A G E N E R A L O V E R V I E W

D R . E L L Y E R A W A T Y , S . H . , L L . M

LEGAL ASPECTS OF FOREIGN INVESTMENT IN INDONESIA

OUTLINE of PRESENTATION

I. A short introductory of Indonesian Government: Legislature, Executive, Judiciary & Legal System.

II. Setting up Business Activities in Indonesia: Representative Office, Branch Office, Agent or Distributor.

III. Indonesian Legal Regimes on Foreign Direct Investment:a. Laws relating to foreign direct investment.b. Indonesia foreign direct investment policy.c. Treatments & Facilities to foreign direct investment .d. Setting up a foreign invesment company.e. Rights, obligations, and liability of foreign investor.f. Dispute resolution.

LEGISLATURE, EXECUTIVE, JUDICIARY POWERS, AND

INDONESIAN LEGAL SYSTEM

I. Introduction to Indonesian Government

LEGISLATURE POWER

� Constitution of State of Republic Indonesia of 1945 divides Government power into legislative, executive, and judical branches.

� Legislative Bodies consist of: 1. People’s Consultative Assembly (or MPR)2. House of People’s Representatives (or Parliament / DPR)3. Regional House of Representative (or DPD)4. Provincial Regional Houses of People’s Representatives (or

DPRD Provinsi)5. Regency or Municipal Regional Houses of People’s

Representatives (or DPRD Kabupaten dan Kota)

EXECUTIVE POWER (1)

� President & Vice President: reign in 5 years & may be re-elected only for one term.

� 3 Coordinating Ministers and 31 Ministers. In several ministries there are Vice ministers.

� State Secretariat is headed by Minister of State Secretariat.� Cabinet Secretariat is headed by Cabinet Secretary� 22 Non Departmental Government Agencies, a.o. Capital

Investment Coordinating Board (or BKPM), Drug & Food Supervisory Body (or BPOM).

EXECUTIVE POWER (2)

� Level of Government:1. Central Government held by the President.2. Provinces headed by Governors and divided into regencies

(Kabupaten) & municipalities (Kota).3. Regencies headed by Regents (Bupati) & divided into Districts

(Kecamatan) and Villages (Desa).4. Municipalities headed by Mayors (Walikota) & divided into

Districts and Villages.5. Districts headed by District Heads ( Camat) & divided into sub-

districts (Kelurahan).6. Sub-districts headed by sub-district heads (Lurah); Villages headed

by Village chiefs.

EXECUTIVE POWER (4)

� There are 33 provinces throughout Indonesia including 4 special provincials which possess special status & are granted special autonomy: Jakarta Capital City Special Administrative Province (DKI Jakarta); Aceh Province; Papua Province, and Yogyakarta Special Region Province (DI Yogyakarta).� 10 provinces are in Sumatra; 6 in Java, 4 in

Kalimantan, 6 in Sulawesi, 1 in Bali, 2 in Maluku, 2 in Nusa Tenggara, 2 in Papua.

JUDICIARY (1)

� Judicial authority is free from any intervention from either the Executive or Legislative body, for administering judiciary power for the purpose of upholding law & justice on the basis of Pancasila & Constitution of 1945.

� Hierarcy of Civil & Criminal Courts in Indonesia is as follows:

1. District Courts (Pengadilan Negeri) are civil & criminal courts of first instance.

2. High Courts (Pengadilan Tinggi) are civil & criminal courts of first appeal, which are locate in the capital cityof each provinces.

JUDICIARY (2)

3. Supreme Court (Mahkamah Agung) is court of secondappeal level (kasasi) which can nullifies decisions or stipulations of courts from all judicial sectors based on:a. Lack of jurisdiction/authority or exceeding limits of

authorityb. Erroneous application or transgression of laws in

effectc. Negligent fulfillment of conditions which are

required by regulations of law.

JUDICIARY (3)

� There are other courts namely: Constitutional Court, State Administrative Courts, Military Courts, Islamic Religious Courts, Commercial Courts, Tax Courts, Industrial Relations Courts, Criminal Corruption Court, Human Rights Court, Children’s Courts, and Courts of Fishery Affairs.

LEGAL SYSTEM (1)

� 4 legal systems in Indonesia: Indigenous Customary (or Adat) Law, Reminiscent of Dutch Law (or Civil Law), Islamic Law (Syariah Law), and National Legislations.� Adat Law is unwritten customary law applicable

mainly for family law matters & property rights. Its applicability however has been increasingly reduced due to the ‘modernization’ & ‘economic development’ which lead the way for ‘western law, i.e. Dutch law’ and ‘national legislations’.

LEGAL SYSTEM (2)

� Dutch laws consist of Civil Code, Commercial Code, and Criminal Code which are still exist and applicable for all Indonesian citizens.

