Business Structuring for Foreign Companies in Indonesia

Contents

1.     Key Takeaways

2.     FAQ

3.     Introduction

4.     Business Entity Types

a)     State-Owned Companies

b)     Private-Owned Companies

c)     Sole Proprietorships (or ’UD’)

5.     Limited Liability Company (Perseroan Terbatas)

a)     Local Limited Liability Company) - PT PMDN

b)     Foreign Limited Liability Company - PT PMA

6.     Corporate Structuring of a PT PMA

a)     Shareholders

b)     Directors

c)     Commissioners

d)     Termination of Directors or Commissioners

e)     Corporate Bank Account Access

7.     Representative Offices (RO)

a)     General Representative Office for a Foreign Company (or ‘KPPA’)

b)     Representative office for Foreign Trade (or ‘KP3A’)

c)     Representative Office for Foreign Construction Companies (or ‘BUJKA’)

d)     Representative office for Foreign Oil and Gas Companies (or ‘KPPA MIGAS’)

8.    Conclusion

9.    How ASK can help

 1. Key Takeaways

• Ease of market entry - multiple structures open for foreign investment

• Whatever the entry strategy there’s always a structure to suit

 2. FAQ

• What are the different company types in Indonesia?

• Can foreigners sit on the Board as Directors or Commissioners?

• What is the corporate structure of a foreign-owned Limited Company in Indonesia?

• What are Representative Offices companies in Indonesia, and what are they for?

• When setting up in business in Indonesia. Do I need a PT PMA or a Representative office? 

 3. Introduction

This article covers the business structures available when doing business in the Indonesian marketplace as a non-Indonesian citizen, and/or as the owner or representative of a non-Indonesian company. 

 4. Business Entity Types

There are several business entity types in Indonesia. Of these, two are particularly relevant to foreign investors (Limited Liability companies and Representative Office companies); other company types are either state-controlled, or expressly forbid or heavily curtail foreign involvement. The main company types falling into this latter category are:

a) State-Owned Companies

These are state-owned and are demarcated into non-profit companies (Perum), and profit-seeking companies (Persero)

b) Private-Owned Companies

There are three sub-types of private-owned enterprises. One of them is the Limited Liability Company (PT), which is important for foreign businesses and is described in further detail below. The other two are the Firma and the CV (Commanditaire Vennonntschap). The latter two both mandate Indonesian citizenship for set-up.

c) Sole Proprietorships (or ‘UD’)

Only an Indonesian citizen can form a UD, and although this individual is permitted to employ their foreign spouse, they cannot employ any other foreigners.

As mentioned, the two business types that best serve the interests of foreign investors are Limited Liability Companies, and Representative Offices; we will concentrate upon these.

 5. Limited Liability Company (Perseroan Terbatas)

The Perseroan Terbatas – commonly referred to as ‘PT’ – is Indonesia’s version of the ‘limited liability’ entity, mirroring such structures as the Limited Company in the UK, or the LLC in the United States. The PT is the most commonly-used business structure in Indonesia today.

A PT works within the concept of capital shares, which are separate to any personally-held assets of the owning bodies, thus removing personal liability for any financial problems the company may experience. Shares – ‘stocks’ – are bought and sold; a trading system that allows for change of company ownership as appropriate.

PT companies are demarcated and defined according to these criteria:

There are two types of PT; local and foreign-owned:

a) Local Limited Liability Company (Perseroan Terbatas Penanaman Modal Dalam Negeri) - PT PMDN

The PT-PMDN is one of three types of privately-owned enterprises in Indonesia, the other two being a Firma, and the Commanditaire Vennootschap (CV), both of which must be set up by two or more Indonesian citizens. We don’t provide further details of the Firma or CV as these do not represent avenues for foreign involvement in the Indonesian marketplace.

Local PTs must have at least:

• one local director; subsequent directorships can be held by foreigners, subject to a total paid-up capital requirement of IDR 1 billion

• one local commissioner; subsequent commissioner positions can be held by foreigners if the PT PMDN has more than one director (the directorship being subject to a total paid-up capital requirement of IDR 1 billion)

• two local shareholders – no foreign shareholders

With the addition of a foreign director or commissioner, the foreigner can hold the main company position (e.g. CEO).

In the case of the company needing to hire a foreigner, a cash or asset capital of IDR 1 billion. Is required. However, when a company is incorporated, the shareholders often produce a signed document (‘capital statement letter’) assuring authorities that funds exist to inject capital post-incorporation.

b) Foreign Limited Liability Company (Perseroan Terbatas Penanaman Modal Asing) - PT PMA

This is the structural vehicle most often used by foreign interests.

If a company is not in the Negative Investment List (a government-produced list of forbidden sectors), this company structure allows for 100% foreign ownership. However, certain business sectors require projects to be set up as joint ventures with Indonesian-based local enterprises. See our section on foreign investment in Indonesia for further details.

Foreign PT’s must have at least:

• one local or foreign director

• one local or foreign commissioner

• two local or foreign shareholders (who can also be directors)

The company’s investment plan has to have a minimum value of IDR 10 billion, with minimum assets of IDR 2.5 billion. This automatically defines a PT-PMA as a large company. As with Local PT companies, a capital statement letter may overcome liquidity issues at the incorporation stage.

For the business location, it’s best to register physical office space for a PT PMA in Indonesia. This is because of restrictions placed upon the use of virtual offices, which can only be supplied by a sub-set of vendors that meet governmental criteria. Registering the company at a physical location avoids this issue. 

The PT PMA is by far the most commonplace business entity utilised by foreign players. Correct adherence to the corporate structural requirements for a PT PMA is crucial – read on for further details.

