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.
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