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LEGAL ASPECTS OF

DOING BUSINESS IN
INDONESIA
15 November 2012

Julian Kwek
Head, Indonesia Desk

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DISCLAIMER

The information and views set out herein are not intended to constitute legal
advice and should not be relied on as legal advice. You should obtain legal
advice from suitably qualified Singapore and Indonesian counsel, as the
case may be, to address the specific circumstances of your case and the
purpose for which the legal advice is sought.

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TABLE OF CONTENTS THOUGHT
PROCESS FOR AN INVESTMENT
1. Is the industry open to foreign investment?
2. What are the applicable national and local laws and regulations for this industry?
3. What are the permits required?
4. Which business vehicle?
5. Foreign Investment Company
6. What is the most suitable structure for the investment from tax perspective?
7. What is the most suitable structure for the investment from enforcement
perspective?
8. Peculiar features of Indonesian law that might affect foreign investors
9. Parting Words
10. Main Contacts

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IS THE INDUSTRY OPEN TO
FOREIGN INVESTMENT?

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IS THE INDUSTRY OPEN TO FOREIGN
INVESTMENT?
Regulated under Presidential Regulation No. 76/2007 in conjunction with
Presidential Regulation no 36 year 2010
This list sets out types of business which are closed to foreign investment or
restricted by way of conditions to invest
Examples:
Section 9 for Culture and Tourism Sector no 13, for Hotel (star 1-2), foreign
ownership is limited to 49%
Section 16 for Health Sector no 5, for Supporting Health Service, foreign
ownership is limited to 49%
Each investment sector is classified under Indonesian Standard Classification of
Business Field (KBLI)
E.g. Hotel (star 1-2) is under KBLI 55114 (Two Star Hotel) and 55115 (One
Star Hotel), Supporting Health Service is under KBLI 86903

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IS THE INDUSTRY OPEN TO FOREIGN
INVESTMENT?
Some limitations for foreign investment according to the Negative Investment
Lists can be as follows:
1. Reserved for Micro, Small, Medium Enterprises and Cooperatives
2. Partnership with an Indonesian entity is required
3. Foreign Capital Ownership is allowed on certain Locations
Some business is allowed on all locations, but some are allowed in
certain location, e.g. Eastern Indonesia (Kalimantan, Sulawesi, NTT,
Bengkulu and Jambi)
4. Special license is required
5. Must be 100% Local Capital
6. Limitation of Foreign Capital Ownership
E.g. Acupuncture service max 49%, dental service max 67%

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WHAT ARE THE
APPLICABLE NATIONAL
AND LOCAL LAWS AND
REGULATIONS FOR THIS
INDUSTRY?

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WHAT ARE THE APPLICABLE
NATIONAL AND REGIONAL LAWS AND
REGULATIONS ?
Indonesia
(Country level)

Provinces
Provinces 5 Special Regions
(Propinsi)

Aceh, Papua,
Regional Government
West Papua,
(Kabupaten)
Yogyakarta and Jakarta

Regency Government
(Bupati)

Cities or
Municipality government
(Kota)

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WHAT ARE THE APPLICABLE
NATIONAL AND REGIONAL LAWS AND
REGULATIONS ?
Indonesia has 33 provinces and 5 provinces have special status:
Aceh, for the use of Sharia Law as the regional law
Yogyakarta Special Region, for being governed in a monarchy system
Papua, for implementation of sustainable development
West Papua, for granting implementation of sustainable development
Jakarta Special Capital Region
Regional Government and Municipal Government may pass their own law,
commonly referred as Regional Regulations (Peraturan Daerah).
But they cannot contradict State Laws or Laws that is of higher hierarchy than
Regional Regulations, such as: Laws (Undang-Undang), Presidential Regulations
and Ministerial Regulations.

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WHAT SORT OF PERMITS
ARE NEEDED?

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WHAT SORT OF PERMITS ARE
NEEDED?
Implementation Licences, such as:

Business License (Izin Usaha) issued by BKPM,


Approvals for tax and custom facilities,
Producer Importer Identity Number,
Approval on the Foreign Manpower Plan and related approvals/documents,
Location Permit,
Nuisance Permit,
Building Permit, and
Business license from the relevant technical ministry having tasks and
responsibilities in the business sectors concerned.

Note: Apply after incorporation of PMA

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WHICH BUSINESS ENTITY?

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WHICH BUSINESS ENTITY FOR
FOREIGN INVESTORS?
A. Representative Office (Rep. Office) not allowed to enter into business
transactions in Indonesia, limited to marketing and coordination, many different
types and each type is subject to different regulation or ministry.

B. Foreign Investment Company (PMA Company) may enter into business


transactions in Indonesia, subject to capital investment regulations of BKPM.

