LEGAL ASPECTS OF DOING BUSINESS IN INDONESIA 15 November 2012
Julian Kwek Head, Indonesia Desk 1
DISCLAIMER The information and views set out herein are not intended to constitute legal advice and should not be relied on as legal advice. You should obtain legal advice from suitably qualified Singapore and Indonesian counsel, as the case may be, to address the specific circumstances of your case and the purpose for which the legal advice is sought.
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TABLE OF CONTENTS – THOUGHT PROCESS FOR AN INVESTMENT 1. Is the industry open to foreign investment? 2. What are the applicable national and local laws and regulations for this industry? 3. What are the permits required? 4. Which business vehicle? 5. Foreign Investment Company 6. What is the most suitable structure for the investment from tax perspective? 7. What is the most suitable structure for the investment from enforcement perspective? 8. Peculiar features of Indonesian law that might affect foreign investors 9. Parting Words 10. Main Contacts
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01 IS THE INDUSTRY OPEN TO FOREIGN INVESTMENT?
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IS THE INDUSTRY OPEN TO FOREIGN INVESTMENT? • Regulated under Presidential Regulation No. 76/2007 in conjunction with Presidential Regulation no 36 year 2010 • This list sets out types of business which are closed to foreign investment or restricted by way of conditions to invest – Examples: – Section 9 for Culture and Tourism Sector no 13, for Hotel (star 1-2), foreign ownership is limited to 49% – Section 16 for Health Sector no 5, for Supporting Health Service, foreign ownership is limited to 49% • Each investment sector is classified under Indonesian Standard Classification of Business Field (KBLI) – E.g. Hotel (star 1-2) is under KBLI 55114 (Two Star Hotel) and 55115 (One Star Hotel), Supporting Health Service is under KBLI 86903
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IS THE INDUSTRY OPEN TO FOREIGN INVESTMENT? Some limitations for foreign investment according to the Negative Investment Lists can be as follows: 1. Reserved for Micro, Small, Medium Enterprises and Cooperatives 2. Partnership with an Indonesian entity is required 3. Foreign Capital Ownership is allowed on certain Locations • Some business is allowed on all locations, but some are allowed in certain location, e.g. Eastern Indonesia (Kalimantan, Sulawesi, NTT, Bengkulu and Jambi) 4. Special license is required 5. Must be 100% Local Capital 6. Limitation of Foreign Capital Ownership • E.g. Acupuncture service – max 49%, dental service – max 67%
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02 WHAT ARE THE APPLICABLE NATIONAL AND LOCAL LAWS AND REGULATIONS FOR THIS INDUSTRY?
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WHAT ARE THE APPLICABLE NATIONAL AND REGIONAL LAWS AND REGULATIONS ? Indonesia (Country level)
Provinces
Provinces (Propinsi)
5 Special Regions
Regional Government (Kabupaten)
Aceh, Papua, West Papua, Yogyakarta and Jakarta
Regency Government (Bupati)
Cities or Municipality government (Kota)
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WHAT ARE THE APPLICABLE NATIONAL AND REGIONAL LAWS AND REGULATIONS ? • Indonesia has 33 provinces and 5 provinces have special status: – Aceh, for the use of Sharia Law as the regional law – Yogyakarta Special Region, for being governed in a monarchy system – Papua, for implementation of sustainable development – West Papua, for granting implementation of sustainable development – Jakarta Special Capital Region • Regional Government and Municipal Government may pass their own law, commonly referred as Regional Regulations (Peraturan Daerah). • But they cannot contradict State Laws or Laws that is of higher hierarchy than Regional Regulations, such as: Laws (Undang-Undang), Presidential Regulations and Ministerial Regulations.
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03 WHAT SORT OF PERMITS ARE NEEDED?
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WHAT SORT OF PERMITS ARE NEEDED? “Implementation Licences”, such as: •Business License (Izin Usaha) issued by BKPM, •Approvals for tax and custom facilities, •Producer Importer Identity Number, •Approval on the Foreign Manpower Plan and related approvals/documents, •Location Permit, •Nuisance Permit, •Building Permit, and •Business license from the relevant technical ministry having tasks and responsibilities in the business sectors concerned.
Note: Apply after incorporation of PMA
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04 WHICH BUSINESS ENTITY?
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WHICH BUSINESS ENTITY FOR FOREIGN INVESTORS? A. Representative Office (Rep. Office) – not allowed to enter into business transactions in Indonesia, limited to marketing and coordination, many different types and each type is subject to different regulation or ministry. B. Foreign Investment Company (PMA Company) – may enter into business transactions in Indonesia, subject to capital investment regulations of BKPM. C. Bank and Financing Company – currently subject to banking and financial regulations of Indonesian central bank (BI) and Department of Finance but from 31 December 2012, will be subject to Financial Services Authority (Otoritas Jasa Keungan).
