BUSINESS ORGANIZATIONS.
1a. Limited Liability Company.
(Perseoan Terbatas - denoted PT): This arrangement is available under foreign joint ventures based on the penanman modal asing (PMA). PMA companies may be either private or publicly listed on the stock exchange. For most foreign investors, this type of incorporation is the most relevant.
Index
1b. Branch of a Foreign Corporation.
The foreign investment law provides that enterprises may operate as a branch in limited circumstances. In practice, this applies to some banks, and to certain mining operations.
Index
1c. Representative office.
A foreign company may establish a representative office in Indonesia. The representative office must be licensed by either the Department of Trade or the Ministry of Public Works. A representative office registered under the Department of Trade may not engage in business activities, but may conduct promotional or quality control activities. A representative office registered under the Ministry of Public Works may engage in specific business activities.
Index
1d. Regional representative office.
A foreign company may establish a regional representative office (RRO) if domiciled in one of Indonesia's main cities. Approval is by the Investment Coordinating Board (BKPM) and the license is valid indefinitely. An RRO's function is to oversee operations of foreign organizations in more than one Asian country.
Index
1e. Full Partnership (Firma).
In principle, foreign participation in Indonesian partnerships is permitted. However, as a matter of long-standing government policy, no such participation is permitted in practice. Partners are personally liable for all obligations of the enterprise.
Index
2. EXPORTING.
2a. Agents and Distributors/Importers.
The Government of Indonesia reserves the field of exporting and importing, as well as the distribution network, for Indonesian companies. The exception to this rule is for foreign investors involved in manufacturing. They may import the required raw materials and may also export their products. Foreign investors may not, however, distribute their products in the domestic marketplace. The investor can frequently arrange to have a separate trading company (owned by its local partner) handle distribution.
U.S. firms can apply with the Indonesian Department of Trade to open a trade representative office. The office may take the form of an Indonesian company, a resident or an expatriate. Only one trade representative office may be opened per company. Though these offices are not allowed to actually participate in direct sales or distribution, they may market and promote products. These offices can work in close cooperation with Indonesian import advisors who may act as importers and distributors for international principals. The trade representative can act as an advisory liaison between the principal and the Indonesian firm.
U.S. firms usually expand sales in Indonesia through the use of agents. The main difference between an agent and a trade representative is that an agent may perform all trade activities and is allowed to have several offices throughout Indonesia. Frequently, an expatriate trade representative can be hired by the agent, thus combining the functions of the two and giving the principal in the United States a greater degree of control over the actions of the agent.
The Indonesian government has instituted a wide array of protective laws aimed at preventing U.S. companies from changing agents. Contract regulations are very specific, and generally favor local agencies. The Ministry of Trade will issue a sole agency license only if it approves of the products being imported. These agreements last for three years, but may be extended. Once the expiration of the contract has expired, the foreign principal may not change agents without first offering the previous agent a new contract. The principal may only hire one agent for the entire country, while resident corporations may engage in many sole agency agreements.
An agency contract may only be terminated with the prior approval of both contracting parties. Another cause for termination is if the agent changes structurally, (i.e., files for bankruptcy or merges with another company). The principal can terminate the agent contract due to "non-performance" or "extremely inappropriate activities". However, as a matter of practice, it usually quite difficult for a foreign principal to extricate itself from a sole agency agreement without providing the agent with significant indemnification. The principal must reimburse the agent for costs incurred in the marketing and distribution if such termination does take place. If the foreign firm does not choose to work with a new agent, it must provide the former agent with enough spare parts to last two years.
Index
2b. Import Restrictions.
Many items may only be imported by government approved importers. The import of agricultural products, iron and steel goods, and goods considered vital to national security are limited to government-approved importers. Quotas also exist for foods, beverages, raw materials, milk powder, and other such goods. This list is revised and updated annually. In addition, the government requires that import contracts worth over Rp 500 million be linked to the export of Indonesian goods of equivalent value.