C. Bank and Financing Company currently subject to banking and financial


regulations of Indonesian central bank (BI) and Department of Finance but from
31 December 2012, will be subject to Financial Services Authority (Otoritas Jasa
Keungan).

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FOREIGN INVESTMENT
COMPANY

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FOREIGN INVESTMENT COMPANY

Must be in the form of a limited liability company (PT/Perseroan Terbatas)


unless otherwise permitted by law
All PMA Companies fall under the coordination of BKPM
New provisions in the current Investment Act that the foreign investor must pay
attention to, i.e.:
Investors, whether domestic or foreign, who conduct investment by forming a
PT, are prohibited to enter into an agreement and/or statement confirming
that the share ownership on that PT is for and on behalf of another party
(nominee scheme)
Purpose to prevent a situation where formally a PT is owned by one person
but in the fact the owner of the PT is another party

Note: Trusts are not recognised under Indonesian laws

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FOREIGN INVESTMENT COMPANY
Article 7 par.(1) PP 20/1994:
Companies wholly owned by foreign investors
the Company has to divest some of its shares to an Indonesian citizen and/or
Indonesian legal entity through direct ownership or the domestic capital market
Has to be carried out within 15 years as from the start of its commercial production

Article 37 par.1 Investment Act:


Investment Act does not provide for divestment rules and to date, no implementing
regulations regarding divestment have been promulgated
All implementing regulations of the old investment act remains valid as long as they do
not contradict to the Investment Act

PP 20/1994 still prevails

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WHAT IS THE MOST
SUITABLE STRUCTURE FOR
THE INVESTMENT FROM
TAX PERSPECTIVE

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STRUCTURE FROM TAX PERSPECTIVE -
Possible Structure Interplay between
Singapore and Indonesia

Indonesian
SIN Holdco
Counterpart

PMA

This structure is intended as an illustration and is not applicable to all fact scenarios. Please consult your financial, tax and
legal advisors if you need specific advice.

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STRUCTURE FROM TAX PERSPECTIVE -
Indonesian Corporate Tax of Singapore
Corporate Tax
Operational:
- Indonesia has a 25% tax rate on corporate income tax.
- Singapores top line tax rate is 17% but could be reduced subject to
qualification under various incentive schemes.

Exit Strategy
- Indonesia imposes a withholding tax of 5% on sale proceeds whenever a
foreigner sells his shares in a PMA.
- Singapore does not have equivalent taxes.

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STRUCTURE FROM TAX PERSPECTIVE -
Indonesian Withholding Tax on Dividends

1. Indonesia imposes 20% withholding tax on dividends paid overseas.


2. Under the DTA, withholding tax is reduced to 10% if recipient company owns at
least 25% of the Indonesian company.
3. Under the DTA, withholding tax is reduced to 15% if recipient company owns
less than 25% of the Indonesian company.
4. Sin Holdco must not have Permanent Establishment Status in Indonesia.
5. Sin Holdco may treat amount withheld as Tax Credits.
6. Singapore does not tax dividend received from Indonesian company as
Indonesia has higher tax rates than Singapore.

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STRUCTURE FROM TAX PERSPECTIVE -
Indonesian Withholding Tax on Interest

1. Indonesia imposes 20% withholding tax on interest on loans.


2. Under the DTA, withholding tax is reduced to 10% if lending company satisfies
DTA requirements.
3. Sin Holdco must not be pass-through entity
4. Sin Holdco must not have Permanent Establishment Status in Indonesia.
5. Sin Holdco may treat amount withheld as Tax Credits.

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WHAT IS THE MOST
SUITABLE STRUCTURE FOR
THE INVESTMENT FROM
ENFORCEMENT
PERSPECTIVE

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STRUCTURE FROM COUNTERPART
RISK MANAGEMENT AND
ENFORCEMENT PERSPECTIVE
Possible Structure Structure it offshore?
Foreign Indonesian
Investor Counterpart

Indonesian
SIN Holdco
Counterpart

PMA

This structure is intended as an illustration and is not applicable to all fact scenarios. Please consult your financial, tax and
legal advisors if you need specific advice.

