Setting Up Business

According to the prevailing laws and regulations, several methods are available to foreign companies that wish to do business in Indonesia, including:

  • Establishment of a Foreign Investment Company
  • Establishment of a Foreign Company Representative Office
  • Investment in the Oil and Gas Sector.

Establishment of a Foreign Investment Company
Foreign investment companies can generally be categorized into the following broad categories:

  • Foreign Investment Companies licensed by the MOF
  • Foreign Investment Companies licensed by the Investment Coordinating Board (BKPM).

Foreign Investment Company Licensed by the MOF
Foreign investment companies licensed by the MOF include banks, insurance companies, finance companies and other financial services companies.

The foreign party is required to establish a joint venture company with a local partner of the relevant business and is only allowed to hold up to a maximum of 80 percent (insurance companies) and between 80 and 99 percent of the shares (most other finance companies) of the joint venture. In addition, there are various minimum paid up capital requirements depending on the business activity. Applications for foreign investment must be submitted to the MOF.

Foreign Investment Company Licensed by BKPM
Foreign companies and individuals are only allowed to invest in a business sector open to foreign investment, through the establishment of a joint venture company with a local partner or a wholly owned company, after obtaining investment approval from BKPM.

Sectors closed to foreign investment are published in a Negative Investment List. The most recent list was issued in May 2010. The Negative Investment List designates various restrictions and prohibitions in certain business sectors, e.g. sectors where small and medium sized businesses are protected from larger competitors. For foreign investors, the most significant restriction imposed is the requirement for a local partner, which applies most commonly for activities outside the manufacturing sector. Applications for foreign investment must be submitted to BKPM.

Under the old provisions, the foreign investor was allowed to establish a wholly owned company but was required to transfer a part of its shares to a local partner within 15 years from the commencement of commercial operations. The new provisions do not require any divestment of shares.

Under the prevailing regulations, there is no minimum investment required. BKPM will evaluate investment applications to determine the adequacy of the proposed investment based on the economic feasibility of the investment project.

In addition, foreign companies and foreign individuals are also permitted to acquire shares in an existing local company, provided the line of business of the local company is open to foreign investment.

Establishment of a Foreign Company Representative Office

There are various types of Representative Office that may obtain licenses from government authorities, including a:

  • Foreign Trading Company Representative Office
  • Foreign Construction or Consulting Company Representative Office
  • Foreign Shipping Company Representative Office
  • Foreign Oil Company Representative Office
  • Foreign Bank Representative Office
  • Foreign Company Regional Representative Office
  • Foreign Airline Representative Office.

With limited exceptions, principally Foreign Construction or Consulting Company Representative Offices, representative offices are only allowed to perform auxiliary services such as acting as an intermediary, handling promotional activities and gathering information for a head office abroad.

Investment in the Oil and Gas Sector
There are a number of contractual arrangements under which foreign and domestic companies can become involved in Indonesia’s oil and gas sector. The principal such arrangement is the production sharing contract (PSC), the first of which was signed in 1966. Prior to that date, a series of contract models were used but these have now terminated or expired.

According to the 2001 Oil and Gas Law, joint cooperation agreements and other forms of agreement will be introduced. However, to date PSC is still the only option offered by the government, as no details of the new forms of agreement have been finalized. The new oil and gas law mentions that existing PSC contracts continue to apply until the said contracts are expired or terminated.

Under the old law, the development of oil and gas, including exploration, production, refining, distribution and marketing, could only be undertaken by the government through the state-owned oil company (PERTAMINA). Foreign investors could only act as contractors to PERTAMINA for the exploration and production of oil and gas under Production Sharing Contracts (PSC) to be negotiated with the Ministry of Energy and Mineral Resources. Under a PSC, the foreign investor bears all the risks and costs of exploration until production. If production does not proceed, these costs may not be recovered. If production does proceed, the contractor receives a share of production as cost recovery, an investment credit and an equity interest after tax at a certain percentage of the remaining production (for example: 85:15 for PERTAMINA and the contractor respectively).

The new law (2001) eliminates PERTAMINA’s monopoly and allows free competition in downstream activities. Upstream activities can be undertaken by a branch or an Indonesian company that enters into a Cooperation Agreement (similar to a PSC) with the Supervisory Agency (BP MIGAS). Only an Indonesian company (which may have foreign shareholders) can undertake downstream activities after obtaining a license from the government. These activities are subject to supervision and administration by the Regulatory Agency (BPH MIGAS). It is unclear how the after tax equity split will be affected as there are extended tax obligations under the new law.

A business entity or a branch carrying out upstream activities may not carry out downstream activities and vice versa.

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