Indonesia is the fourth most populous country in the world. It has become a transit area for traders that could develop Indonesia’s tourism activities and a good location for traders to do export and import as it is strategically located in between two continents (Asia and Australia) and two Oceans (Indian and Pacific).
With it being the growing economy of the South East Asia region, many foreign investors are seeking ways to expand their business activities in Indonesia.
Types of Business Entities in Indonesia
Perseroan Terbatas (PT)
Perseroan Terbatas (PT) or Limited Liability Company is a legal entity to run a business that consists of capital shares, which is a part owner of shares owned. A majority of the companies in Indonesia are Local PT.
- Can carry out many business activities in various business fields
- Lower minimum paid-up capital than foreign owned company
- Legal Protection Pursuant to the Laws and Regulations
- Clear Separation between Personal Asset and Company Asset
Foreign Owned Company (PT PMA)
A PT PMA (Perseroan Terbatas Penanaman Modal Asing) is a legal entity which foreigner can use to conduct commercial activities in Indonesia established under the Indonesia law. In a PT PMA, foreigner both individual and legal entities can be registered as shareholder. However, the shares of PT PMA can be owned up to 100% by foreign investors subject to the Negative Investment List.
- Shares of PMA can be owned up to 100% by the foreign investors, but subject to the Negative Investment List
- On-site tax or import duties are lower
- Has same rights and responsibilities as local companies
Management structure of the Indonesian Company
The management of a company is comprised of a board of directors (BOD) and a board of commissioners (BOC). The BOD represents the company and is responsible for its daily management, while the BOC acts as an advisory and/or supervisory organ to the BOD.
Under the Indonesian Company Law, all individuals can be appointed as directors, unless they have been:
- Declared bankrupt in the five years before their appointment.
- Members of a BOD or BOC found to be at fault in causing a company to be declared bankrupt.
- Sentenced for a crime that caused losses to the state and/or a crime related to the finance sector.
A relevant technical institution in the related business sector may impose additional requirements on becoming a director.
Foreign nationals are prohibited from serving as human resources directors and there are a number of other directorship positions that foreign nationals are prohibited from holding under the employment laws and regulations.
There is no general requirement for a director to reside in Indonesia. However, the Minister of Manpower Decree No. 40 of 2012 regarding Certain Positions Should Not be Taken by Foreign Manpower (MOM Dec 40/2012) sets out various company positions related to personnel and industrial relations that cannot be taken by foreign nationals.
Directors’ and officers’ Liability
The BOD and its members are not liable for the acts taken for and on behalf of the company, but the member(s) of the BOD and BOC can be personally liable for the losses of the company, if it can be proven that the loss resulted from the fault or negligence of the BOD or BOC.
Parent Company Liability According to Company Law
A parent company, in its role as a shareholder for its subsidiary, is not personally liable for the actions or losses of the subsidiary beyond its investment into the subsidiary. However, the parent company can be liable if one of the following applies:
- Subsidiary no longer fulfills the requirements to be a legal entity.
- Parent company used the subsidiary for its own interests in bad faith.
- Parent company is directly involved in an unlawful act committed by the subsidiary.
Generally, product liability is regulated under the Consumer Protection Law. Products and services must:
- Fulfill certain required standards.
- Conform with the information stated in their packaging.
- Not be falsely marketed or advertised.
Several products, such as foods and drugs, are subject to additional regulatory requirements as regulated by, among other things:
- Law No. 36 of 2009 regarding Health.
- Law No. 18 of 2012 regarding Food.
- Various regulations enacted by relevant authorities, such as the Food and Drug Supervisory Agency (Badan Pengawas Obat dan Makanan) (BPOM))
Tax allowances are set out under Law No. 7 of 1983, as amended by Law No. 36 of 2008 regarding Income Tax (Income Tax Law), which provides investors with the following facilities:
- Additional net income reduction, up to a maximum of 30% of the amount of investment in fixed assets, including land, used for main business activities, which are charged at 5% per annum for six years from the commencement of commercial production.
- Accelerated depreciation of tangible assets and accelerated amortisation of intangible assets.
- A loss carry-forward period of between five and ten years.
- Tax on dividends at 10%, unless the relevant tax treaty stipulates a lower rate.
Not all business sectors are entitled to receive tax allowances. The list of business sectors and regions that can be granted tax allowance are stipulated in Government Regulation No. 18 of 2015, as amended by Government Regulation No. 9 of 2016 regarding Income Tax Facilities for Capital Investment in Certain Business Fields and/or in Certain Regions.
Government Regulation No. 94 of 2010 regarding Calculation of Taxable Income and Redemption of Income Tax in the Current Tax Year (GR 94/2010) provides that taxpayers conducting new investments in certain pioneer industries, which do not receive a tax allowance (see above) can be granted corporate income tax exemption or reduction facilities known as tax holidays under the Investment Law. The corporate income tax facility reduction starts at 10% and goes up to a maximum 100%. This reduction can be given at least for five years and at the most for ten years.