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STRUCTURE FROM COUNTERPART
RISK MANAGEMENT AND
ENFORCEMENT PERSPECTIVE
Dispute Resolution Options
A. Foreign Courts

B. Indonesian Courts

C. Arbitration International or BANI

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STRUCTURE FROM COUNTERPART
RISK MANAGEMENT AND
ENFORCEMENT PERSPECTIVE Option
A: Foreign Courts
Foreign Courts Singapore, Hong Kong, United Kingdom, USA, etc
May be used for joint ventures or acquisitions structured offshore
May also be used for onshore agreements

Problems:
Foreign court orders are not recognised in Indonesia.
Only relevant to assets outside of Indonesia

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STRUCTURE FROM COUNTERPART
RISK MANAGEMENT AND
ENFORCEMENT PERSPECTIVE Option
B: Indonesian Courts
Hierarchy of Civil Courts
Some key features of Indonesian Legal System

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STRUCTURE FROM COUNTERPART
RISK MANAGEMENT AND
ENFORCEMENT PERSPECTIVE Option
B: Indonesian Courts
Hierarchy of Indonesian Civil Courts

1.District Court (Pengadilan Negeri)


2.High Court (Pengadilan Tinggi) Appeals Banding
3.Supreme Court (Mahkamah Agung) Appeals Kasasi
4.Civil Review Peninjauan Kembali

Problem:
Could be a longer process than foreign court proceedings

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STRUCTURE FROM COUNTERPART
RISK MANAGEMENT AND
ENFORCEMENT PERSPECTIVE Option
B: Indonesian Courts
SOME KEY FEATURES OF INDONESIAN COURTS

1. No execution pending appeal


2. No Doctrine of Precedence
3. No injunctions
4. Summons is served by Court Bailiff
If defendant is overseas, summon will be served through diplomatic
channels

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STRUCTURE FROM COUNTERPART
RISK MANAGEMENT AND
ENFORCEMENT PERSPECTIVE Option
C: Arbitration
1. International Arbitration Centers in Singapore, Hong Kong, United Kingdom,
United States etc.

2. Indonesia Arbitration Center (BANI Badan Arbitrase Nasional Indonesia)

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STRUCTURE FROM COUNTERPART
RISK MANAGEMENT AND
ENFORCEMENT PERSPECTIVE Option
C: Arbitration
Foreign Arbitration Award

Indonesia is a signatory to NY Convention of 1958 on Recognition of Foreign


Arbitral Awards (ratified through Presidential Regulation no 34/1981)
International arbitration award may be enforced by Indonesian courts if:
International arbitral award is issued by signatory country of NY Convention
Valid arbitration agreement and subject matter
Must be limited to matters of trade/commercial nature
Must not be contrary to public order or decency
Problem:
If losing party disputes registration and enforcement of international arbitral
award, back to civil court process.

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STRUCTURE FROM COUNTERPART
RISK MANAGEMENT AND
ENFORCEMENT PERSPECTIVE Option
C: Arbitration
LOCAL ARBITRATION AWARD FROM BANI

Within 30 days of arbitral award, arbitrator will submit and register such award with
District Court bailiff
Chairman of District Court must order enforcement of arbitral award within 30 days
of registration of request for enforcement
Prior to issuance of order of enforcement (perintah pelaksanaan), Chairman of
District Court is required to review:
Whether Arbitral award is founded upon enforceable arbitration agreement
Whether arbitral dispute is legally subject to resolution through arbitration
Whether arbitral award contradicts public order and decency/morality

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PERCULIAR FEATURES OF
INDONESIAN LAW FOR
FOREIGN INVESTORS

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PECULIAR FEATURES OF INDONESIAN
LAW FOR FOREIGN INVESTORS

Plan your timing!


Pursuant to Law No. 24 year 2009, Art 24 para (1) requires the transaction
documents to be in bahasa if it involves Indonesian individuals or business
entities - Use bilingual documents or sign in English and translate later
If a corporate action, such as merger or acquisition, results in change in control,
the corporate action must be advertised and the corporate action may not close
within 30 days of the advertisement
If such a corporate action takes place and the workers are not willing to continue
their employment, the worker shall be entitled to severance pay
No concept of trusts in Indonesia

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PARTING WORDS

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PARTING WORDS
1.Indonesia is not Singapore
The Laws are different
The Legal and Court Systems are different
Timing is different
2.Get the Partner, Target and Terms right
They are hard to change
3.Choose the right Advisors
Financial & Tax Advisors
Good financial advice is critical
Many structure offshore for tax and other reasons
Indonesian Lawyers
Always a must for onshore Legal Due Diligence and legal advice
Offshore Lawyers
To conduct offshore Legal Due Diligence and legal advice
Accountants
To conduct Financial Due Diligence and Financial Modelling

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MAIN CONTACTS
Julian Kwek
Head, Indonesia Desk
Director, Corporate & Finance
Tel: +65 6531 2451
Email: julian.kwek@drewnapier.com

Aaron Kok
Associate Director, Corporate & Finance
Tel: +65 6531 2299
Email: aaron.kok@drewnapier.com

Drew & Napier LLC


10 Collyer Quay, #10-01 Ocean Financial Centre, Singapore 049315
D: +65 6531 2425 | F: +65 6536 2148 | www.drewnapier.com

Incorporated with Limited Liability | ROC: 200102509E


Supporting www.singaporelaw.sg

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