Indonesian company law makes a clear differences between a locally-owned companies (PT) and foreign-owned companies (PT PMA). There is also a negative investment list, or also known as Daftar Negatif Investasi (DNI).

This list regulates the specific sectors that are open and closed to foreign investment. The DNI also regulates the specific proportion of equity that a foreign investor may have in a specific line of business.

Indonesia has been going through bureaucratic reforms to improve the efficiency of its internal processes to encourage foreign direct investment. This has resulted in an amendment of the DNI and the recent creation of an online process, also known as the Online Single Submission (OSS), which is currently managed by the Coordinating Ministry for Economic Affairs.

The Negative Investment List is compiled by the Indonesia Investment Coordinating Board, BKPM. It stipulates which sectors are open to foreign investment in Indonesia

The list of business sectors is split among the following categories:

  1. Closed to Investment
  2. Reserved for Small and Medium Enterprise
  3. Through Partnerships or Partnerships Kemitraan with SMEs
  4. Limited Foreign Capital Ownership
  5. Defined Location
  6. Requires a Special
  7. 100% Domestic
  8. Foreign Capital and Defined Location
  9. Foreign Capital and Special License (Commercial airline transportation can be held up to 49% by foreign ownership but subject to a domestic shareholder always holding a single majority)
  10. 100% Domestic Capital and Special License (Production of weapons and ammunition requires authorisation from the Ministry of Defence)
  11. Foreign Capital Ownership

Using the OSS system, a foreign company can apply for their Indonesian Business Identification Number (Nomor Induk Berusahaor (NIB)). The Business Identification Number is an identification number that also functions as a Company Registration Certificate (Tanda Daftar Perusahaan), an Importer’s Identification Number (Angka Pengenal Import) and a Customs Identification Number (Nomor Induk Kepabeanan).

While a business license is required for all companies, a commercial license is not always required. A commercial license is only required if a company engages in certain business activities that requires the needed technical standards, certifications and/ or licenses.

Depending on the line of business, the business license will be issued by the relevant authority.

Notwithstanding the improvements, foreign investors often experience difficulties when navigating the regulatory landscape in Indonesia.

Language might be the issue, or the common practice that takes place in Indonesia, will be always be the issues that foreigners face when dealing with the authorities. Knowing this, there are instances where foreign investors resort to the use of nominees when investing in a sector where foreign investment is either prohibited or regulated.

This often results in an grimy landscape as the shareholding of a company (both domestic and foreign investment companies) is often not easily available from the public register.

You must also be aware that the structures of beneficial equity ownership and trusts are both prohibited under Indonesian law, , although they may exist in reality. Experience and good local knowledge are essential attributes that you look for in your professional advisors.

You also need to be aware that in the event of a dispute, if any, claimants often find the dispute resolution process challenging.

Foreign investors have long used nominee arrangements to participate in industries on which the DNI imposes foreign equity restrictions.

Such arrangements are contractual in nature and they grant foreign investors some measure of control over their investments in a company through a power of attorney granted by the nominee and a debt relationship with the nominee. This is often coupled with a charge over the nominee’s shares in the company and an assignment of dividends. Such arrangements tend to create very complex issues in litigation.

So, if we go back to the questions of the partiality of the laws in Indonesia, although they are slightly supportive towards the local, it is only to garner the locals to be their own entrepreneurs.