Indonesia Investment Environment

INVESTMENT ENVIRONMENT

A. Comparative Advantages for Foreign Investment

As a member nation of the ASEAN countries, Indonesia is located on the cross road of two great continents, namely Asia and Australia, and the Indian and Pacific Oceans, offers some comparative advantages to investors with attractive ranges and combinations such as:

1. A vast, fertile country endowed with rich and diversified natural resources, among others agricultures, plantations, fisheries, mining, oil and gas.

2. A large population of about 210 million and dynamically adaptive to progress, constituting a huge potential market as well as the competitive work force.

3. A strategic location controlling vital international sea communication lines.

4. A more democratic country.

5. An open market-oriented economy, with free foreign currency exchange regime.


B. Legal Aspect

The legal aspects to be considered while investors set up investments, such as are;


1. Foreign Capital Investment Law No. 1 of 1967


1. 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.

2. The PMA company is granted a period of 30
years to operate after its legal formation. If within the said
periodof 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. Domestic Capital Investment Law No. 6 of 1968

Domestic Direct Investment, further referred to as Penanaman Modal Dalam Negeri(PMDN), is a status of doing business for entirely owned by Indonesian capital either jointly between company(ies) or individual(s) governed primarily by the Domestic Capital Investment Law No. 6 of 1968, as amended by Law No. 12 of 1970.


3. Corporate Law No. 1 of 1995

The most common legal entity to business community is a Corporate Company - Perseroan Terbatas (PT) either they are foreign direct investments or domestic direct investments.


4. The Government Regulation No. 20 of 1994 on Share Ownership.


1. 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 amount of investment (equity plus loan). The amount is for the parties concerned to determine, based on their economies of scale and business considerations.

2. A PMA company may be established as a straight investment, or 100 % foreign ownership. It is required, however that not later than 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 %.

3. 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 enterprise.


C. Taxation


1. Income Tax

Income tax in Indonesia is progressive and applied to both individual (s) and enterprises. A self-assessment method is used to calculate the tax.



2. Losses

Basically the government provides a loss carried forward facility for a period of 5 (five) years.


3. Depreciation and Amortization Rates

a. Depreciation

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Depreciation cost on assets is deductible from the income before tax. Depreciable assets are grouped into four categories depending on the useful life of the assets.
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Investors may choose either the straight line method (for periods of less than 20 years) or the fast declining balance method (except for buildings)
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Depreciation rate is determined according to the useful life and utilization such as :





2. Amortization









4.Value Added Tax and Sales Tax on Luxury Goods

In normal cases, 10 % Value Added Tax (VAT) is applied to imports, manufactured goods and most services. In addition, there is also sales tax on luxury goods ranging from 10 % to 75 %.

5. Withholding Tax

Payment of dividends, interests, royalties, and technical & 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 non-resident as follows ;

Payments to Indonesian residents (except for technical and management services 6 %) 15 %

Payment to non-Indonesian residents 20 %

6. Stamp Duty

Stamp duty is nominal only at either Rp. 3,000 or Rp. 6,000 on certain documents. The rate of Rp. 6,000 is applicable for letters of agreement and other letters, Notary Deed and Land Deed including its copies. For all documents bearing a sum of money, the rate is Rp. 6,000 when the value stated in the document is more than Rp. 1 million, and Rp. 3,000 when the value is between Rp. 500,000 and Rp. 1 million. Below Rp. 500,000 is not subject to stamp duty. For cheques, the rate is Rp. 3,000 regardless of money value stated.

7. Land & Building Tax

Land & building tax is payable annually on land, buildings and permanent structures.
The effective rates are nominal, typically not more than one tenth of one percent per annum (0.1%) of the value of property.

8. Avoidance of Double Taxation Agreements

To avoid incidental double taxation on certain income such as profits, dividends, interests, fees, and royalties, Indonesia has signed agreements (tax treaties) with the 50 countries as follows;



Withholding tax rates applied to residents of these countries signing tax treaty with Indonesia, may be reduced based on the provisions of the particular tax treaty.


D. Incentives

1. Import Duties


All investment projects of PMA as well as PMDN projects which are approved by the Investment Coordinating Board or by the Office of Investment in the respective districts, including existing PMA and PMDN companies expanding their projects to produce similar product(s) in excess of 30% of installed capacities or diversifying their products, will be granted the following facilities:

1.