Index
2c. Import Duties.
Duties generally range from zero percent on raw materials to 200 percent for certain vehicles. Indonesia also imposes an import surcharge ranging from five to 30 percent on selected items. Products subject to the surcharge include food, chemicals, and pharmaceuticals. Most import items face a 10 to 30 percent tariff range, with less essential goods encountering duties in the 50 to 60 percent range. There are, however certain exemptions from duties, administered on a case-by-case, government-sanctioned basis. These include exemptions for factory equipment, spare parts, raw materials, and certain consumable products.
There are also other taxes on imports, including withholding taxes of 2.5 percent and 7.5 percent depending whether or not an import license is required; value-added taxes (VATs) of 10 percent; and sales taxes on luxury items, ranging from 10 to 30 percent.
Index
2d. Documentation.
Commercial shipments to Indonesia must include a commercial invoice, bill of lading, or airway bill, a certificate of origin (when applicable), an insurance certificate for any policy purchased outside of Indonesia, a packing list, and whatever sanitary certificates are required for the particular shipment.
Index
3. COMMERCIAL POLICIES.
3a. Free-Trade Zones.
The Indonesian government has established a free-trade zone (FTZ), located on Batam island, in an attempt to promote foreign investment. The Batam Authority administers the island and application is made directly to the Authority, which forwards it to the BKPM for approval.
The government has also created bonded zones in Jakarta, Surabaya, Semarung, Medan/Belawan, Cilacap, and Ujung Pandung. Among the incentives offered by these zones are fewer regulations regarding land titles and various building permits, allowances permitting an unlimited number of expatriates to work at enterprises located in the zones, and exemption from the licensing requirements of the regional government authorities.
Index
3b. Exchange Controls.
Indonesia imposes no foreign exchange restrictions. Investors are free to transfer funds abroad. Repatriation of profits, costs related to expatriate employment expenses, loan principal and interest, royalties, technical fees, as well as capital transfers are allowed without any prior permission.
Index
4. FOREIGN INVESTMENT.
The government views foreign investment as a way of attracting high technology and business to Indonesia. Investment is coordinated by the BKPM, which works with various government ministries to formulate investment policy. Indonesia has made strides to improve the foreign investment climate by opening up more industries and allowing a wider variety of manufacturing inputs to be imported. The BKPM publishes a "negative list" which identifies the 16 areas completely closed to foreign investment, and the 44 areas where foreign investment is conditionally permitted.
In Indonesia, foreigners are not permitted to own land; all foreign investors must have an Indonesian joint venture partner to invest in an Indonesian venture. In April, 1992, the Government of Indonesia loosened restrictions transferring majority ownership to nationals. Under these rules, foreign investors are limited to 80 percent equity in a limited liability company, which must be reduced to 49 percent within 20 years of commencement of commercial production.
Index
4a. Incentives.
Various fiscal measures are available to both foreign and domestic investors. Investors may import duty free (or at reduced rates) capital goods, tools, and spare parts which are to be used in the start-up of a venture. Additional incentives include indefinite postponement of the value-added tax (VAT) on inputs imported for use in items manufactured for re-export, unrestricted foreign exchange transfers, and exemption from the capital stamp tax on initial foreign capital.
Index
5. INTELLECTUAL PROPERTY RIGHTS.
5a. Patents.
In 1991, Indonesia adopted its first patent protection laws, and currently belongs to the Paris Convention for the Protection of Industrial Property. The new law outlines patent application procedures, application fees, registration of patent consultants, and patent announcements. Under this law, products and production processes may be patented for a 14-year period with an optional two-year extension period.
Index
5b. Trademarks.
In August 1992, Indonesia passed a new trademark law which will bring its laws into line with international standards. In addition, the Indonesian government's trademark office in May 1991 expanded its definition of well-known marks to include those known in Indonesia and abroad. This coverage is not limited to the same class of goods.
Index
5c. Copyrights.
