Knowledge is key when investing in Indonesia unleashed

By Mohamed Idwan (Kiki) Ganie, Lubis Ganie Surowidjojo
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Indonesia has significant potential as a destination for investment, both regionally and on the world stage. This is not a new development, considering that ever since Indonesia’s independence foreign companies have made major investments in the country to develop its resources, build infrastructure, establish manufacturing facilities for export, and provide products and services for the domestic market. More recently, however, Indonesia has emerged as an investment destination that combines an ample resource base and a growing domestic market, all of which have positioned it as an attractive choice for foreign investors.

Mohamed Idwan (Kiki) Ganie
Mohamed Idwan (Kiki) Ganie

Indonesia has been a favourite investment destination of natural resource companies. Combined with the growth of manufacturing, in light of Indonesia’s competitiveness in this area, the country is beginning to transition from being merely a source of raw materials to securing a place as a manufacturing base in its own right.

Following the nation’s transition to democracy in the past two decades, the domestic market has been transformed with the growing purchasing power of an increasingly prosperous population. This has resulted in the growth of service and retail consumer-oriented businesses that have experienced growth driven by demand.

The geographic features of the archipelago, and previous underinvestment, have also created opportunities in infrastructure development. The government has instituted an extensive framework of incentives and facilities designed to encourage and support private sector participation.

INVESTMENT INCENTIVES

In order to encourage foreign investment, the government created a number of incentives, including income tax holidays for strategic and innovative industries, and value-added tax and customs duty reductions and exemptions.

Income tax holidays are available to large investments that introduce new technologies or have strategic value to the economy. The goal behind this incentive structure is to accelerate development of higher-added-value industry in Indonesia and diversify from, and complement, the natural resource industries.

Customs duty and value-added tax reductions and exemptions are available for the import of capital machinery, certain goods and materials, and select services, with varying durations of applicability. The intent is similar to the above-mentioned tax holiday facility, which is to encourage development of manufacturing and service industries by making participation in these sectors attractive for foreign investors.

In the context of infrastructure development, with its typically larger and longer-term projects, the government is developing a legal framework for structured guarantees that provides coverage for select commercial and political risks faced by projects. Such guarantees are generally available to public-private partnership (PPP) projects, under the state-owned Indonesia Infrastructure Guarantee Fund, and to select non-PPP projects under more specific schemes designed to encourage development of certain industries through the Ministry of Finance.

MARKET ENTRY

Foreign investments should be incorporated as an Indonesian legal entity and domiciled in Indonesia. Investments are made in the form of a limited liability company (termed a PMA company in case of foreign ownership). Regarding percentage of foreign ownership, foreign direct investment can be established in two ways (with restrictions depending on the business area): 100% foreign-owned; or via joint venture with an Indonesian partner.

What may come as a surprise to investors is the at times lengthy and administratively complex process of fulfilling formalities involved in entering the market. For instance, it can take up to six months to complete the registration of a limited liability company in Indonesia, with just the first BKPM (investment co-ordinating board) approval taking one to two months in some cases where industry-specific ministerial approvals are required. This compares with neighbouring jurisdictions where minimal incorporation formalities can be completed in days.

So investors have to have accurate and realistic expectations concerning the market entry process and, to ensure that the process is completed as expediently as possible, select trusted and reputable counsel that have a well-established presence in Indonesia.

There are a number of business types spanning several sectors that are either closed to foreign investment or require foreign investors to enter into a joint venture with an Indonesian partner. Restrictions are set out in the negative investment list contained in Presidential Regulation No. 39 of 2014, and are set to be revised in the immediate future.

In the context of such restrictions it should be noted that the concept of trusts (nominee ownership) does not exist within the Indonesian legal system, and is explicitly deemed as not being recognized when it is designed to avoid foreign ownership restrictions. Nonetheless, alternative structures exist that allow an investor to achieve an outcome similar to a traditional trust arrangement.

MOHAMED IDWAN (KIKI) GANIE is managing partner at Lubis Ganie Surowidjojo

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