Relief from import duty so that the final tariffs become 5 %. In the case of tariffs of import duty which are mentioned in the Indonesian Customs Tariff Book
(BTBMI) being 5% or lower, the effective tariffs shall be those in BTBMI:


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On the importation of capital goods namely machinery, equipments, spare parts and auxiliary equipments for an import period of 2 (two) years, started from the date of stipulation of decisions on import duty relief.
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On the importation of goods and materials or raw materials regardless of their types and composition, which are used as materials or components to produce finished goods for the purpose of two years full production (accumulated production time).


2.

Exemption from Transfer of Ownership Fee for ship registration deed / certificate made for the first time in Indonesia.


2. Tax Facilities

1.

The government has introduced a Tax Bill No's 16, 17, 18, 19 and 20 of 2000 and applied since January 1, 2001. Based on this tax law, the domestic and foreign investors will be granted tax allowances in certain sector and/or area as follows :


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An Investment Tax Allowance in the form of taxable income reduction as much as 30 % of the realized investment spread in 6 (six) years.
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Accelerated depreciation and amortization
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A Loss carried forward facility for period of no more than 10 (ten) years.
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A 10 % income tax on dividends, and possibly being lower if stipulated in the provisions of an existing particular tax treaty.


2.

The government has also introduced provisions No's 146 of 2000 of 2000 and 12 of 2001 on the importation and/or delivery of Selected Taxable Goods, and or the provision of Selected Taxable Services as well as the importation and or delivery of Selected Strategic Goods which are exempted from Value Added Tax


3. Export Manufacturing

There are many incentives provided for exporting manufacture products. Some of these incentives are as follows;

1.

Restitution (drawback) of import on the importation of goods and materials needed to manufacture the exported finished products.
2.

Exemption from Value Added Tax and Sales Tax on Luxury goods and materials purchased domestically, to be used in the manufacturing of the exported products.
3.

The company can import raw materials required regardless of the availability of comparable domestic products.


4. Bonded Zones

The industrial companies which are located in the bonded areas are provided with many incentives as follows;

1.

Exemption from import duty, excise, income tax of Article 22, Value Added Tax on Luxury Goods on the importation of capital goods and equipment including raw materials for the production process.
2.

Allowed to divert their products amounted to 50% of their export (in term of value) for the final products, and 100% of their exports (in term of value) for other than final products to the Indonesian customs area, through normal import procedure including payment of customs duties.
3.

Allowed to sell scrap or waste to Indonesian custom area as long as it contains at the highest tolerance of 5% of the amount of the material used in the production
process.
4.

Allowed to lend their own machineries and equipments to their subcontractors located outside bonded zones for no longer than 2 (two) years in order to further process their own products.
5.

Exemption of Value Added Tax and Sales Tax on Luxury Goods on the delivery of products for further processing from bonded zones to their subcontractors outside the bonded zones or the other way around as well as among companies in these areas.


E. Land & Building

Indonesia's land legislations do not recognize the concept of freehold land rights. Instead the various rights attached to the land are subdivided into separate titles.

The Basic Agrarian Law (Law No. 5 of 1960) recognizes type of rights on land of non-state-forest area, whereas for the state-forest area, the Law No. 5 of 1967 on forestry is applied. To foreign as well as domestic investors, the following three main rights are significant; the Land Cultivation Right (Hak Guna Usaha, abbreviated as HGU), the Right of Building on Land (Hak Guna Bangunan, abbreviated as HGB) and the Right of Use on Land (Hak Pakai, abbreviated as HP).

These rights authorize the use of land in some ways, and their differences are mainly on the duration of validity, the nature of utilization, the opportunity to mortgage (to use as an asset or collateral) and proof of title:

1.

The Land Cultivation Right (HGU) is the right to use a State Owned Land for the purposes of agriculture namely plantation, fishing, or cattle rising. By law the title is granted for a maximum period of 35 years, but can be extended to 25 years if the land is properly used and managed. This title of right is given to Indonesian individual(s) or legal entities domiciled in Indonesia including PMA companies. It can be used as a collateral or transferred to other party with the government approval.
2.