Amendments to Indonesia's copyright law in 1989 brought it largely into conformity with international standards for copyright protection. While Indonesia has not joined an international copyright convention, it has recently entered into a bilateral copyright agreement with the United States. Enforcement of these rights has been undertaken by the government in the sound recording and book piracy areas. Computer software and videotape piracy, however, remains a problem.
Index
6. TAXATION.
6a. Income Taxes.
There is a three-tiered income tax system:
* Income up to Rp 10 million is taxed at 15 percent.
* Income from Rp 10 million to Rp 50 million is taxed at 25 percent.
* Income above Rp 50 million is taxed at 35 percent.
Dividends from resident corporations, interest, rents, royalties and other income derived from property, management compensation, and after-tax profits paid to non-residents are subject to an additional withholding tax of 20 percent. When paid to a resident, they are subject to a withholding tax of 15 percent. There are depreciation deductions for most assets (excluding buildings). Deductions vary from five to 50 percent depending on the life of the product.
Index
6b. Indirect Taxes.
Indonesia has implemented a value-added tax (VAT) system to replace the previous sales tax system. The VAT rate is 10 percent on imported goods, except for goods and basic materials used to produce export commodities and machinery and equipment used in developing industries. In addition to the VAT, there is a sales tax of between 10 and 30 percent levied on luxury goods.
Index
7. REGULATORY AGENCIES.
* Investment Coordinating Board (BKPM) approves all new investments, issues licenses and permits, and formulates regulatory policy with the various ministries.
* The Bank of Indonesia regulates and administers the banking system, and handles the government's monetary policy.
* The Ministry of Environment ensures that the government's environmental regulations are enforced.
* Societe Generale de Surveillance (SGS) is charged with handling Indonesia's customs authorizations.
* The Departments of Trade and Health, issue approvals for the production of certain chemicals and pharmaceuticals.
* The Capital Market Executive Agency (BAPEPAM) operates the stock exchange and its activities.
Index
BUSINESS ORGANIZATIONS.
1a. Limited Liability Company.
(Perseoan Terbatas - denoted PT): This arrangement is available under foreign joint ventures based on the penanman modal asing (PMA). PMA companies may be either private or publicly listed on the stock exchange. For most foreign investors, this type of incorporation is the most relevant.
Index
1b. Branch of a Foreign Corporation.
The foreign investment law provides that enterprises may operate as a branch in limited circumstances. In practice, this applies to some banks, and to certain mining operations.
Index
1c. Representative office.
A foreign company may establish a representative office in Indonesia. The representative office must be licensed by either the Department of Trade or the Ministry of Public Works. A representative office registered under the Department of Trade may not engage in business activities, but may conduct promotional or quality control activities. A representative office registered under the Ministry of Public Works may engage in specific business activities.
Index
1d. Regional representative office.
A foreign company may establish a regional representative office (RRO) if domiciled in one of Indonesia's main cities. Approval is by the Investment Coordinating Board (BKPM) and the license is valid indefinitely. An RRO's function is to oversee operations of foreign organizations in more than one Asian country.
Index
1e. Full Partnership (Firma).
In principle, foreign participation in Indonesian partnerships is permitted. However, as a matter of long-standing government policy, no such participation is permitted in practice. Partners are personally liable for all obligations of the enterprise.
Index
2. EXPORTING.
2a. Agents and Distributors/Importers.
The Government of Indonesia reserves the field of exporting and importing, as well as the distribution network, for Indonesian companies. The exception to this rule is for foreign investors involved in manufacturing. They may import the required raw materials and may also export their products. Foreign investors may not, however, distribute their products in the domestic marketplace. The investor can frequently arrange to have a separate trading company (owned by its local partner) handle distribution.
