Source: http://eibn.org/en/page/bizguide_content/4
Timestamp: 2019-04-18 16:36:46+00:00

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Like most developing and emerging countries, Indonesia continuously seeks to find a balance between ensuring the maximum benefit from foreign investment for the local economy, attracting capital and expertise, and protecting local companies against foreign competition. Driven by political pressures, the regulations on foreign investment occasionally change.
Indonesia’s consumer market, abundant workforce, growing economy, changing society and strategic position as a potential hub for ASEAN, places the nation among Asia’s top investment destinations. In recent years, various administrations have recognised Indonesia’s potential for foreign investment, while simultaneously being cautious of opening up the market. Overall, recent policy strategies indicate that Indonesia is not ready to give up on, or reduce, the burden of its complex foreign investment regulations. In fact, foreign companies are not allowed to invest in certain business sectors and in most cases the procedure of licensing products and services remains a complex matter. Nevertheless, measures have been taken to facilitate procedures related to foreign-owned businesses and investment. This has been witnessed in the re-structuring BKPM’s mandate (Investment Coordinating Board of the Republic of Indonesia) and in the progressive deregulation and liberalisation of some sectors of the economy.
According to expert’s experience, the easiest way for a foreign company to establish an economic presence, or to do business in Indonesia, is by direct investment in the form of a legal entity incorporated under Indonesian law.
This legal entity can be either established as a legally independent subsidiary of the foreign company, in the form of a Representative Office (KPPA or K3PA) if the branch is merely an extension of its foreign mother company, or a limited liability company (PT PMA). Any plans by foreign (and domestic) investors need to be approved by BKPM, the government agency that has been given authority by most of the ministries to review and approve investment. Moreover, BKPM is able to facilitate meetings with representatives of the ministries and to ensure that companies can gather the necessary information to be ready for a face-to-face conversation.
BKPM is a non-departmental government institution commissioned to formulate government policy in the field of both domestic and foreign investment in a wide range of sectors. BKPM was established by the Investment Law of 2007. Previously, investment plans in the financial, energy and mining sectors have been reviewed separately by other entities, but now they are being gradually transferred and integrated within BKPM authority.
The service and speed of the approval process have generally improved in recent years. Some of the ministries are, however, trying to regain some control over the investment procedures in their sector by instructing the BKPM to incorporate additional requirements. These requirements sometimes include a consultation with a ministry before an approval can be issued. As a result, these additional administrative hurdles can complicate the procedure and result in delays.
In order to simplify Indonesia’s investment procedures BKPM has launched a one-stop-shop integrated service (PTSP) and an electronic automation platform for investment licenses and non-investment licenses (SPIPISE-NSWi). Please refer to our Resources and Contacts section.
The following paragraphs provide an overview of the procedures and regulations in terms of registering your business, licensing, as well as other essential benefits and challenges, to be considered before conducting business in Indonesia.
As clearly stated in Indonesian legislation; “a foreign company or a group of foreign companies may open a Rep. Office in Indonesia to represent and manage its / their interests, or to prepare the establishment and development of their business in Indonesia”3.
Engage in any agreement or transaction for the sale or purchase of goods and services with an Indonesian company or Indonesian national. As such, the main foreign company is the only one through which all transactions can be handled.
There are two types of representative office in Indonesia: a general Rep. Office (Kantor Perwakilan Perusahaan Asing-KPPA) and a Rep. Office for trading (K3PA).
The KPPA provides a certain time frame in which to register for a PT PMA, or until the volume of business reaches the requested threshold.6 This is because Rep. Offices are allowed to engage in sales and products, as well as service delivery on behalf of the mother company. However, every payment has to be made through the latter (no taxable income can be generated7).
The legal entity that enables foreign investors to have a stable presence in Indonesia is the PT PMA. The acronym PT (Perseroan Terbatas) categorizes the company as a limited liability company, while PMA shows that it is specifically funded by foreign investment (Penanaman Modal Asing).
A PT can be established either in the form of a “closed” company (Perseroan Tertutup) or in the form of a publicly-listed company (Perseroan Terbuka, Tbk).
A foreign investor may decide to establish a fully self-funded PT PMA, or to incorporate it in a partnership with an Indonesian investor, aiming to circumvent some restrictions found in the Negative Investment List.
Under Article 7(1) of the Company Law (Law of the Republic of Indonesia No. 40/2007), companies should be established by two or more shareholders (they can be both individuals and/or corporate entities), based on a notarial deed drawn up in Indonesian. The new legal entity is mandated to appoint at least one commissioner and one director.
After the initial process is completed and BKPM has approved the company’s Investment Plan, the company will have its Principal License and will be able to begin operations. The Principle License has a maximum validity of 3 years for manufacturing companies and only one year for services and trading companies. The latter could vary, however, depending on the scope of commodities that are reviewed by BPKM on a case-by-case basis.
