKPM) to BKPM every year.

The Foreign Investment Law contemplates that certain tax benefits conferred upon PMA and PMDN companies will now be extended to general Indonesian companies.

In December 2009, BKPM issued a regulation which is intended to make BKPM a “one-stop shop” with respect to licensing of PMA companies. In other words, BKPM will be able to issue both general and industry-specific business licenses, rather than a PMA company being required to approach industry-specific departments for additional licenses.