U.S. firms can apply with the Indonesian Department of Trade to open a trade representative office. The office may take the form of an Indonesian company, a resident or an expatriate. Only one trade representative office may be opened per company. Though these offices are not allowed to actually participate in direct sales or distribution, they may market and promote products. These offices can work in close cooperation with Indonesian import advisors who may act as importers and distributors for international principals. The trade representative can act as an advisory liaison between the principal and the Indonesian firm.
U.S. firms usually expand sales in Indonesia through the use of agents. The main difference between an agent and a trade representative is that an agent may perform all trade activities and is allowed to have several offices throughout Indonesia. Frequently, an expatriate trade representative can be hired by the agent, thus combining the functions of the two and giving the principal in the United States a greater degree of control over the actions of the agent.
The Indonesian government has instituted a wide array of protective laws aimed at preventing U.S. companies from changing agents. Contract regulations are very specific, and generally favor local agencies. The Ministry of Trade will issue a sole agency license only if it approves of the products being imported. These agreements last for three years, but may be extended. Once the expiration of the contract has expired, the foreign principal may not change agents without first offering the previous agent a new contract. The principal may only hire one agent for the entire country, while resident corporations may engage in many sole agency agreements.
An agency contract may only be terminated with the prior approval of both contracting parties. Another cause for termination is if the agent changes structurally, (i.e., files for bankruptcy or merges with another company). The principal can terminate the agent contract due to "non-performance" or "extremely inappropriate activities". However, as a matter of practice, it usually quite difficult for a foreign principal to extricate itself from a sole agency agreement without providing the agent with significant indemnification. The principal must reimburse the agent for costs incurred in the marketing and distribution if such termination does take place. If the foreign firm does not choose to work with a new agent, it must provide the former agent with enough spare parts to last two years.
Index
2b. Import Restrictions.
Many items may only be imported by government approved importers. The import of agricultural products, iron and steel goods, and goods considered vital to national security are limited to government-approved importers. Quotas also exist for foods, beverages, raw materials, milk powder, and other such goods. This list is revised and updated annually. In addition, the government requires that import contracts worth over Rp 500 million be linked to the export of Indonesian goods of equivalent value.
Index
2c. Import Duties.
Duties generally range from zero percent on raw materials to 200 percent for certain vehicles. Indonesia also imposes an import surcharge ranging from five to 30 percent on selected items. Products subject to the surcharge include food, chemicals, and pharmaceuticals. Most import items face a 10 to 30 percent tariff range, with less essential goods encountering duties in the 50 to 60 percent range. There are, however certain exemptions from duties, administered on a case-by-case, government-sanctioned basis. These include exemptions for factory equipment, spare parts, raw materials, and certain consumable products.
There are also other taxes on imports, including withholding taxes of 2.5 percent and 7.5 percent depending whether or not an import license is required; value-added taxes (VATs) of 10 percent; and sales taxes on luxury items, ranging from 10 to 30 percent.
Index
2d. Documentation.
Commercial shipments to Indonesia must include a commercial invoice, bill of lading, or airway bill, a certificate of origin (when applicable), an insurance certificate for any policy purchased outside of Indonesia, a packing list, and whatever sanitary certificates are required for the particular shipment.
Index
3. COMMERCIAL POLICIES.
3a. Free-Trade Zones.
The Indonesian government has established a free-trade zone (FTZ), located on Batam island, in an attempt to promote foreign investment. The Batam Authority administers the island and application is made directly to the Authority, which forwards it to the BKPM for approval.
The government has also created bonded zones in Jakarta, Surabaya, Semarung, Medan/Belawan, Cilacap, and Ujung Pandung. Among the incentives offered by these zones are fewer regulations regarding land titles and various building permits, allowances permitting an unlimited number of expatriates to work at enterprises located in the zones, and exemption from the licensing requirements of the regional government authorities.
Index
3b. Exchange Controls.
Indonesia imposes no foreign exchange restrictions. Investors are free to transfer funds abroad. Repatriation of profits, costs related to expatriate employment expenses, loan principal and interest, royalties, technical fees, as well as capital transfers are allowed without any prior permission.