Hire staff and proceed with applying for temporary visa permits for foreign workers.
PT PMAs in all industries are required, by legislation, to set a minimum capital investment in order to obtain approval of their operations from BKPM.
This amount currently stands at Rp 10 billion or its equivalent amount in US$, according to the exchange rate at the time. The relatively high threshold is set to protect local small businesses from foreign competitors. The value of the assets stated in the investment plan, in so far as it reaches the minimum capital threshold for the company to be eligible for incorporation under Indonesian Law, may also include assets such as financed equipment and machinery, but excludes land and buildings.
Every PT PMA is obliged to report its investment activities by submitting an Investment Activity Report (LKPM) to BKPM.
The LKPM is to be submitted every 3 months if the PT PMA has not completed its incorporation process. After this stage, the LKPM is due every 6 months. The objective of this report is to facilitate the monitoring of BKPM, keeping track of foreign investment activities and solving problems reported by companies while doing business in the country.
BKPM requires that companies appoint a designated person to be responsible for making and submitting the LKPM.
While applying for the Permanent Business License (IUT), a copy of the warehouse agreement must be provided.
Approval from the National Agency of Drug and Food Control (under certain circumstances).
Each company can obtain an Import License for only one product category. To begin operations, the company must obtain an Importer Identification Number (API), according to the MOT regulation No.45/M-DAG/PER/9/2009.
For a specific set of goods, special ministry recommendation letters or certificates are requested in order to import.
In order to set up a PT PMA & Representative Office there are certain requirements to be met.
Directly selling final products to end-users without the intervention of any external distributor is called a Multi-Level Marketing Structure and is limited to certain types of products. It also requires the importer to be in possession of a distributor license. For all other products, establishing a partnership with a reliable Indonesian distributor, or agent, that understands the complexities and modus operandi of doing business in Indonesia is of crucial importance to expand sales in the country and reduce the time required to understand local market conditions.21 A good distribution partner can also ease the burden during importation procedures and customs clearance.
Many Indonesian importers represent multiple foreign manufacturers and product lines. Generally, a European company should select an agent that handles products complimentary to its own business, in order to enable the agency to tap into its existing customer base.22 In this respect, especially for industrial equipment and machinery, the competencies and the distributor/agent’s staff are fundamental in ensuring a certain degree of after-sales technical support.
With some exceptions, foreign companies wishing to sell their products in Indonesia are required to appoint an Indonesian agent or distributor in accordance to the Ministry of Trade (MOT) Regulation No.30/1977.
MOT Regulation No. 11/M-DAG/PER/3/2006 on Guidelines and Procedures for the Issuance of Registration Certificates for Agents/Distributors of Goods/Services sets out procedures and guidelines for registering agencies and distributors handling goods and services in Indonesia.
Upon registration, the MOT will issue a registration certificate (STP) to the registered agent/distributor. The STP will be valid for two years from the date of issuance, unless the agency/distribution agreement determines a shorter appointment period.
In the case of a sole distributorship or agency agreement, if the principal terminates the contract prior to the expiration of an STP and seeks to appoint a new distributor for the same territory, “the MOT will not issue an STP to the new distributor until a clean break is achieved”25. This requires that any agency contract be terminated by mutual consent only, unless a clause permitting the severance was inserted in the original agency agreement.
It is advisable to establish a trial period of at least six months, given that termination solely upon the will of one party usually involves a reimbursement for the remaining length of the contract to the other party.
A local partner is essential for success when entering a joint venture in Indonesia.27 A local partner would possess the knowledge and contacts, as well as a more realistic assessment of the risks involved, which may be indispensable for the success of the venture.
The conditions for terminating the JV, a waiver of Articles 1266 and 1267 of the Indonesian Civil Code.
Ongoing support in promoting and upgrading products.
A Steering Committee for Franchises and Licenses (WALI) has been established to facilitate the access of foreign franchisors to the domestic market.
In Indonesia, trademark license agreements are regulated by Trade Mark Law no. 15/2001. A License Agreement has to be submitted to the Directorate General of Intellectual Property Rights. This is a mandatory protection measure for businesses, as a missing record makes the agreement null and void before court.
While the potential of this sector is undeniable, there are still unresolved issues in getting the ordered goods delivered, as remote areas lack clear addresses and maps are not as detailed as they are supposed to be, which creates risk for the investor.
Additionally, the comprehensive regulatory framework is not sufficient to govern online transactions. Its growth has been somewhat conditioned by law No. 11/2008 on Electronic Information and Transactions. The regulation’s intention was only to promote open and fair electronic activities and commerce in a broader sense and does elaborate more specifically in the area of e-commerce.
Under Presidential Decree No. 39/2014, the government included e-commerce among the industries closed to foreign investment, requiring e-commerce businesses to be wholly owned by local parties. However, this does not affect online marketplaces, due to their role as an intermediary connecting the buyer and seller.