The Right of Building on Land (HGB) is the right to construct and own buildings on a piece of land that one has purchased. The title is granted for a maximum period of 30 years and can be extended for a maximum period for 20 years for Indonesian individual(s) and /or legal entities domiciled in Indonesia, including PMA companies, and can also be used as a collateral or transferred to other party. This is also applicable and generally granted to tenants in industrial estates.
3.

Right of Use on Land (HP) is the right to use land for a specific purpose and granted for a period of 25 years and can be extended for period of 20 years or as long as the land is used for a certain (normal) utilization. Now, this right can also be used as a mortgage. In addition, it can also be transferred to other party through a government approval.


A dwelling house or a residence that can be owned by a foreign person shall be:

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A separate house constructed on a piece of land with the right of utilization on state land or controlled on the basis of an agreement with a land holder; or:
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An apartment constructed on a piece of land with the right of utilization on state land.


Foreign investors who obtained mining contract from the Minister of Mines and Energy or the Respective Governor / the District Head or forest exploitation rights and or plantation right from the Ministry of Agriculture or the Respective Governor / District Head could automatically use the land within their business license. In case investors want to use the land for different purposes, special applications should be submitted to the Ministry or the respective Governor / District Head concerned. This rights have no collateral value to the owner.

F. Relevant International Agreement


1.

Investment Guarantee and Protection Agreement

A number of governments provide investment guarantees to other nationals who make overseas investment in their countries. In most cases, these guarantees cover compensation in case of nationalization or expropriation, damages or losses caused by incidents of war, revolution or insurrection and payments for any approved remittance pursuant to the investment in case of non-convertibility of currency of the host country.

To provide security for foreign investment, the Government of Indonesia concludes Investment Guarantee Agreement (IGA) with ASEAN governments. Besides, Indonesia signed bilaterally the Investment Promotion and Protection Agreements with 55 countries, namely: Argentina, Alger, Australia, Bangladesh, Belgium / Luxembourg, Cambodia, Chile, People Republic of China, Cuba, Czech Republic, Denmark, Egypt, Finland, France, Germany, Hungary, India, Italy, Jamaica, Jordan, Democratic People's Republic of Korea, South Korea, Kyrgyzstan, People Democratic Republic of Laos, Malaysia, Morocco, Mauritius, Mongolia, Mozambique, The Netherlands, Norway, Pakistan, The Philippines, Poland, Qatar, Romania, Singapore, Slovak Republic, Spain, Sri Lanka, Sudan, Suriname, Sweden, Switzerland, Syria, Thailand, Tunisia, Turkmenistan, Turkey, Ukraine, United Kingdom, Uzbekistan, Vietnam, Yemen and Zimbabwe.

To create a favorable international investment climate, Indonesia has also signed multilateral agreements, thereby promoting foreign direct investment in Indonesia. Indonesia is now a member of the Multilateral Investment Guarantee Agency (MIGA), which will protect investment against various political risks.

To deal with foreign investment disputes, Indonesia has become a signatory member of the International Center on the Settlement of Investment Disputes(ICSID)

2.

Intellectual Property Right

Indonesia has made a great progress on intellectual property protection since 1986. Indonesia is a member of the World Intellectual Property Organization and is party of certain sections of the Paris Convention for the protection of Intellectual Property. Pursuant to obligations under the Agreement on Trade-Related Aspects of Intellectual Property Right (TRIPs), one of the Uruguay Round Agreements, Indonesia has amended Patent Law, Copyrights Law and Trademark Law in 1997.


1.

Patent

Indonesia's first patent law entered into effect on August 1, 1991 but then it was replaced on August 1, 2001 by Law No.14 of 2001. The Law and its implementing regulations outline patent applications, procedures, application fees, registration of patent consultants, and patent announcements. Products and production processes are in principle patentable subject to certain requirements. The Law provides protection for a period of 20 years for Patent and 10 years for Simple Patent, both of them can not be extended.

2.

Trademarks

The first Indonesia's trademark act took effect on April 1, 1993 but then it was replaced by Law No. 15 of August 2001. The act is intended to provide greater protection for well-known foreign and Indonesian marks, and to prohibit the use of deceptively similar marks. The act states that trademark right are determined on a first file basis rather than on a first use basis. The trademark is valid for 10 years from the date of trademark filed and it can be extended. After registration, the trademark must actually be used in commerce. The deletion of registered trademark from the general list of trademark can be undertaken either by the trademark holder initiative or the trademark office if trademark is not used within 3 years.