� Islamic or Syariah Law is applicable for Moslem persons especially in relation to family matters, such as marriage & divorce, inheritance, testaments, donative transfers, and in some cases is also governing the syariah economy.

� National legislations are all laws and regulations issued by the Government of Indonesia since 1945.

LEGAL SYSTEM (3)

� Forms and order of national legislations:1. Constitution of 1945 which stipulates 2. Laws (Acts or Undang-Undang) and Government

regulations in lieu of laws (or PERPU). 3. Government Regulations (Peraturan Pemerintah)4. Presidential Regulations (Peraturan / Keputusan

Presiden)5. Regional Regulations (Peraturan Daerah / Perda) at the

provincial, regency, or municipality levels.

REPRESENTATIVE OFFICE, BRANCH OFFICE,

AGENT OR DISTRIBUTOR

II. Setting up Business Activities in Indonesia

WAYS OF CONDUCTING BUSINESS IN INDONESIA (1)

� Foreign investors may choose to appoint an Agent or Distributor; or alternatively set up a Representative Office .

� ROs allow investors a legal presence in Indonesia, but its activity is limited to supervising & coordinating the business of its principal. It is not allowed to undertake business transactions with companies or persons in Indonesia either for export or import or for domestic trading.

� A RO can be established in one of province capitals.� Typical ROs tasks: promoting, marketing, or market research,

and/or preparing the establishment & development of FDI in Indonesia.

LAW, POLICY & FACILITIES FOR FOREIGN DIRECT

INVESTMENT

Indonesian Legal Regimes on Foreign Direct Investment

LAWS REGARDING TO FOREIGN DIRECT INVESTMENT (1)

� Several laws that are related to FDI in Indonesia: Investment (Law No. 25 of 2007), Company, Contract, Agency, Business licensing and trade, Labor Relations, Competition, Taxation & Customs, Foreign Exchange, Land and buildings, Intellectual Property, and Dispute Resolution.

� Certain industries are subject to specific regulations andrequirements, for example oil & gas, banking & financial services, forestry, and mining.

� Regional Regulations at the level of province, regency, or municipality may also affect FDIs.

GOVERNMENT POLICY ON FOREIGN DIRECT INVESTMENT (1)

� Indonesia welcomes foreign investment on its own terms.� Indonesia needs the development capital, the technical and

management skills of foreigners to achive the national economic development goals.

� Government policies aim at ensuring great contributions of foreign investors to assist in development of the country’seconomy.

� Objectives of Law No. 25 of 2007 concerning Investment: (a)- encourages the creation of conducive business climate for

investment - strengthening the competitiveness of national economy - accelerating the increase of investment

GOVERNMENT POLICY ON FOREIGN DIRECT INVESTMENT (2)

� The Investment Law serves as the main legal basis of both domestic & foreign investment activities in Indonesia.

� 3 Basic investment policies: - equal treatment to all investors (b) - ensures legal certainty, business certainty & security to

any investors starting from the licensing process up to the termination of investment activities pursuant to the rules of law

- gives opportunity for development & protection to micro-small & medium-sized enterprises.

GOVERNMENT POLICY ON FOREIGN DIRECT INVESTMENT (3)

� Any business fields are open to foreign investment activity, except for those declared as being closed or open with certain conditions.

� Business fields closed to foreign investment are production of weapons, ammunition, explosive devices, armaments, and other sectors which are explicitly declared closed under the Investment Law of 2007.

� There is another regulation which determines what business fields are conditionally open up or are totally closed to foreign investors (ie. Presidential Regulation)

GOVERNMENT POLICY ON FOREIGN DIRECT INVESTMENT (4)

� Goverment by virtue of Presidential Regulation specifiybusiness fields that are:1. closed to both foreign & domestic investments based on

the criteria of health, moral, culture, environment, national defence & security, and other national interests;

2. conditionaly opened to foreign investments based on the criteria of national interests, namely the protection of natural resources, protection of micro-small & medium-sized enterprises, supervision of production & distribut-ion, increase of technological capacity participation of

GOVERNMENT POLICY ON FOREIGN DIRECT INVESTMENT (5)

domestic capital, and joint venture with companies appointed by the Government.

� As the implementation of those provisions in the Investment Law, the Government has issued Presidential Regulation No. 36 of 2010 which determines list of business fields closed & conditionally opened to foreign investments (See, the separate sheets as Appendix to my paper).

