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Although the strict regulations might seem like a major disadvantage to many companies, you can still pursue other activities with an agent for the parent company. It actually depends upon the type of representative office and there are 4 options to consider.
What is a Representative Office?
For foreign investors intending to expand their business to Indonesia, a representative office will be a great choice. You can set up a branch, but with certain major restrictions. With this form of business entity, you are not allowed to generate revenues or perform any business transactions directly under the name of the representative office. You should also own a main company overseas to manage the representative office in Indonesia. Most of the representative offices focus on conducting market research as well as marketing for the company through selling or buying agents. Some foreign investors choose to set up a representative office in Indonesia before establishing a PT PMA to promote their company first.
The representative office will be managed by one or more people, either foreigners or Indonesians. They are appointed by the foreign company as their representatives to:
- Handle the company or its affiliates concerns
- Prepare the establishment and development of foreign direct investment companies, in Indonesia or in other countries
Pros & Cons of Representative Office in Indonesia
With different types of business entities, there are both pros and cons. If you do not have prospective clients in Indonesia and wish to explore your business perspectives in this country, it might be better to open a representative office instead of a PT PMA company first. There are various advantages and disadvantages of opening a representative office in Indonesia.
- Quick and easy to set up
- No requirements for large investments or paid up capital
- Less paperwork; you will only need to report income tax for the employees as well as (rented) office space tax
- You are not allowed to generate revenues, profit or engage in sales directly
4 Types of Representative Office
Although the strict regulations might seem like a major disadvantage to many companies, you can still pursue other activities with an agent for the parent company. It actually depends upon the type of representative office. There are 4 options to consider:
- Foreign Representative Office
- Foreign Trade Representative Office
- Foreign Construction Representative Office
- Foreign Bank Representative Office
Among all four types of representative office, the first two options are the most popular among foreign companies.
1) Foreign Representative Office (KPPA)
Establishing a foreign representative office (Kantor Perwakilan Perusahaan Asing – KPPA) allows you to create a market presence in Indonesia. A Foreign Representative office is usually set up for management reasons. The roles are limited to supervising, managing, liaising, coordinating and representing the main company.
To start off, you must submit an application to the Indonesian Investment Coordinating Board (BKPM). Another option would be a power of attorney. There are several steps to consider for a successful application and that will certainly take you some time. It is important to review the following points:
– Appoint a business representative
– Collect all the documents needed
- Notarized letter of Intent
- Notarized letter of Appointment
- Letter of Reference
- Resume and work permit of the company’s representative
– Submit application to BKPM
Once all the paperwork has been submitted, BKPM will issue the license, usually within one month. The license is valid for three. With the new regulation for BKPM, there are no limitations on the extension of the license.
2) Foreign Trade Representative Office (SIUP)
According to the Minister of Industry, all Foreign Trade Companies or Joint Enterprise (Association) of Foreign Companies that are interested in setting up their representative office in Indonesia, are required to obtain a license SIUP3A (Surat Izin Usaha Perwakilan Perusahaan Perdagangan Asing) from the Ministry of Industry and Trade of the Republic of Indonesia.
Only Foreign individuals or Indonesian individuals with high educational background and related experiences are eligible to manage the representative office.
Foreign Trade Representative Office is used for trading as well as marketing. The permitted activities of a Foreign Trade Representative office with an active permit SIUP3A (Surat Izin Usaha Perwakilan Perdagangan Asing) are as follows:
- Act as a buying or selling agent
- Conduct market research and create promotional materials
Both Foreign representative office and Foreign Trade representative office are not allowed to generate revenues, profit or engage in sales directly.
To establish a Foreign Trade Representative Office, the application process is the same as for Foreign Representative office (KPPA). The only difference is that all documents such as the Letter of Intent or Letter of Appointment must be signed by a notary in the country of origin and legalized by the Indonesian Ministry of Foreign Affairs.
3) Foreign Construction Representative (SIUJK)
Unlike the previous two types, the construction sector is regulated by Ministry of Public Works and also partially by BKPM. A SIUJK permit (surat izin usaha jasa konstruksi) is required to operate in the construction area. It is important to note that only large companies can qualify for the license, which is issued for three months with the possibility of extension.
Unless regulated differently by a related authority, the distribution of work in a Joint Operation is as follows:
- At least 50% of the value of construction work is performed in Indonesia; and
2. At least 30% of the value of construction work is performed by the Indonesian construction company
For construction planning work, the distribution of work in a Joint Operation is as follows:
- The entire technical planning work is performed in Indonesia; and
2. At least 50% of the value of construction planning work is performed by the Indonesian construction company
The Foreign Construction Representative office allows you to:
- Do market research and contact institutions/companies
- Be involved in procedure of construction services
- Appoint local and foreign manpower to head the office
To establish a Foreign Construction Representative office, all the necessary documents must to be submitted to the Ministry of Public Works and the administration fee must be paid. The fee can amount to either $5,000 in the case of construction consultancy services sector, or $10,000 if target sector is construction implementation services.
Apart from the same requirements as for a Foreign Representative Office, several documents must be submitted along with the application to prove that the main company is reputable.
4) Foreign Bank Representative Office
Although this option is rarely used, a foreign bank can open a representative office in Indonesia to act as a liaison office between the foreign bank and its customers in Indonesia. This type of representative office is regulated and monitored by Bank Indonesia, the Indonesian central bank. As a liaison office, the representative office cannot conduct banking activities in Indonesia, but is only allowed to:
- Provide information to third parties within Indonesia on requirements and procedures for establishing relations with its principal/branch offices outside of Indonesia
- Assist its main office/branch outside of Indonesia in supervising credit collateral in Indonesia
- Act as a proxy in making contact with institutions to represent the interests of its main office/branch outside of Indonesia
- Act as supervisors of projects within Indonesia which are partially or fully financed by its main office/branch outside of Indonesia
- Perform promotional activities
- Provide information on Indonesia’s trade, economic, and finance matters for foreign parties or vice-versa; and assist Indonesian exporters in obtaining market access outside of Indonesia through international network of banks affiliated with the representative office or vice-versa
The opening of a representative office must have permission from Board of Governor of Bank Indonesia. Any banks that intend to open a representative office in Indonesia should have a total asset of which ranks top 300 in the world. The application letter should be signed by the Director of the bank and addressed to the Board of Governor of Bank Indonesia.
In the application letter, you should include the reason to open a representative office in Indonesia. The application letter must be accompanied by:
- A copy of document that proves the total asset of bank is ranked top 300 in the world
- The letter of assignment from main office to the candidate of head of representative office in Indonesia
- The curriculum vitae of the candidate of head of representative office in Indonesia
- A letter that states the candidate of head of representative office will only work for the bank
- A letter that states no objection from banking authority where the main office is located, to open a representative office in Indonesia
A letter of approval to open a representative office in Indonesia will be given by Bank Indonesia within 30 days after all completed documents is received by Bank Indonesia. With regard to the application process, Bank Indonesia will check the of the documents and conduct an interview with the candidate of head of representative office.