A new law in Trade No.7, launched in 2014, has included e-commerce as an issue to be regulated as an integral part of Indonesian trade policy. However, further specific regulation has not yet been put in place. This “legal grey zone” could also be a reason why Sequoia and Softbank were able to invest US$ 100 million in Tokopedia at end of 2014.34 Apparently there is a somewhat obvious gap in the legislation which allows smart investors to circumvent the closed investment regulation.
Indonesia’s Coordinating Investment Board (BKPM) is the main implementing agency with consulting and policy formulating functions in the area of investment.
Even though Indonesia has formally replaced its investment approval system with an investment notification system, notaries in the country will not establish companies with a foreign share if there is no approval from BKPM. Therefore, practice dictates that every foreign investment requires the approval of BKPM. Approvals are issued in the form of a Principle License (Izin rinsip).
Foreign ownership restrictions are regulated by the Investment Law No. 25/2007 and the Presidential Decree No. 39/2014.
Indonesia’s Negative Investment List, determines a large number of sectors that are either wholly or partially banned to foreign investment, but with some exceptions for SMEs and cooperatives. If the business activity is not mentioned in the list, 100% foreign ownership is allowed. The Codes for Standard Classification of Indonesia Business Sectors (KBLI-codes) are the crucial indicator to determine the categorisation and possible foreign ownership restriction that applies to a proposed investment.
Taxable business profits are calculated on the basis of normal accounting principles and modified by certain tax adjustments. Since 2010, a flat rate of 25% applies for the purposes of corporate income tax.
Permanent establishments are subject to a branch profits’ tax of 20%, or a lower rate under a tax treaty on net after-tax profits, in addition to corporate income tax.
Most expenses incurred in deriving business income may be deducted, including wages, fees, interest, rent, royalties, travel expenses, bad debts, insurance premiums, administration costs and levies, depreciation and amortization, operating losses and contributions, and approved pension funds. Non-deductible items include the payment of dividends, unapproved reserves, fringe benefits, charitable contributions and the income tax itself.
There is a legal option that allows foreign nationals that frequently come to Indonesia to do business without the need of permanent employment; the business visa. Most nationalities are eligible to apply for a multiple entry business visa after three visits, and are allowed to stay in Indonesia for the duration of 60 days per visit. The same visa can be extended for up to one year.
Indonesian regulation on Intellectual Property (IP) is comprehensive and in accordance with international standards. However, the lack of trust on legal decisions of existing rights is insufficient. This phenomenon is frequently pointed out as one of the main factors discouraging foreign investment in Indonesia, particularly in relation to technology development. This is becomes immediately understandable with a glance at the software piracy rate in Indonesia, which was 84% in 2013, with an estimated commercial value of unlicensed software of US$ 1.463 million39. Among the products which are most affected by the inconsistencies in the IPR system in Indonesia are audio and video, various software products, pharmaceuticals and original clothing and apparel, which are often copied by local parties.
Therefore, when operating in Indonesia, depending on the sector in which they operate, foreign investors commonly resort to self-protection strategies. These include working with local law firms and consultancies that can bridge the gap between the company and the authorities to organise action against piracy, and also awareness-raising activities, such as conferences on the negative economic and business impacts of Intellectual Property Right (IPR) infringements. In Indonesia, another protection measure that businesses should take into account is early registration. This will speed up the enacting of any possible IPR protection laws in force in Indonesia, thus improving legal protection when the product comes into the market from the outset. However, companies have to take into account the fragility of the Indonesian judicial system and do the utmost to protect their IPR through self-initiative. The ASEAN IPR SME Helpdesk can serve as a first step to provide appropriate information, materials, training and recommendations and to consult on companies’ IPR strategies. European SMEs may additionally use Helpdesk’s Enquiry Service by submitting IPR related questions in order to receive written, free of charge, personalised advice from an IP expert.
Again, an advisable step would be to find a reliable business partner with a network that can bring Indonesian legal expertise into the venture and to help create legally safe contractual and implementation mechanisms to ensure that IPRs are effectively protected.
The Negative Investment List, which is usually updated every three to four years, is the result of extensive negotiations between the various ministries. The ministries have delegated the power of approval in their respective areas, such as agriculture, construction, industry and telecommunications, to BKPM. The ministries try to control foreign investment, not only by setting maximum percentages of foreign ownership in the Negative List, but also by occasionally sending additional instructions to BKPM.
In April 2014, the Government of Indonesia issued a new decree as an amendment of a previous regulation, which permits higher foreign ownership, especially in projects related to public-private partnerships (PPP) with the government. Some sectors are adversely affected for its foreign capital ownership.
Others: Open to foreign investment without conditions.
The KBLI-codes determine the (sub) sector by which an investment has to be categorized. There are hundreds of KBLI-codes, and therefore hundreds of (sub) sectors. Nevertheless, it may be a matter of negotiation between BKPM and the investor what KBLI-code applies to a particular investment. This may depend on the specific combination of activities that the investing company plans to carry out.