Registration and Formation
The main registration requirements to establish a corporate business vehicle (that is, a PT PMA) are:
- Executing a deed of establishment in the Indonesian language before a public notary.
- The PT PMA must comply with any shareholding limitation requirement set out in the Negative Investment List
- Obtaining approval from the Ministry of Law and Human Rights (MOLHR) for the establishment of the PT PMA.
- Obtaining a certificate of domicile (Surat Keterangan Domisili Perusahaan) (SKDP) from the Sub-District Head (Lurah).
- Obtaining a taxpayer registration number (Nomor Pokok Wajiba Pajak) (NPWP) from the tax office.
- Opening a bank account in Indonesia.
The company must then obtain the appropriate business licence before it commences production/operation.
A PT PMA must normally submit the following reports:
- Capital Investment Activity Report (Laporan Kegiatan Penanaman Modal) (LKPM) quarterly before it obtains a business licence, and every semester once it has obtained a business licence.
- Audited Annual Financial Statement to the Ministry of Trade (MOT).
- Mandatory Manpower Report to the local manpower office.
Companies engaged in the financial services sector must submit a monthly report and audited annual financial statement, as well as an annual business plan and implementation of good corporate governance report, to the Indonesian Financial Services Authority (Otoritas Jasa Keuangan) .
Tax Resident Employees
Tax resident employees are subject to the following taxes:
- Income tax applied progressively from 5% to 30% based on the employee’s income.
- Social security in the form of:
- old age insurance (Jaminan Hari Tua) (JHT) at 2% of monthly salary;
- pension insurance (Jaminan Pensiun) (JP) at 1% of monthly salary; and
- healthcare contribution at 1% of monthly salary (capped at IDR4,725,000).
There may be additional charges for additional family members.
Non-tax Resident Employees
Non-tax resident employees are subject to a flat-rate of 20% of income tax, unless otherwise regulated by the relevant tax treaty between Indonesia and the non-tax resident employee’s country of origin. In addition, there is a 5% final tax on the proceeds of the sale of certain assets and/or shares of an Indonesian company owned by a non-tax resident.
Employers must withhold the income tax of tax resident and non-tax resident employees. They must also make the following social security contributions for their employees:
- JHT at 3.7% of the employee’s monthly salary.
- JP at 2% of the employee’s monthly salary.
- Healthcare contribution at 4% of the employee’s monthly salary (capped at IDR4,725,000).
Tax Resident Business
A business entity is tax resident when it is established or domiciled in Indonesia.
Non-tax Resident Business
Non-tax resident businesses are:
- Entities that are not established and have no domicile in Indonesia and that carry on business or conduct activities through a permanent establishment in Indonesia.
- Entities that are not established and have no domicile in Indonesia and that receive or earn income from Indonesia other than from carrying on business or conducting activities through a permanent establishment in Indonesia.
A permanent establishment can be used to carry on business or conduct activities in Indonesia by:
- Individuals that do not reside in Indonesia.
- Individuals that live in Indonesia for not more than 183 days for a period of 12 months.
- Entities that are not established and have no domicile in Indonesia.
A permanent establishment has the same tax obligations as a tax resident. Therefore, any income generated by a permanent establishment in Indonesia is taxable in Indonesia as if the income was generated by an Indonesian tax subject.
Taxes that are applicable to Business
- Income tax. Income tax is imposed on income received or obtained in a fiscal year. The corporate tax rate is generally 25%. A 5% reduction is applicable for publicly listed companies that fulfill certain requirements.
- VAT. VAT is imposed on the delivery of goods and services. The rate is 10%.
- Luxury goods sales tax. Taxes are imposed on the import and/or delivery of luxury goods and services in addition to VAT. Government Regulation No. 145 of 2000 regarding Goods Subject to Luxury Tax (GR 145/2000) stipulates the goods that are considered as luxury goods and the rate of sales tax on them. Under GR 145/2000, six types of goods are subject to luxury sales tax at rates ranging between 10% and 75%.
- Land and building tax. Land and building tax is imposed annually on property, buildings, and land in Indonesia. The rate of land and building tax depends on the region where the land and/or building is located.
- Duty on Acquisition of Rights to Land and Building (BPHTP). BPHTB taxes are imposed on individuals or entities that obtain the rights to land and/or building. The rate of BPHTB depends on the region where the land and/or building is located.
- Stamp duty. Stamp duty of IDR6,000 is imposed on documents to be used in court and documents that have a value.
- Local government tax. Depending on an entity’s domicile, there are various taxes, charges, and duties imposed by the local government, such as vehicle tax, restaurant tax and hotel tax.
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