Indonesia Company Formation & Tax Rates

Company Formation & Tax Rates


*1 Limited Liability Company

*1.1 Cooperative. The cooperative is established based on Law No. 12/1967 concerning Cooperatives, derided from Articles 33 of the 1945 Constitution of the Republic of Indonesia, which stipulates the cooperatives shall have an important role to play in Indonesia's economy and development.

RO may only perform limited activities including acting and gathering information for head office abroad. Generally it is not permitted to perform operational business or trading activities including entering into contracts.

*2 The Minister of Justice will normally approve the Deed of Establishment if the following conditions are met:

* There is no serious objection to the establishment of the company
* The company established is neither against good morals nor the public order
* The articles of association contain no provisions that are contrary to the Commercial Code
* At least 20% of the authorized capital has been issued
* At least 10% of the issued capital has been paid up
* A certain period has been determined when the remaining share capital will be issued.

*2.1 Articles of association should be approved and validated by the Head of the Regional Cooperative Office in the relevant provincial region

*2.2 Foreign corporations are allowed to register branches only in exceptional circumstances. In recent years, no branches have been registered. In the event of permission being granted for registration, the procedures would be determined by the relevant Ministries on a case-by-case basis.

A Representative Office can be established depending upon the line of business and the necessary licenses issued by the related government department. The limitation of a Representative Office is that they are not allowed to conduct direct sales and cannot issue Bills of Lading. Representative offices are set up primarily for marketing, market research, or as buying or selling agents. The related government ministries are:

* Representative Office from Ministry of Industry and Trade - for bilateral trade
* Representative Office from Ministry of Public Work - for consultant or contractor
* Representative Office from Ministry of Mining - for mining activities
* Representative Office from Ministry of Finance - for banking
* Representative Office from Investment Board (BKPM) - regional representative

To establish a Representative Office with permission from the Ministry of Industry and Trade, the company's head office needs to issue three letters:

* Letter of Intent - stating the intention of the company to establish a representative office
* Letter of Appointment - stating the appointment of the chief representative
* Letter of Statement - stating that the Chief Representative will follow Indonesian regulations

These three letters must be stamped by a notary public and approved by the Indonesian Embassy in the home country of the firm. Upon approval, the Indonesian Embassy will issue a Letter of Notification (Surat Keterangan). Upon completion of the four letters the process can continue to the related government ministry in Jakarta, to incorporate a fixed license for 2 years.

*3 A PT is managed by a Board of Directors (mandatory), which is supervised by a Board of Supervisors (not mandatory). The board of directors and the board of supervisors are responsible to the general meeting of shareholders.

*4 The Tax Rates for Individuals:
Taxable for Annual Income (Indonesian Rupies IDR) Income Tax Rate
up to 25 million 5%
over 25 million to 50 million 10%
over 50 million to 100 million 15%
over 100 million to 200 million 25%
over 200 million 35%


*4.1 Rates of Tax For resident companies:
Taxable Income IDR Rate Tax IDR
on the first 50,000,000 10% 5,000,000
on the next 50,000,000 15% 7,500,000
over 100,000,000 30% -


*4.2 Withholding Taxes Payments of dividends, interests, royalties and technical and management fees for services performed in Indonesia to Indonesian and non-Indonesian residents are subject to withholding tax. The withholding tax rates may vary, depending on whether it is paid to a resident or nonresident as follows:

* Paymentsto Indonesian residents 15% (except for technical and managementservices 6%)
* Paymentsto non-Indonesian residents 20%

*4.3 In normal cases 10% value added tax (VAT) is applied to imports, manufactured goods and most services. In addition, there is also a sales tax on luxury goods ranging from 10% to 75%.

Investment Environment

Indonesia offers some comparative advantages to investors, with an attractive range and combination such as:

1. Avast, fertile country endowed with rich and diversified naturalresources, among others agriculture, plantations, fisheries, mining,oil and gas.
2. Alarge population of about 212 million and dynamically adaptive toprogress, constituting a huge potential market as well as a competitivework force.
3. Astrategic location, controlling vital international sea communicationlines.
4. Amore democratic country.
5. Anopen market-oriented economy, with free foreign currency exchangeregime.
6. Afavorable business and investment climate.