Any sector not included in the DNI is to be considered fully open to foreign investment.
All companies (PTs) must comply with the Indonesian Company Law No. 40/2007 on Limited Liability Companies.
Social and environmental responsibilities (a mandatory obligation for a company having business activities in the field of and/or related to natural resources), and dissolution, liquidation, and termination of the company's status as a legal entity.
The five types of limited liability companies (banks and financial institutions, publicly listed companies, companies issuing debt, state-owned companies and companies with assets of at least IDR 50 billion) must publish audited financial statements that have been approved by their general meeting of shareholders. Annual reports should be prepared in accordance with Indonesia’s Generally Accepted Accounting Principles (PSAK). Indonesia is in the process of adapting these rules to the International Financial Reporting Standards (IFRS).
A report on the condition and performance of the company.
A company must maintain a register of shareholders, as well as a special register of members of the board of directors and board of commissioners, detailing the ownership of the company’s shares. Changes in share ownership must be recorded in the register of shareholders and approved in the general meeting. The board of directors must submit an annual report to the general meeting of shareholders within six months of the closing of the company’s books.
For tax purposes, foreign investment (PMA) companies, permanent establishments, certain entities with foreign affiliations and companies that prepare their financial statements using the US dollar as the functional currency in accordance with PSAK 10, may maintain English language and US dollar bookkeeping, provided that an approval from the Minister of Finance is obtained. Contractors of oil and gas PSAs and companies operating under Mining Contracts of Work need only to provide notification. A change in the method of bookkeeping is possible, subject to approval from the DGT (Directorate General of Tax).
Renewal or extension of rights on expiry of the initial term is made via an application to the National Land Agency and is subject to the payment of a fee. An application must be submitted one year before the expiry of the term. Although the law is silent in regards to the period after the expiry of the extended term(s), consensus indicates that a land right can be extended if there has been no infringement of the conditions attached to its usage.
All transactions concerning the transfer of land rights must be done via deeds executed before the land deed registrar (PPAT, Pejabat Pembuat Akta Tanah) administering the concerned territory. In addition, the transfer must be registered in the regional office of the National Land Agency (BPN, Badan Pertanahan Nasional).
A land title deed is known in Indonesia as a Sertifikat Tanah and is always accompanied by a survey certificate known as Surat Ukur, which documents the location and dimensions of the land. Land transfers and land title deeds are drafted by the PPATs, who are very commonly also notaries. PPATs are easy to find even in the smallest towns in Indonesia. Most of a PPAT’s work involves land transfers (in the case of sale or inheritance), land registration and land disputes.
Although there is no regulation stating that contracts have to be drawn up in Indonesian, it is recommended to use Bahasa Indonesia in contracts and agreements to prevent later arguments that the local partner did not fully understand the content.
The vast majority of land in Indonesia is, in fact, not registered at the BPN and is held under traditional title (Hak Adat). Occasionally, provincial governments will carry out publicity campaigns urging people, especially those in non-urban areas, to survey and register their land. However, this can be very problematic, as lands are often "owned" by big families, resulting in disputes over ownership.
Indonesia recognizes “well-known” trademarks (on a case-by-case basis), but only to the extent that they may be used to prevent a third party from registering a similar trademark, at least in theory. It is not rare that “bad-faith” (intentional registration of pre-existing intellectual property) registrations occur. Legal remedies are not easily available for these situations, which often result in expensive procedures for the rightful proprietors, in order to cancel these bad-faith registrations in the commercial court.
In addition, Indonesian legislation does not yet protect non-traditional trademarks such as three-dimensional trademarks, even though new trademark legislation is in the process of being drafted in order to prepare Indonesian IP system for the accession to the Madrid Protocol in 2015.
If looking to enforce IPR in Indonesia it is crucial that IP rights owners are aware of the corruption vulnerabilities of the Indonesian authorities and how to expose violations if faced with such a situation. An Indonesian lawyer may be the best source to obtain a corruption risk assessment when enforcing rights via the authorities.
Renewal Period: Provision with respect to the Madrid Protocol, which will become effective in 2015.
Starting from 31st March 2015, the Indonesian Central Bank (BI) has imposed a rule that all financial transactions (cash and non-cash) performed by individuals and corporations within Indonesian territory are to use the local currency, Rupiah.
In Indonesia, it is not possible to enforce a foreign court action, despite the possibility for parties to contractually select foreign law as the framework for dispute resolution mechanisms. However, doing this might only prove efficient if the Indonesian party holds assets outside Indonesia, given that assets that are present or registered in the country are within the exclusive jurisdiction of national courts. Indonesian judges, however, can choose to take into account foreign law in their decisions.
Notwithstanding, Indonesian law follows the civil law system, which does not bind judges to precedents and is prone to lengthy processes.
