There is a lot of room for growth in Indonesia due to it still being in the early stages of the digital economy implementation. Here is why Indonesia can be an attractive market to expand to:
– The largest economy in Southeast Asia, USD 1 trillion GDP.
– Population 261 million People – 4th largest in the world, 40% of Southeast Asia.
– 173 million mobile phone users, 87% of households.
What entity type?
Representative office or a limited liability company are the two main structures that allow foreign participation. Generally speaking, a representative office is a good temporary solution to “test the waters.” Serious and more permanent solution would be to form a limited liability company, PT PMA.
Foreign representative office is strictly forbidden from engaging in commercial activities and generate revenue/profit, send invoices. A representative office may act as a supervisor, liaison, coordinator, and representative of the parent company’s interests in Indonesia. All financial transactions must be handled by the parent company — a representative office is not allowed to generate income.
A representative office is not the same as a branch office. If you are looking to establish a local entity that can earn revenue, import products, or own a land and property, you will need to set up a foreign direct investment (PT PMA) company.
There are three types of a representative office:
– a general representative office (Kantor Perwakilan Perusahaan Asing – KPPA)
– a representative office for trading (KP3A)
– a representative office for foreign construction companies (BUJKA)
Advantages of representative office:
– no paid-up capital requirement
– the possibility of handling sales and delivery, although there is a limitation that you need to charge your clients under the name of your parent company.
– you are still entitled to a limited stay permit (KITAS) for foreign executives. This means you will be able to legally stay and work in Indonesia.
Limited liability company – PT PMA
A PT PMA is a type of company that allows foreign shareholders. It can be either wholly owned by foreigners or co-owned by locals as a part of joint venture. The minimum paid up capital requirement is IDR 2.5 billion (approx. USD $185,000) per business classification, while the investment plan is set at IDR 10 billion (approx. USD $745,000). In other words, somebody has to provide at least $185K in cash or assets upfront and present a plan to invest USD $745,000 in five years. Some investment sectors have even higher minimum capital requirements for PT PMAs, check the negative investment list. Some PT PMAs get around the paid-up capital requirement by having shareholders sign a capital statement letter stating that the shareholders have the sufficient funds to inject the capital into the PT PMA after the incorporation.
If you form a company in Indonesia as part of a joint venture with a local partner, make sure that the Joint Venture Agreement addresses:
– Appropriate rights of exit from the JV for all partners.
– obligations of each party with respect to tax filings, reporting of transactions, cooperation on tax issues, and compliance with tax laws.
– Procedures for to extracting profits. Should a minimum level of profits be retained or distributed every year? Will distribution levels be restricted for an initial period? How will changes to the distribution policy be made? Are there any tax or regulatory constraints on the distribution of profits?
– Anticipated financing needs and distribution policy.
– Procedures for admission of new shareholders.
– Business plan to define certain milestones which, if not met, can provide for certain “no fault” exit provisions.
– Any anticipated additional capital contributions, percentage vote necessary to make capital calls, the timing for such contributions, and the effect of any failure to make them.
– Rights to any IP that will be contributed or licensed to the JV and to any IP that will be developed by the JV.
– Restriction on transfer of interest in the JV to third parties. Normally, the JV should have the right of first refusal before interest can be offered to a third party.
– Audit rights.
– Will there be minority protection mechanisms? For example, the minority protections may apply to establish or modify the purpose of the joint venture; major changes in the business activities; amendments of the JVs incorporation documents; expenditures outside the ordinary course of business; material loans, etc.