Legal Aspect

The legal aspects to be considered while investors set up investments are:

1. ForeignCapital Investment Law No.1 of 1967
* Foreign Direct Investment (FDI), further referred to as Penanaman Modal Asing (PMA), is a status of doing business and governed primarily by the Foreign Capital Investment Law No.1 of 1967, as amended by Law No.11 of 1970. Based on the law the government has been introducing various policies and measures on FDI where now great efforts are given to promoting FDI in Indonesia.
* The PMA company is granted a period of 30 years to operate after its legal formation. If within the said period of time it commits an additional investment (expansion of its project), another 30 years of time is granted for the expansion project. This period can be extended for another 30 years.
2. DomesticCapital Investment Law No. 6 of 1968 Domestic Direct Investment,further referred to as Penanaman Modal Dalam Negeri (PMDN), is astatus of doing business for businesses that are entirely ownedby Indonesian capital either jointly between company(ies) or individual(s)governed primarily by the Domestic Capital Investment Law No.6 of1968, as amended by Law No.12 of 1970.
3. Corporate Law No.1 of 1995 The most common legal entity in the businesscommunity is a Corporate Company – Perseroan Terbatas (PT), whichcan be either foreign direct investments or domestic direct investments.
4. TheGovernment Regulation No.20 of 1994 on Share Ownership.
* In general a PMA company is established as a joint venture between foreign and Indonesian partners. The partnership may involve legal entities (corporations) or individual persons. There is no requirement on the minimum capital, it is for the parties concerned to determine, based on their economies of scale and business considerations.
* A PMA company may be established as a straight investment, or 100% foreign ownership. It is required, however that within 15 years of commercial operation, the company starts to be divested by selling some of its shares to Indonesian individual(s) and / or business entities, through direct placement and / or indirectly through domestic stock exchange provided that the Indonesian share is maintained at least 5%.
* PMA companies in infrastructure projects such as ports, generation and transmission as well as distribution of electricity for public use, telecommunications, shipping, airlines, potable water, public railways and nuclear electric power generation should be established by way of joint ventures between foreign and Indonesian state-owned enterprises.

Foreign Direct Investment Company

A foreign direct investment company in Indonesia (known locally as "Penanaman Modal Asing" or PMA), can take the form of a 100% foreign owned limited liability company or can be established as a limited liability company through a joint venture with Indonesian partners. In the case of a joint venture, the Indonesian partner is required to own at least 5% of the shares. The Corporate Law requires that there are at least two shareholders in a PMA company, or any limited liability company. The shareholders can be two individuals, two companies, or a mixture of both. Therefore, in the case of a PMA company with full foreign ownership, the foreign investor initially planning the investment in Indonesia must invite another foreign party to participate in shareholding of the proposed company. When a PMA company is established, the initial investment approval from the Board of Investment will be valid for three years. Once the PMA company is ready to start its commercial operations, it is required to apply for a permanent business license, which is valid for 30 years and can be extended for another 30 years. To obtain the permanent business license, the company has to secure the approvals, permits, and licenses required by the different government agencies.

Allowable Share Ownership

Foreign investors may own a maximum of 95% of the shares of PMA companies involved in construction and operations of ports and harbors; processing and provision of clean water for the public; electricity production, transmission and distribution; generation of atomic power; public railway service; shipping and medical services (covering among others building and operation of hospitals, medical check-ups, clinical laboratories and mental rehabilitation service). In the case of telecommunications and regular/non-regular/chartered commercial airlines, foreign investors who wish to participate in these industries must form a joint venture with an Indonesian company. Previously, the foreign ownership in these industries was limited to a maximum of 49%. However, based on Presidential Decree No. 118/2000 dated August 16, 2000, there is no limitation on the percentage. A more conservative interpretation based on the Investment Law suggests that foreign investors may own a maximum of 95% of the shares. A 100% foreign-owned PMA company is required to divest part of its shares to Indonesians within a maximum period of 15 years from the start of its commercial operation.