In addition, legal costs during litigation procedures are borne by each party, as courts do not commonly distribute them between the litigants.
A common alternative to litigation in Indonesia is mediation, which has a particularly prominent role in the context of the Indonesian legal system. In fact, before any proceedings are initiated, a judge must recognise that parties have made an effort to resolve the dispute through certified mediation before they engage in legal action. The former, however, always depends on the voluntary participation of the disputing parties.
Conversely, arbitration provides the parties with a more meaningful voice in the process, while being able to choose the arbitrator. Moreover, awards decided in a mediation settlement are binding and cannot be subject to appeal. These elements can make arbitration more efficient than court disputes and mediation. Nonetheless, reaching arbitration agreements can entail more expensive legal costs and procedural time, while preventing parties from resorting to Indonesian courts once the dispute has been settled through this method. Moreover, enforcement must be requested in an application to the competent district court.
On a global scale, tax collection rates are still low in Indonesia, due to a large informal sector and many non-compliant companies. Tax offices around the country are responsible for collecting the taxes in their district. This often creates a sense of unfairness among compliant taxpayers and paradoxically represents another reason for companies to have tight financial and fiscal administration. The local tax offices regard foreign companies as potentially large taxpayers and may be particularly strict towards them. Foreign companies need to anticipate this and ensure the availability of very complete documentation. They are advised to seek local expertise and support regarding this matter. In the experience of several chambers of commerce and consulting firms, companies with very tight financial and fiscal documentation face strict scrutiny, but ultimately receive fair treatment by the tax office.
Indonesia has a broad tax treaty network, following the OECD treaty model and containing OECD-compliant exchange of information provisions. Treaties generally provide for relief from double taxation on all types of income, limit the taxation by one country for companies established in another country, while protecting companies resident in one country from discriminatory taxation.
To claim relief under a tax treaty, the foreign taxpayer must complete and submit a specific document issued by the Indonesian tax office to the Indonesian tax authorities, accompanied by a Certificate of Domicile and form DGT-1 or DGT-2. The Certificate of Domicile must be endorsed by the tax authorities of the tax treaty partner country. If the foreign taxpayer is unable to obtain the endorsement, they can use any form of Certificate of Domicile commonly verified or issued by the tax treaty country’s tax authorities, provided certain requirements are met.
This form must be attached to a complete form DGT-1 or form DGT-2. Treaty relief will be denied if the foreign taxpayer fails to fulfil this requirement.
Taxable business profits are calculated on the basis of normal accounting principles, modified by certain tax adjustments.
Since 2010, a flat rate of 25% applies to corporate income tax. Public companies with 40% of publicly owned capital and consisting of a minimum of 300 individual shareholders, each holding less than 5% of the paid in capital, are entitled to an effective tax rate of 20%.
Permanent establishments are subject to a branch profits tax of 20%, but a lower rate is possible under a tax treaty on net after-tax profits. The latter is in addition to corporate income tax.
In particular reference to SMEs, Government Regulation No. 46/2013 Art. 3 (1), effective since 1 July 2013, states that individual taxpayers and corporate taxpayers (except permanent establishments) with certain qualifications and declaring a gross turnover of less than 4.8 billion IDR per fiscal year, are entitled to 1% final tax rate on certain types of business income.
Most expenses incurred in deriving business income may be deducted, including wages, fees, interest, rent, royalties, travel expenses, bad debts, insurance premiums, administration costs and levies, depreciation and amortisation, operating losses and contributions to approved pension funds. Non-deductible items include the payment of dividends, unapproved reserves, fringe benefits, charitable contributions and the income tax itself.
Losses can only be carried forward for five years, although this may be extended to 10 years in certain sectors and regions. However, the carry-back of losses is not permitted. For investments in certain sectors, regions and Integrated Economic Development Zones (KAPET), the Investment Coordinating Board (BKPM) may also recommend that the tax office provide additional tax incentives to an investing company. These can include the deduction of 30% of the invested amount from the taxable profit over a period of six years and accelerated depreciation schemes.
Tax holidays of five to 10 years have been granted to businesses in a limited number of “pioneer industries” with strong spin-off effects on the local economy, such as base metals, base organic chemicals, oil and gas, renewable energy, machinery and telecommunication.
New entities may apply for exemption from the income tax payable on the importation of capital goods and raw materials.48 Therefore, new enterprises must obtain an exemption certificate from the municipal Indonesian tax office where the new entity is registered. The exemption is granted for capital goods indicated in the BKPM Master List and must be applied for each year.
Income tax relief is also available for investments in 15 selected locations, mostly located outside of Java49. Most of them are either Special Economic Zones or Free Trade Areas.
In general, tax incentives are available for companies or cooperatives undertaking new investments, or expanding their current business in different industries and/or provinces in Indonesia.
Investment allowance in the form of a reduction of net income.
Taxpayers seeking to obtain tax incentives will require approval from the Minister of Finance, with a recommendation from the chairman of BKPM50.
