The Company Law No. 40 of 2007 regulates limited liability (Perseroan Terbatas, or PT) companies. This is the most common form of business organization and the one to which foreign investors are restricted under the Investment Law. Branches of foreign corporations are normally not permitted outside of the banking and oil and gas sectors.
Formalities for setting up a company
To set up a company with foreign equity (PMA company), a letter of registration approval must be obtained from the BKPM. A deed of establishment and articles of association also are necessary. It is standard practice to employ the services of a notary public to draft the articles of association, who will then undertake the steps to obtain the necessary legal documents.
The draft deed must set out the firm’s purpose, location, capital and management rules in accordance with the provisions of the Investment Law or relevant regulation and the final terms of the individual foreign investment agreement. It must include details of the proposed company’s founders, first directors and commissioners, and shareholders.
The registration approval is valid for six months after it is granted. The PMA company must be established within that six months period, the PMA must be formed and approval from the Ministry of Justice and Human Rights, as well as Regional Justice and Human Rights offices, must be obtained. Once approved, the PMA company is considered to be established. Issuance of a Certificate of Company Registration by the Ministry of Trade takes an additional week. Although an Indonesian corporation’s capital must be denominated in rupiah and so stated in the articles of association, the foreign currency equivalent may be stated in brackets for purposes of future capital repatriation. Equity capital owned by foreign shareholders, which may be up to 100%, must equal the value in rupiah of the government-approved foreign investment, calculated at the foreign exchange rate prevailing on the date the investment permit was issued.
Company books are ordinarily kept in rupiah, in the Indonesian language. Subject to the approval of the Directorate-General of Taxation (DGT), however, books may be kept in U.S. dollars, using English. The directorate also sets the exchange rate used for accounting and tax payments on a weekly basis. Books, records, annual balance sheets and copies of correspondence must be retained for 10 years.
A portion of profits must be retained each year until a minimum reserve of 20% of issued capital has been attained.
Forms of entity
Requirements for a limited liability company
Capital. The minimum authorized capital for a foreign investment company depends on the type of business activity (e.g. trading company, USD 250,000; freight forwarding company, USD 2 million; etc.); at least USD 100,000 or 25% must be issued and paid up. Higher minimums apply in certain sectors. All issued capital must be paid up and evidence of payment must be submitted to the Ministry of Justice and Human Rights to obtain approval for the deed of establishment containing the articles of association. All shares issued subsequently must be fully paid up upon issue.
For foreign investment companies, the rupiah value of capital is assigned at the foreign exchange rate prevailing at the time the investment licence was granted. However, the rupiah value of payments of capital in foreign currency is calculated at the exchange rate prevailing at the time of payment. This calculation applies to payments in kind, which must be valued by an independent appraiser.
A company may repurchase its shares if (1) payment is made out of net profits and does not cause the company’s net assets to fall below the total of subscribed capital plus the required reserve; and(2) the aggregate nominal total shares owned by—or pledged in favor of—the company or its subsidiary does not exceed 10% of the total subscribed capital.
Increases and decreases of capital must be approved at a general meeting of shareholders; a reduction of capital also requires that there be no objection from a creditor.
Founders, shareholders. At least two shareholders are required at all times which may be two individuals, or two companies, or a combination thereof in certain sectors. A foreign investment company may be 100% foreign-owned, whereby the minority shareholder must hold at least 1% or have an investment of USD 1,000. There are restrictions on foreign ownership in certain business sectors. Investment in infrastucture requires a joint venture company, with the Indonesian partner holding at least 67% equity.
Board of directors/management. Companies must have at least one director and one commissioner. Certain companies, notably public companies, must have at least two directors and two commissioners, while a bank must have at least three directors and two commissioners. When there is more than one director, each is entitled to represent the company (subject to exceptions stated in the articles of association). In foreign/domestic joint ventures, the composition of the board of directors generally reflects the ratio of foreign to local shareholdings.
Directors must carry out their duties in good faith and a disposal or encumbrance of substantial company assets must be approved at a general meeting of shareholders. At least 75% of issued shares must be represented at the general meeting at which such approval is sought. One or more shareholders representing, collectively, at least one-tenth of a company’s total issued shares may, in the name of the company, file a civil complaint against a director or commissioner on the grounds that the company was harmed as a result of mismanagement or negligence.
General shareholder meetings must be held at least once a year to approve the annual report and determine whether profits will be retained or distributed as dividends. The meeting must be held within six months of the closing of the company’s financial year. Decisions are taken by majority vote or as provided for in the articles of association. Functions of the general meeting of shareholders that cannot be delegated to the directors or commissioners include amendments to the articles of association, appointment and dismissal of members of the board of directors and commissioners, and mergers, consolidations and dissolutions.
Taxes and fees. Notary fees amount to 0.1%-1% of a company’s authorized capital, but are negotiable. A nominal stamp duty is charged on the deed of establishment.
Types of shares. The company’s capital may be issued in several classifications of equity shares, at least one of which must have the characteristics of ordinary shares. Shares may be registered or bearer, but bearer shares may not be issued until the full value has been paid up. In practice, all shares held by foreign investors must be in registered form. Both common and preferred shares are permitted, but subsequent issues of preferred shares may be sold only to those already holding preferred shares. Each share normally has one vote, unless otherwise provided in the articles of association.
Branch of a foreign corporation
The Investment Law requires that a foreign-owned enterprise operating wholly or mostly in Indonesia as a separate business unit be organized under Indonesian law and resident in Indonesia. Branches are, therefore, not normally permitted, except by foreign banks and oil and gas companies. Other businesses such as trading, construction or foreign news agencies may be established as representative offices.
A foreign company can set up a trading representative office, but it must obtain approval from the Ministry of Trade and Industry. A trading representative office can only perform business promotion or market research. A regional representative office, other than one in the financial sector, must obtain approval from the BKPM to set up. Its activities are limited to supervision and coordination; they may not own or maintain production facilities or operational activities and, therefore, cannot accept orders, participate in tenders, sign contracts or engage in the importation of goods. A foreign construction service representative office may conduct construction project through joint operation by obtaining approval from the Department of Public Works.