Foreign companies which plan to enter the Indonesian market may choose to set up a representative office in order to do so. Representative offices will help their parent companies know more about the market and thus allow them to make better and more informed business decisions.
Indonesia has one of the most stable economies in the world with a steady average economic growth percentage of 5.2%. Its quarterly economy report shows a trend of stable economic growth in the coming year of 2020. In a world in which some economies are facing struggles, Indonesia stands out by not only growing the economy but also striving to reduce poverty levels to an all-time low.
This is the type of positive statistic that companies favor, thus leading to increased investment. For this reason, many choose to establish a foreign company in Indonesia.
Foreign companies have three methods of setting up a branch in Indonesia; this article discusses one of those methods, which is the representative office.
Definition of Representative Offices
Representative offices in Indonesia are offices set up by companies outside Indonesia to oversee their interests in Indonesia. Representative offices are set up by foreign companies that intend to join the Indonesian market; thus, not everyone is allowed to set up a representative office in Indonesia. Nevertheless, they are relatively common across the country
Representative offices are not branches in the way that most people imagine, and they work in a supervisory role rather than in any other role. They are extensions of the parent company that are entirely dependent on the parent company.
Representative offices are not allowed to generate money or make transactions in Indonesia. The parent company makes all the transactions on their behalf. For this reason, the representative office can be regarded as a ceremonial office because the head office is the parent company in charge of the decisions.
Representative offices are taxed in much the same way as most other local and foreign companies are. As an aside, if you have any questions about the specific details of how your representative office or any other business in Indonesia is to be taxed, you may consult our tax experts at Paul Hype Page & Co. Our tax team is well-versed in all matters related to corporate tax and tax rates in Indonesia and will help you better understand all you will need to know about taxation in Indonesia.
Why One Should Set Up a Representative Office in Indonesia
Setting up a representative office in Indonesia carries certain inherent advantages. They are as follows:
Does not need much Capital
Setting up a representative office does not require much capital. On the contrary, all it requires in terms of capital is enough money to complete the process of application and enough money to set up a company office.
Setting up a representative office is much cheaper than registering a foreign investment company. For a foreign investment company, the lowest amount of capital required is approximately US$175,000. Representative offices do not have any form of financial requirements.
Allows Parent Company to know more about the Market
Representative offices are used to link the parent company to the Indonesian market. Major companies that intend to open a foreign investment company usually start with a representative office to make their entry into the market.
Through the representative company, the parent company can do on-site market research to determine if it would be acceptable to set up a foreign investment company.
Creates a legal entity in Indonesia
Setting up a representative office is a certain and quick way of creating a legal entity in Indonesia. The government and the law recognize the representative offices.
Although representative offices are connected to the parent company, creating a legal entity nevertheless carries great benefits, especially if the company intends to set up a foreign investment company.
Even though the representative office is not allowed to generate revenue on its own, it can create jobs. The office will need to be run itself by employees to make the representative office operational. The only major point to note is the fact that the parent company is in charge of paying the workers.
Grants eligibility for a Limited Stay Permit (KITAS)
During the process of setting up a representative office in Indonesia, the government grants the business a limited stay permit known as KITAS. This limited permit is not only limited to the representative office or the business as an entity; it also covers the company executives. Therefore, executives of these companies have the opportunity to obtain a limited stay permit.
Allows sales to be made
While a representative office might not be able to generate revenue for itself, it can nevertheless generate revenue for its parent company. Representative offices are allowed to sell the products of their parent company. In other words, the representative office would thus become a buying agent of goods and services. However, the account used to carry out these transactions must be linked to the foreign company. In this way, one can build upon an already rich customer base before applying to open a foreign investment company and then establish a presence in the market.
Allows the opening of a bank account
Although a company owner will not be making any revenue while owning a representative office, it is still essential for the owner to have a bank account. This will make it easier to carry out any transactions needed to be made in the name of the parent company.
Types of Representative Offices in Indonesia
General Representative Company (KPPA)
The general representative office in Indonesia is only allowed to oversee the welfare of its parent company and companies affiliated with it. The process of applying to be a representative office takes approximately 13 days and the work permit is valid for up to three years.
General representative offices are only allowed to open a physical base in certain buildings in the country. They may neither sign nor offer invoices to customers.
Representative Office for Trading (KP3A)
This type of representative office is set up by any foreign company that needs to have a manufacturing and selling presence. The application process takes 16 days.
While the KP3A enjoys much more leeway in terms of location, it also has to deal with a temporary work permit that is valid for between just two months and one year.
Requirements for Setting Up a Representative Office in Indonesia
The process of setting up a representative office in Indonesia depends on the type of representative office in question; however, the setup of all representative offices in Indonesia requires the approval of the Investment Coordinating Board (BKPM).
Should you be interested in setting up a representative office or any other business entity in Indonesia, we at Paul Hype Page & Co can be of service to you. We will guide you through the entire process of incorporation. This way, you will not experience any major problems and issues because we will ensure that such is the case.
Foreign Construction Representative Office
This representative office is mainly focused on tapping into the lucrative construction industry. The construction industry has been booming in Indonesia. Therefore, representative construction offices go through many checks imposed by the government.
They are only allowed to offer foreign construction services via advice and quotations. The following are the steps involved in registering a representative construction office:
Acquire an expertise certificate(SKA)as verification of credentials.
Receivean SBU certificate from LPJK (Indonesia Construction Service Development Board).
Acquire a BUJKA permit from BKPM.
Get a domicile permit.
Generateatax registration number (NPWP).
Take a SIUJK (construction business permit) to the relevant local government to avoid issues after the commencement of business operations.
Receive a company registration number(TDP).
General Representative Office
General representative offices are much simpler to set up and maintain. The following is the process of doing so:
Pick out a person whose duty it will be to manage the representative office.
Get the required documents including a letter of appointment, letter of intent, resume, work permit, company resume, and sometimes a letter of reference.
Submit the paperwork to BKPM and wait for response.
After two months, the owner of the office would have received everything needed such as approval of the representative office, tax number, and domicile letter.
Foreign Trade Representative Office
The general purpose for having a foreign trade representative office is to engage in foreign trade. They do not operate in the same way that most representative offices do. However, the parent company can make returns on foreign trade by making use of its representative offices as conduits. To do so, it may use representative offices as sales agents to buy and sell.
The following are the steps required to register this type of representative office:
Select a leader who must have the requisite knowledge and at least three years of experience.
Compile all necessary documents including letter of appointment and letter of reference.
Submit the documents and wait for BKPM to grant a temporary license known as SIUP3A.
Receive a local tax registration number (NPWP).
Receive a certificate of registration for the company (TDP).
Get a permanent SIUP3A.
Restrictions Placed on Representative Offices in Indonesia
The main restriction placed on representative offices in Indonesia is that of revenue generation. All representative offices are not allowed to generate revenue for themselves; all revenue is generated for the parent company via representative offices.
Some representative offices such as general representative offices are only allowed to set up in certain buildings such as high–rise buildings. On the other hand, others such as foreign trade representative offices can choose their location.