This subsidy is only granted to companies established after August 2010. To qualify, applicants must invest a minimum of IDR 1 trillion and provide a statement of agreement to deposit 10% of this amount in a bank in Indonesia before submitting the application. Successful applicants will be entitled to an exemption from corporate income tax for an initial five to 10 years and a reduction of 50% of corporate tax liability for the following two years after expiry.
The delivery of taxable goods for the individual’s own use, or as free gifts.
In general, the VAT rate is 10%. For some specifically regulated transactions, it may be 5% or 15%. VAT on the export of goods and a particular service is 0%. The basis of the VAT calculation is the transaction value, although in some specific cases, such as delivery of goods or asset transfers between related parties, another value is calculated. Specific rates and amounts apply to some transactions, such as the import of films and the private construction of buildings.
Several other services, such as medical, financial and insurance, and education as well as manpower.
Companies have to report and settle their VAT liabilities monthly.
From 1st July, 2015, the government, through regulation Directorate General of Taxes No. PER 17/PJ/2014, established that a Taxable Entrepreneur (PKP) is obliged to create e-Faktur or e-invoice.
Each branch of a company has to report to the tax office in its own area. However, companies may apply for centralised VAT reporting so that intra-company deliveries do not need to be reported for VAT. Large and medium-sized taxpayers, foreign investment companies, some foreign companies and individuals and listed companies, have to centralise their VAT reporting at particular tax offices.
VAT liabilities are settled using a VAT input-output mechanism. VAT paid by companies on goods and services that are purchased to run a business may be credited (VAT-input) against the VAT the business received from selling products (VAT-output). If the accumulated VAT-output for a particular month exceeds the accumulated VAT-input for the same period, the said company must settle the difference by the end of the following month and prior to the VAT return filing due date. However, if the accumulated VAT-input for a particular month exceeds the accumulated VAT-output, the overpaid amount may be carried over to the following month, or requested to be returned as an annual refund at the end of the financial year. The tax office should reply to such a request within twelve months after carrying out a VAT audit. In the absence of a VAT audit, the request is deemed approved.
State-owned companies, production sharing contractors and the Treasury are appointed as tax VAT collectors. As such, they have to immediately pass on to the tax office the VAT they are due to pay on delivery of goods and services, instead of paying this VAT to the supplier.
In addition to VAT, a number of products are subject to a luxury sales goods tax, which may vary from 10% to 75% (it may even increase up to 200% in some cases), and which is applied once, either upon importation of the product, or upon delivery by the domestic producer to another party.
Strategic Goods: According to Indonesian law products that have been labelled as ‘strategic’ include some capital goods, water and electricity equipment, and inputs for the agriculture sector.
In Indonesia, exporting manufacturers that base their operations within bonded zones, free trade areas and economic development zones (KAPET) can benefit from the non-application of VAT and duties. More specifically, goods imported into KAPET areas are not subject to import duties, VAT or STLG (Sales Tax on Luxury Goods). The currently assigned free trade areas are Batam, Bintan, Karimun and Sabang. Other incentives and allowances are also applicable, namely regarding the manufacture-related transfer of goods between bonded zones and the wider territory.
Tax payments and the filing of tax returns must be made to the State Treasury through a tax payment bank appointed by the authorities. The payment period (either annually, monthly, or both) depends on the regime of tax obligation that a given company must fulfil54.
Under Law No. 13 of 2003, Art. 1(14) 14 of Labour Law, an (individual) employment agreement shall be defined as an agreement made between an employee and an entrepreneur, or employer. The agreement specifies the work requirements, rights and obligations of both sides. Usually it regulates; minimum wages, maximum working hours, minimum paid leave and regulations on dismissal. Under Art.56 (1) of Labour Law, an employment agreement may be made for either a definite or an indefinite period of time.
Is made in writing or verbally agreed upon. A work agreement is not compulsory to obtain recognition from a related labour institution. In the event that PKWTT is made verbally, then the clauses that are applicable between worker and employer are clauses that are regulated by law.
Under the same law Art.88 (1), every worker is entitled to obtain an income which enables them to sustain an adequate level of livelihood.
Under Law No. 13/2003, Art.99, every worker shall be entitled to obtain manpower social insurance.
Under Law No.3 of 1992 or the Jamsostek Law, companies with a payroll exceeding IDR 1 million per month, or employing 10 or more staff, must enrol their employees in the Jamsostek program. In 2014, Jamsostek changed its name to Badan Penjamin Jaminan Sosial (BPJS; Social Security Agency) as regulated by Law No. 40 of 2004 on the National Social Security System.
The first three are mandatory under BPJS Ketenagakerjaan. Healthcare benefit contributions are mandatory for all companies as of 1st January 2015 and it will cover all citizens by 201963.
Eight hours per day/five days per week.