3.

Copyright

In 1987 and 1997, the House of Representative - Dewan Perwakilan Rakyat (DPR) passed two amendments to the 1982 Copyright Law. The amended law affords protection to people's creations on science, art and literature, expands the scope of coverage and raises the terms of protection for most categories of works to international standards. The copyright is valid for:


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As long as the author's life until 50 years from the date of the death of author: for book, flyer, paper / write, seminar, lecture, speech, and the like, performance (music, Java traditional music / karawitan, drama, dance, people or puppet performance / pewayangan, pantomime, choreography, created song or music with or without lyric, arts (painting, statue), batiks arts, architecture, map, translation, interpret, and excerpt, writing and work of arts.
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50 years from the date of the copyright notification: for broadcasting creation used such as on TV, radio, video, and movie, created song or music with or without lyric, recorded voice or sound, arts (painting, statue); cinematography, computer program.
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25 years from the date of copyright notification: for photography, computer programs, and cover design.


G. Immigration

1.

Visa and Immigration Requirement

Tourists and business visitors from Argentina, Australia, Austria, Belgium, Brazil, Brunei, Canada, Chili, Chinese Taipei, Denmark, Egypt, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Jordan, Kuwait, Luxembourg, Malaysia, Maldives, Malta, Morocco, Mexico, Monaco, Netherlands, New Zealand, Norway, The Philippines, Saudi Arabia, Singapore, South Korea, Spain, Sweden, Switzerland, Hong Kong / China, Thailand, Turkey, Uni Emirate Arab, United Kingdom, United State of America, Venezuela and Yugoslavia do not require visa for a maximum stay of 2 (two) months.
In addition, tourists and business visitors from Hongkong Special Administrative Region (SAR) and the Myanmar do not require visa for a maximum stay only of 2 (two) weeks. However, these visas are unextendable. The granting of free visa to business visitors is limited for the purpose of business investigations or discussions with their business relations. They are not permitted to conclude any business transaction, engage in local employment, perform any professional or technical service. Visa is still required for visitors from countries which are not mentioned above.

2.

Multiple-Journey Business Visas

Multiple-Journey Business Visa travel visa gives the bearer the right to make several entries to Indonesia within a period of 12 (twelve) months and each stay be up to 2 (two) months.
For business or tourist travelers of nationalities that have obtained the two months free visa on arrival, multiple-journey business visas are not necessary for stays within those two months.

3.

Limited Stay Visas or Temporary Resident Visas
Limited Stay Visas are valid for three months to one year and are issued exclusively to experts for the national development and to expatriates who are involved in training or other educational or scientific programs in line with the prevailing government regulations. Direct dependents can also qualify for this type of visa.

4.

Re - entry Permit

Non-citizens with residential status in Indonesia must have valid re-entry permits to re-enter Indonesia.


H. Environmental Protection


1.

In 1990, the government established the Environmental Impact Management Agency (BAPEDAL) and then, since 2002 this agency merges into the Ministry of Environment which is responsible for the development and implementation of national policies and programs for environmental management, particularly as they relate to urban and industrial pollution and hazardous waste management.
2.

The Ministry of Environment oversees a decentralized enforcement system (conducting environmental assessment) through the Regional Environment Management Agency (BAPEDALDA) and regional laboratories to ensure efficient monitoring of the implementation of environmental policies.


I. Business Entrance

Few fields of business activities are regulated by Presidential Decree No. 96 of 2000 as amended by No. 118 of 2000. There are 11 (eleven) business activities closed for any investment (domestic as well as foreign / PMA) such as cultivation and processing marijuana, collection / utilization of sponges, industries of harmful chemicals and chemical weapon, which are listed in the attachment-I of the mentioned decrees. There are 8 (eight) business activities and closed for PMA companies such as germ plasma cultivation, concessions for natural forest, which are listed in the attachment-II. In addition, there are 9 (nine) business activities opened on the condition of joint venture between foreign and domestic capital, such as developing and operating of harbor, electricity production, transmission and distribution, as listed in the attachment-III. List of business activities which are opened for investment if fulfilled certain conditions is listed in the attachment-IV, such as cultivation of fish in fresh water, industries of pulp made of wood and ethyl alcohol.