SETTING UP A FOREIGN INVESTMENT COMPANY (1)

� Foreign investment can be done in either direct (FDI) or indirect investment.� In case of FDI, it should be done in the form of an

Indonesian legal entity, i.e. Limited liability company or PT (Perseroan Terbatas) which can be carried out by having shares when such company is established, or by purchasing shares in an existing PT.� A PT could be wholly foreign owned capital or a

joint company with Indonesian partners (PT PMA)

SETTING UP A FOREIGN INVESTMENT COMPANY (2)

� Under the Company Law of 2007, a foreign investment company (PT PMA) must have at least 2 (two) founders or shareholders.� Check the Negative List to make decision whether

such company will be incorporated as 100% foreign owned PMA company or as a joint venture with Indonesian partners.� Shareholders structure may vary from 49% foreign

ownership up to 95 %.

SETTING UP A FOREIGN INVESTMENT COMPANY (3)

� If the Negative List silent on the limitation on foreign ownership shares but it requires a partnership agreement with Indonesian parties, then the latter’s participation is assumed that must be at least 5% of the total paid up capital at the time of company’s establishment.� In the case of 100% foreign owned PMA Company,

the foreign investors must divest a portion of shares to an Indonesian party within 15 years after commencing commercial operations.

SETTING UP A FOREIGN INVESTMENT COMPANY (4)

� No minimum amount of capital to be invested in a PMA Company, it is decided by the investors themselves.� Recently, the BKPM (Coordinating Investment

Board) issued an internal policy to have a minimum of IDR 10,000,000,000. or of USD 1,000,000 as an actuallly applied investment value.� Investors are prohibited to make a trust or nominee

arrangement with regard to the share ownership of a foreign investment company.

THE GOVERNMENT APPROVAL (1)

� Foreign investment company shall obtain permit / approval before making any business activity in accordance with the regulations issued by the Captal Investment Coordinating Board (BKPM), and this permit shall be obtained from the one-stop integrated service provided by the BKPM in Jakarta or an Investment Board in every province orthrough ROs of the Republic of Indonesia abroad.

� Approval from the BKPM (upon the delegation of power from the Government) is essential in order to get a status as a PMA Company, by which it could be given some facilities afterwards.

THE GOVERNMENT APPROVAL (2)

� Foreign investors should also be aware of the compulsory provision for them to get a validation or ratification over the Deed of Establishment (DoE) of a PT by the Ministry of Laws & Human Rights. This validation is very essential in order to make such company getting the status as a Indonesian legal entity; otherwise the DoE will become null and void and the company is dissolved by operation of the law.

TREATMENTS & FACILITIES TO FOREIGN INVESTORS (1)

� Any foreign investors originating from any countries will be given the non-discriminatory treatments.

� Foreign investment projects/companies of any foreign investors will not be taken over or nationalize except based on and through the law.

� If nationalization happens the Government is required to pay compensation whose amount is calculated based on market price, and if the parties fails to reach an agreement on this issue, it then shall be settled through arbitration forum.

TREATMENTS & FACILITIES TO FOREIGN INVESTORS (2)

� Foreign investors may freely transfer their assets & have the right to make repatriation in foreign currency to, a.o: capital, profit, dividend, payable royalty or interest, income of any individuals working in any PMA Companies, compensation of any loss, etc.� A PMA shall be entitled to use experts of foreign

citizen on certain position & expertise.� Foreign investors who are eligible will be given

facilities in form of:

TREATMENTS & FACILITIES TO FOREIGN INVESTORS (3)

1. net income tax deduction within certain period. 2. import duty holiday or reduction for (a) imported capital goods, machinery, or equipment domestically unavailable for production (b) raw materials or support materials for production within certain period and with certain conditions;3. value added tax holiday or postponement for imported capital goods or machinery or equipment domestically unavailable for production within certain period;

TREATMENTS & FACILITIES TO FOREIGN INVESTORS (4)

4. accelerated depreciation or amortisation; and 5. property Tax reduction, especially for certain business fields in certain region, area, or zone. 6. import licensing facility, immigration service facility and land rights.

Foreign investors who are eligible shall be those who fulfill at least 1 of the following criteria:� Employing plenty of workers; belonging to high priority

scale; belonging to infrastructure development;

TREATMENTS & FACILITIES TO FOREIGN INVESTORS (5)

� transferring technology; pioneering new industry; � domiciling in remote area, deserted area, border

area, or any other area deemed necessary; � preserving the environment; � conducting research, development, and making

innovation; � making partnership with micro, small and medium-

sized enterprises, or cooperatives; � using capital goods or machinery or equipment

produced domestically.

DISPUTES SETTLEMENT MECHANISM

� Avoid as far as you can the litigation /adjudication process for resolving any commercial contracts.� Draft-in your investment agreements in a careful and

detailed way.� Apply in the principle of choice of law and choice of

forum by referring to a specific national law.� Choose an alternative disputes resolution for

resolving commercial legal cases by choosing arbitration rule & arbitration body (Badan ArbitraseNasional Indonesia).