Indonesian President Joko Widodo has signed the Job Creation Law (commonly known as the Omnibus Law) on 2 November 2020 to attract investment, create jobs and stimulate the economy by simplifying the licensing process and harmonising various laws and regulations.
The law requires the government to issue implementing regulations within three months of the signing, two of which are Presidential Regulation No. 10 of 2021 on Investment Business Lines (the priority list) and Government Regulation No. 5 of 2021 on Risk-Based Criteria Business Licensing (the business licensing regulation).
Priority list
Under the new presidential regulation, the priority list replaced the previous negative investment list under presidential regulation No. 76 of 2007 and presidential regulation No. 44 of 2016. It represents a major development in the opening up of the country’s economy to foreign investment by removing the number of business lines that were subject to foreign investment limitations, including telecoms, healthcare and certain retail activities.
However, some limitations remain. The following business lines are still closed for both foreign and domestic investors: (1) narcotics; (2) gambling (in any form); (3) fishing for prohibited species under the Convention on International Trade in Endangered Species; (4) coral or reef extraction; (5) manufacturing of chemical weapons; and (6) manufacturing of chemicals and materials that are hazardous to the ozone layer.
Certain business lines allocated for Indonesian co-operatives and micro, small and medium-scale companies (C-MSMEs) are only open for foreign investors and large-scale domestic businesses in co-operation with C-MSMEs. There are 89 business lines in this category, significantly lower than 145 lines in the previous negative list. The law also specifies that a joint shareholding between foreign and Indonesian shareholders does not qualify as co-operation with a C-MSME.
Business lines that are open, with certain requirements, are classified into: (1) those that open only for domestic investors; (2) those that remain subject to foreign ownership limitations; and (3) those that are subject to special permits. The requirements imposed on these business lines do not apply if the foreign investors are carrying out relevant business in special economic zones.
The key business lines that are subject to foreign ownership limitations are: (1) postal services remain subject to a 49% foreign ownership limitation; (2) transportation activities, including commercial scheduled air transportation and sea/water transportation, remain subject to a 49% foreign ownership limitation; (3) broadcasting services remain subject to a 20% foreign ownership, limited to a business expansion only; and (4) traditional medicine business remains subject to a 100% domestic investment requirement.
Among these certain requirements, the category of business fields subject to special permits has seen the most significant change in numbers, with only 46 business lines, down from 350 in the previous negative list.
The priority list provides some exceptions to the foreign ownership limitations imposed on certain businesses. For example, it has maintained: (1) the grandfathering policy, so any restricted changes do not result in divestment obligations; and (2) indirect or portfolio investments through domestic capital markets. The list also recognises bilateral agreements entered into by Indonesia and foreign shareholders to enjoy preferential treatment.
Business licensing
The business licensing regulation revoked Government Regulation No. 24 of 2018 on Electronic Integrated Business Licensing Services, the underlying regulation for the current online single submission (OSS) system. The business licensing regulation was adopted effectively by the OSS system on 2 June 2021.
It remains to be seen how this regulation will be implemented. Therefore, businesses should be aware of the following:
Nature of the system. The self-assessment concept remains the same. Companies are expected to know the appropriate business lines for their activities, and the corresponding code of the Indonesia standard industrial classification – known as the Klasifikasi Baku Lapangan Usaha Indonesia (KBLI) number – the foreign investment or capital requirements for the business lines, and the required licences.
With the new OSS system, the government places more trust in investors, and companies are expected to be more proactive in compliance. It means that the companies need to obtain appropriate advice in advance, and discuss any possible issues with the Indonesian Investment Co-ordinating Board if necessary, in addition to completing self-assessment.
The required licences. The business licensing regulation came with some annexes. It seems that the licences and the requirements to obtain the licences have not changed, but the regulation uses different terminologies.
- Annexe I is divided into sections A and B. Section A contains information on KBLI numbers for business activities (divided by sector), the level of risk for the KBLI numbers, and the KBLI numbers’ licences on the level of risk. Section B lists the supporting licences required to conduct the business activities (divided by sector).
- Annexe II is also divided into sections A and B. Section A contains requirements and/or obligations to obtain the required licences under section A of annexe I. Meanwhile, section B contains requirements and/or obligations to obtain the required supporting licences under section B of annexe I.
- Annexe III contains guidelines for the government to determine the level of risk of business activity, and the required licences based on the level of risk.
- Annexe IV contains guidelines for ministers and sectoral agencies in determining business or product standards applicable for their business sectors, in addition to the licences in sections A and B of annexe I.
Licensing in specific business sectors are still subject to sectoral regulations. In accordance with annexe IV of the business licensing regulation, the ministers and sectoral agencies can still determine business or product standards applicable for their business sectors, in addition to the licences in sections A and B of annexe I.
Stages in business activities. The business licensing regulation differentiates between preparing for business activities and operating or conducting commercial activities for determining when to apply for the relevant licences. Although no specific definition is provided, the regulation offers samples for each stage as a reference. For example, the preparation stage includes land acquisition, construction building, equipment and facilities procurement, and hiring. The operation or commercial activities stage includes goods or services production, distribution and marketing.
Risk-based licensing approach. Business activities are categorised based on their risk levels, which will determine the licence they need.
- Businesses with low-risk activities theoretically only need to obtain a business identification number (known as a nomor induk berusaha, or NIB) to prepare and operate commercial activities. However, depending on the products, they may need to obtain certain supporting licences. Therefore, businesses with low-risk activities need to assess annexes I and II to determine the licences and the requirements and obligations they need.
- Medium-risk business activities are categorised into medium-to-low-risk and medium-to-high-risk business activities. Businesses with medium-to-low-risk activities theoretically only need to obtain an NIB and standard certification. These businesses must submit a statement in the OSS system to fulfil the required business or product standards. For medium-to-high-risk business activities, a statement made in the OSS system needs to be followed up with verification conducted by the central or regional government. They can only operate commercial activities once they have a verified standard certification.
- High-risk business activities. Businesses with high-risk activities need licences to carry on any operational activities.
Businesses with both medium-risk and high-risk activities should assess annexes I and II, and ministerial or sectoral regulations to be issued based on annexe IV, to determine the required licences and obligations.
Given that the licences and requirements will be processed through the OSS system, companies and businesses should beef up their compliance status, as it will be much easier for government officials to check within one system.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact the author by emailing Daniel Pardede (daniel.pardede@bakermckenzie.com) and Preti Suralaga (preti.suralaga@bakermckenzie.com)