Index
4. FOREIGN INVESTMENT.
The government views foreign investment as a way of attracting high technology and business to Indonesia. Investment is coordinated by the BKPM, which works with various government ministries to formulate investment policy. Indonesia has made strides to improve the foreign investment climate by opening up more industries and allowing a wider variety of manufacturing inputs to be imported. The BKPM publishes a "negative list" which identifies the 16 areas completely closed to foreign investment, and the 44 areas where foreign investment is conditionally permitted.
In Indonesia, foreigners are not permitted to own land; all foreign investors must have an Indonesian joint venture partner to invest in an Indonesian venture. In April, 1992, the Government of Indonesia loosened restrictions transferring majority ownership to nationals. Under these rules, foreign investors are limited to 80 percent equity in a limited liability company, which must be reduced to 49 percent within 20 years of commencement of commercial production.
Index
4a. Incentives.
Various fiscal measures are available to both foreign and domestic investors. Investors may import duty free (or at reduced rates) capital goods, tools, and spare parts which are to be used in the start-up of a venture. Additional incentives include indefinite postponement of the value-added tax (VAT) on inputs imported for use in items manufactured for re-export, unrestricted foreign exchange transfers, and exemption from the capital stamp tax on initial foreign capital.
Index
5. INTELLECTUAL PROPERTY RIGHTS.
5a. Patents.
In 1991, Indonesia adopted its first patent protection laws, and currently belongs to the Paris Convention for the Protection of Industrial Property. The new law outlines patent application procedures, application fees, registration of patent consultants, and patent announcements. Under this law, products and production processes may be patented for a 14-year period with an optional two-year extension period.
Index
5b. Trademarks.
In August 1992, Indonesia passed a new trademark law which will bring its laws into line with international standards. In addition, the Indonesian government's trademark office in May 1991 expanded its definition of well-known marks to include those known in Indonesia and abroad. This coverage is not limited to the same class of goods.
Index
5c. Copyrights.
Amendments to Indonesia's copyright law in 1989 brought it largely into conformity with international standards for copyright protection. While Indonesia has not joined an international copyright convention, it has recently entered into a bilateral copyright agreement with the United States. Enforcement of these rights has been undertaken by the government in the sound recording and book piracy areas. Computer software and videotape piracy, however, remains a problem.
Index
6. TAXATION.
6a. Income Taxes.
There is a three-tiered income tax system:
* Income up to Rp 10 million is taxed at 15 percent.
* Income from Rp 10 million to Rp 50 million is taxed at 25 percent.
* Income above Rp 50 million is taxed at 35 percent.
Dividends from resident corporations, interest, rents, royalties and other income derived from property, management compensation, and after-tax profits paid to non-residents are subject to an additional withholding tax of 20 percent. When paid to a resident, they are subject to a withholding tax of 15 percent. There are depreciation deductions for most assets (excluding buildings). Deductions vary from five to 50 percent depending on the life of the product.
Index
6b. Indirect Taxes.
Indonesia has implemented a value-added tax (VAT) system to replace the previous sales tax system. The VAT rate is 10 percent on imported goods, except for goods and basic materials used to produce export commodities and machinery and equipment used in developing industries. In addition to the VAT, there is a sales tax of between 10 and 30 percent levied on luxury goods.
Index
7. REGULATORY AGENCIES.
* Investment Coordinating Board (BKPM) approves all new investments, issues licenses and permits, and formulates regulatory policy with the various ministries.
* The Bank of Indonesia regulates and administers the banking system, and handles the government's monetary policy.
* The Ministry of Environment ensures that the government's environmental regulations are enforced.
* Societe Generale de Surveillance (SGS) is charged with handling Indonesia's customs authorizations.
* The Departments of Trade and Health, issue approvals for the production of certain chemicals and pharmaceuticals.
* The Capital Market Executive Agency (BAPEPAM) operates the stock exchange and its activities.
Index