Pregnant employees who, as stated by a doctor's statement, are at risk of damaging their health, or risking their own safety, or the safety of their unborn child, if they work.
In general, employers who require an employee to work outside the normal working hours must pay overtime wages to the employee.
Overtime can only be performed for a maximum period of three hours per day and 14 hours per week. The overtime pay rate for one hour is 1/13 of the monthly wage, plus fixed allowances64.
Employees are entitled to annual leave for a minimum of 12 days per year. Other leave must be granted for certain occasions such maternity, death and birth of relatives, or marriage.
Art.108 states that every entrepreneur employing at least ten people must create a corporate rule, which comes into force after the minister or the appointed official ratifies it. According to Art.111, the corporate rule shall contain: rights and obligations of entrepreneurs and workers; working requirements; corporate disciplinary-rule and its duration. Provisions contained in the corporate rule cannot contravene provisions of laws already in force.
The occurrence of conditions mentioned in the working agreement, corporate rule or collective working agreements, can cause working relations to terminate.
In the event of a change in a company’s ownership, the new owner shall bear the responsibility of fulfilling the rights of the employees, unless otherwise stated in the transfer agreement, which must not reduce the rights of the employees.
Under Art.62 of the Labour Law, the party terminating the working relationship before the expiration period stipulated in the contract, shall pay compensation to the other party equal to the amount due, until the expiration of the working agreement. This rule applies a principle of fairness, applicable to both employers and workers, and an enforcement rule towards compliance of the employment agreement that has been made and signed.
The company admonished the employee three times within a definite period of time.
Upon dismissal compensation must be paid, dependent on the time the employee has been working for the company.
Indonesia has one of the most expensive severance package regimes in the world. Making up for the lack of a comprehensive social security system, Indonesian lawmakers established a regime requiring employers to pay a comparatively large amount in compensation to dismissed employees.65 Usually, minimum severance pay is based on the monthly wage, up to a maximum of nine months wages.
According to Art.64, companies can give up some of their job positions to other companies through an agreement of service in writing.
The agreement has to be reported to the local MOMT office. The jobs that can be put under the responsibility of other companies must meet the following requirements: being executed separately from the main activities; being executed by direct or indirect order of job providers; serving as supporting activities for the companies as whole; and not discouraging production directly.
Besides the actual employment contract, including its attached regulatory framework, other aspects need to be considered when employing people in Indonesia. The basic rights of workers and trade unions to strike and protest should not be underestimated.
The definition of a trade union is found in Art.1 no.17 of the Labour Law. Trade unions shall be recorded and registered to the responsible agency for employment, namely the Ministry of Manpower.
In 2011, the government enacted the Ministerial Regulation No.PER.16/MEN/XI/2011 concerning Procedures for the Making and Ratification of Company Rules (PP) and the Making and Registration of Collective Labour Agreements (CLA). A company that employs at least 10 workers must register a PP, which documents a company’s working policies and requirements. A CLA is a bipartite agreement, covering working rules, wage payments, health-and-safety benefits and systems, as well as regulations on violations and sanctions for workers, the employer and the unions.
According to Art.116 of the same law, a collective working agreement shall be entered into by a trade union that is adequately registered at the MOM, or another designated institution, and the employer. A collective working agreement shall be valid for a maximum of two years (Art.123). The agreement can be extended for one year on the basis of a written agreement between the two parties. In the case where a singular working contract does not observe the provisions regulated in an existing collective working agreement, the provisions of the latter shall prevail (Art.128).
According to Art.137, labour strikes are a basic right of workers and labour unions. Strikes shall be held as a result of the failure of negotiations and are to be conducted in a legal, peaceful and orderly manner. Within a period of at least seven days before the strike is performed, the employees and the employees’ trade union must notify the employer in writing. In addition, the concerned government institution governing the specific employment affairs must also be informed. Under Art.141, this institution shall settle the dispute that triggered the labour strike by organising meetings and negotiating with the opposing parties, both before and during the strike. If an agreement is reached among the parties, it must be made formal and signed by both sides. If the negotiation fails to achieve an agreement, the question has to be submitted to the designated industrial disputes settlement institution.
A strike performed without fulfilling the provisions of the Labour Law is considered illegal.
The regulations to be followed when employing expatriates in Indonesia establish a preference towards national workers, binding the recruitment of foreign employees to certain conditions, in terms of positions that can be awarded, the nature of the work activities and the duration of employment.
Projects related to mechanical or electrical installation, after sales service, or testing out new projects.
Obtaining a business visa requires a letter of sponsorship from a company registered in Indonesia. It is mainly directed at foreigners who need to conduct business activities in the country that do not entail permanent employment. It is possible to apply for a one year multiple entry business visa, which is most likely the best option for a foreign national who visits Indonesia on a regular basis.
The KITAP is valid for five years and is easily renewable. It is usually attributed to eligible investors, CEOs, retired foreigners, children of Indonesian citizens, or, in other cases, to foreigners who have stayed for a long period in Indonesia and who fulfil certain criteria.