 6. Corporate Structuring of a PT PMA

Each PT PMA has shareholders, directors and commissioners, each of which come with a variety of roles and responsibilities. There is a Board of Directors and a Board of Commissioners.

a) Shareholders

Shareholders can be single individuals, groups of individuals, companies, partnerships, legal entities, foundations or even foreign countries.

Shareholders are not personally liable for debt but this does not apply if a shareholder participates in improper acts committed by the company.

At shareholder General Meetings, the company will seek permission of shareholders in order to engage in certain activities, such as:

• Appointing or removing commissioners and/or directors

• Transferring shares

• Changing capital levels within the company

• Updating or introducing various business activities

Each shareholder has one vote, although shareholder votes can occur by proxy (if this is allowed according to the company’s articles), but directors and commissioners cannot perform this proxy role.

b) Directors

Directors are responsible for the day-to-day management of the company.

Directors are responsible for:

• Maintaining the minutes and registers of meetings

• Maintaining the shareholder’s register

• Representing the company

• Arranging the production of stipulated documents and reports; annual or otherwise

• Signing contracts

• Reporting to the Board of Commissioners

c) Commissioners

Commissioners act in a supervisory role. They are responsible for advising and liaising with the Board of Directors; their role is to focus upon the formal, written goals of the company and ensure that the decisions of the Board of Directors reflect said goals. Indeed – the Board of Commissioners has the power to suspend a director from their position.

In a financial context, commissioners are responsible for the approval financial statements, as well as the preparation and auditing of the coming year’s budget. 

d) Termination of Directors or Commissioners

A General Meeting of Shareholders (GMS) has the power to remove members pf the board. A letter of termination is produced, and hearing held. Following that, a statement letter is produced and signed; this acts as evidence that the individual concerned was allowed to defend themselves. If the individual does not wish to offer a defence, the statement letter is signed and there is no hearing. 

e) Corporate Bank Account Access

Access to the company bank account is based upon shareholder request; shareholders can request access for multiple signatories to be setup for the company’s account, as required.

7. Representative Offices (‘RO’)

Representative Offices are used as vehicles for establishing a foreign presence in Indonesia. Each RO is tied to a named foreign parent company, and in practise any business is able to open an RO. Either foreign employees or local Indonesian employees – or a mix of both - can be taken on by an RO.

Crucially, a Representative Office is barred from earning money or issuing invoices. They are permitted to conduct market research, various promotional and communications operations, and engage in buying and selling as representatives of the named parent company that they are declared to be affiliated with.

Licenses for RO’s are granted for differing time periods according to the type; there are four types of RO, catering to differing business sectors.

a) General Representative Office for a Foreign Company (or ‘KPPA’)

The KPPA is most commonly used as a vehicle for market evaluation, prior to setting up a Foreign Limited Liability Company (PT PMA – see above). There are no capital requirements for setting up a KPPA, which is why it is an attractive proposition for foreign entities wishing to test the waters of their sector in the Indonesian marketplace.

The KPPA is designed to coordinate, manage and oversee the interests of the parent company. As such, it is classed as a local branch of a foreign parent company.

b) Representative office for Foreign Trade (or ‘KP3A’)

The KP3A is useful for acting as an agent for the buying, selling and manufacturing activities of the parent company, engaging in activities such as:

• Overseeing market research into product movement in and out of Indonesia

• Promotional activities for products and services

• Overseeing sales (although, as mentioned, an RO cannot issue invoices)

• Providing informational services to a client or parent company

• Contract formation with companies in Indonesia on behalf of the parent entity

• Establishing branch offices – this type of corporate structure can be located in provincial capitals or cities anywhere in Indonesia

c) Representative Office for Foreign Construction Companies (or ‘BUJKA’)

The BUJKA is designed to enable foreign construction companies to engage in construction activities in Indonesia. This is quicker and easier than setting up a standalone construction company in the country. A BUJKA facilitates tendering, the hiring of Indonesian consultants and other staff, industry fact-finding and bank account set-up. 

There are several requirements for setting up a BUJKA: 

• A joint venture (‘Joint Operation’) must be set up between the BUJKA and an Indonesian construction services company. The Joint Operation is responsible for handing the actual construction projects themselves.

• The local company must be 100% owned by Indonesian nationals; there can be no foreign shareholders

• Construction projects that the BUJKA engages in must involve high-level technology and/or be high risk, or high-value

• The company category for both the foreign construction company, and the local construction company must be ‘large’. This is to be evidenced by the construction portfolios of the companies concerned, which must show experience of handling projects with a minimum value of IDR 83 billion

d) Representative office for Foreign Oil and Gas Companies (or ‘KPPA MIGAS’)

The KPPA MIGAS enables foreign oil and gas companies to set up a permanent presence in the Indonesian marketplace.

KPPA MIGAS can be set up in any area of Indonesia, and although this broadens appeal, this type of Representative Office can be more administratively onerous to set up than others. As well as a KPPA Oil and Gas Permit and a KPPA Oil and Gas Report, you will need a letter of recommendation from the Directorate General of Oil and Gas at the Ministry of Energy and Mineral Resources (ESDM).

 8. Conclusion

Various options exist for a foreign company wishing to enter the Indonesian market. The company structures that might be the most profitable choice for your project are likely to depend upon a variety of factors.

9. How ASK can help

 ASK Consulting supports a number of investors across the region with Board advisory services:

• Identifying your suitable local partners and investors

• Government Liaison 

• Investment advisory

• Structuring

• Non-profit entity establishment 

• Agreement drafting

• License and permit process

• Initial Operational Support