Foreign nationals who have obtained the KITAP as employers or top-level managers should ensure that all employees under their supervision have their employment situation legalised, as their KITAP might be cancelled if an illegal situation is found.
Spouses are automatically entitled to a KITAP after two years of marriage (provided there is government certification) and also after divorce, provided that the union lasted for at least 10 years. Retirees are eligible to apply for a KITAP if they are over 55 years of age.
The KITAP is valid for 5 years and is easily renewable. It is usually attributed to eligible investors, CEOs, retired foreigners, children of Indonesian citizens, or, in other cases, to foreigners who have stayed for a long period in Indonesia and who fulfill certain conditions.
Foreign nationals who have obtained the KITAP as employers or top-level managers should ensure that all employees under their supervision have their employment situation legalized, as their KITAP might be cancelled if an illegal situation is found.
Spouses are automatically entitled to KITAP after 2 years of marriage (provided there is a government certification) and also after divorce, if the union lasted for at least 10 years. Retirees are eligible for applying for a KITAP if they are over 55 years of age.
This type of visa is easily obtainable for most nationalities. In fact, most visitors are eligible to obtain a tourist visa on arrival, payable in US dollars and valid between seven and 30 days, depending on conditions set by the immigration office. Visas offering longer periods (up to 60 days) can be provided through an application at the Embassy of Indonesia of the visitor’s country of origin. In most cases, tourist visas are extendable for up to one month, more than once. As of October 2015, 92 countries are eligible for this Visa On Arrival, which will gradually be upgraded as part of a campaign to boost the economy through international tourism.
It is illegal to work in Indonesia on a tourist visa. As such, for screening purposes, foreign nationals entering Indonesia with a tourist visa should hold a valid return ticket and be prepared to provide information about their travel plans to immigration officers.
Overstaying the duration of a visa is penalised at USD 20 (IDR 300,000) per day. Periods surpassing 60 days can lead to legal prosecution, future access restrictions, or even deportation.
Following its 1994 ratification of the World Trade Organization (WTO) Agreement, Indonesia has taken steps to develop and issue IP laws, create a better framework for IP protection and provide a better environment for the development of IP. Indonesia a member of WTO and WIPO, and it is party to the main WIPO treaties, including the Berne (re-entering in 1997) and Paris Convention. Indonesian legislation was substantially revised in recent years to bring it in line with regional and international IPR standards.
A trademark is a sign (picture, name, word, letters, figures, or a combination of these elements), used by companies to distinguish their goods and services from those of others. In Indonesia signs with three-dimensional shapes are not yet recognised and it is therefore recommended that they be registered under the Industrial Design Law in order to be protected. Sound and smell are not included in the current Indonesian concept of trademarks.
A patent is understood as a right granted and reserved to a designer or inventor to utilize his or her invention commercially and exclusively. It can obtained for either an innovative, or improved, machine or process, as well as for a manufactured article, or a chemical composition.
Similar to other IP rights, a 'first-to-file' system is in place for industrial designs. Thus the first person to file a right in the Indonesian jurisdiction is granted ownership. Industrial designs protecting the external appearance of an article are to be filed with the Directorate General of Intellectual Property Rights. The registration procedure requires the product or design to be new and previously unpublished. Multiple design filings are not accepted.
A Copyright exclusively entitles its authors, artists and other creators to publish or reproduce their work.
Translations, interpretations, adaptations, anthologies, databases and other similar works.
The number of trademarks, patents and industrial designs submitted by non-resident (foreign) applicants increased recently.
While foreign patents’ registrations have been rising constantly since the millennium, Industrial designs are recovering again after they dropped dramatically from 2,400 in 2002 to 500 in 2005.
The information presented above provides essential insights on the procedures, regulations and requirements to be considered by European companies seeking to set up, as well as conduct, business in Indonesia. This has been illustrated through general information, specific details on the legal frameworks and also external influences relevant for establishing a business, such as the Indonesian taxation system, labour and human resources and IPR. EU trade policy facilitates trade and investment relations with Indonesia and other non-member countries by eliminating protective trade barriers, but also by offering hands-on business support through projects such as the EIBN or the Export Helpdesk.
While obstacles remain, the Indonesian market is becoming more accessible and profitable than ever before. Many environmentally friendly, innovative and high-quality products and services created by EU SMEs provide solutions to the ecological, industrial and social challenges and opportunities that Indonesia faces. The EIBN is perfectly prepared to support EU business activities here in Indonesia and to help to identify what EU businesses stand to gain by entering the Indonesian market, the likely risks and how to manage those potential risks.

References: Art. 3
 Art. 1
 Art.56
 Art.88
 Art.99

Art.108
 Art.111
 Art.62
 Art.64
 Art.1
 Art.116
 Art.137
 Art.141