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05 FOREIGN INVESTMENT COMPANY
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FOREIGN INVESTMENT COMPANY • • •
•
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Must be in the form of a limited liability company (PT/Perseroan Terbatas) unless otherwise permitted by law All PMA Companies fall under the coordination of BKPM New provisions in the current Investment Act that the foreign investor must pay attention to, i.e.: Investors, whether domestic or foreign, who conduct investment by forming a PT, are prohibited to enter into an agreement and/or statement confirming that the share ownership on that PT is for and on behalf of another party (nominee scheme) Purpose to prevent a situation where formally a PT is owned by one person but in the fact the owner of the PT is another party
Note: “Trusts” are not recognised under Indonesian laws
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FOREIGN INVESTMENT COMPANY Article 7 par.(1) PP 20/1994: •Companies wholly owned by foreign investors •the Company has to divest some of its shares to an Indonesian citizen and/or Indonesian legal entity through direct ownership or the domestic capital market •Has to be carried out within 15 years as from the start of its commercial production
Article 37 par.1 Investment Act: •Investment Act does not provide for divestment rules and to date, no implementing regulations regarding divestment have been promulgated •All implementing regulations of the old investment act remains valid as long as they do not contradict to the Investment Act
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PP 20/1994 still prevails
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06 WHAT IS THE MOST SUITABLE STRUCTURE FOR THE INVESTMENT FROM TAX PERSPECTIVE
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STRUCTURE FROM TAX PERSPECTIVE Possible Structure – Interplay between Singapore and Indonesia Indonesian Counterpart
SIN Holdco
PMA
This structure is intended as an illustration and is not applicable to all fact scenarios. Please consult your financial, tax and legal advisors if you need specific advice. 18
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STRUCTURE FROM TAX PERSPECTIVE Indonesian Corporate Tax of Singapore Corporate Tax Operational: -
Indonesia has a 25% tax rate on corporate income tax.
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Singapore’s top line tax rate is 17% but could be reduced subject to qualification under various incentive schemes.
Exit Strategy -
Indonesia imposes a withholding tax of 5% on sale proceeds whenever a
foreigner sells his shares in a PMA. -
Singapore does not have equivalent taxes.
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STRUCTURE FROM TAX PERSPECTIVE Indonesian Withholding Tax on Dividends 1. Indonesia imposes 20% withholding tax on dividends paid overseas. 2. Under the DTA, withholding tax is reduced to 10% if recipient company owns at least 25% of the Indonesian company.
3. Under the DTA, withholding tax is reduced to 15% if recipient company owns less than 25% of the Indonesian company. 4. Sin Holdco must not have Permanent Establishment Status in Indonesia. 5. Sin Holdco may treat amount withheld as Tax Credits. 6. Singapore does not tax dividend received from Indonesian company as Indonesia has higher tax rates than Singapore.
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STRUCTURE FROM TAX PERSPECTIVE Indonesian Withholding Tax on Interest 1. Indonesia imposes 20% withholding tax on interest on loans. 2. Under the DTA, withholding tax is reduced to 10% if lending company satisfies DTA requirements.
3. Sin Holdco must not be “pass-through� entity 4. Sin Holdco must not have Permanent Establishment Status in Indonesia. 5. Sin Holdco may treat amount withheld as Tax Credits.
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07 WHAT IS THE MOST SUITABLE STRUCTURE FOR THE INVESTMENT FROM ENFORCEMENT PERSPECTIVE
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STRUCTURE FROM COUNTERPART RISK MANAGEMENT AND ENFORCEMENT PERSPECTIVE – Possible Structure – Structure it offshore? Foreign Investor
Indonesian Counterpart
Indonesian Counterpart
SIN Holdco
PMA
This structure is intended as an illustration and is not applicable to all fact scenarios. Please consult your financial, tax and legal advisors if you need specific advice. 23
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STRUCTURE FROM COUNTERPART RISK MANAGEMENT AND ENFORCEMENT PERSPECTIVE – Dispute Resolution Options A. Foreign Courts
B. Indonesian Courts C. Arbitration – International or BANI
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STRUCTURE FROM COUNTERPART RISK MANAGEMENT AND ENFORCEMENT PERSPECTIVE – Option A: Foreign Courts • Foreign Courts – Singapore, Hong Kong, United Kingdom, USA, etc • May be used for joint ventures or acquisitions structured offshore • May also be used for onshore agreements
• Problems: – Foreign court orders are not recognised in Indonesia. – Only relevant to assets outside of Indonesia
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STRUCTURE FROM COUNTERPART RISK MANAGEMENT AND ENFORCEMENT PERSPECTIVE – Option B: Indonesian Courts •
Hierarchy of Civil Courts
•
Some key features of Indonesian Legal System
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STRUCTURE FROM COUNTERPART RISK MANAGEMENT AND ENFORCEMENT PERSPECTIVE – Option B: Indonesian Courts Hierarchy of Indonesian Civil Courts
1.District Court (Pengadilan Negeri) 2.High Court (Pengadilan Tinggi) Appeals – Banding 3.Supreme Court (Mahkamah Agung) Appeals – Kasasi 4.Civil Review – Peninjauan Kembali
Problem: •
Could be a longer process than foreign court proceedings
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STRUCTURE FROM COUNTERPART RISK MANAGEMENT AND ENFORCEMENT PERSPECTIVE – Option B: Indonesian Courts SOME KEY FEATURES OF INDONESIAN COURTS 1. No execution pending appeal 2. No “Doctrine of Precedence” 3. No injunctions 4. Summons is served by Court Bailiff • If defendant is overseas, summon will be served through diplomatic channels
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STRUCTURE FROM COUNTERPART RISK MANAGEMENT AND ENFORCEMENT PERSPECTIVE – Option C: Arbitration 1. International Arbitration Centers in Singapore, Hong Kong, United Kingdom, United States etc. 2. Indonesia Arbitration Center (BANI – Badan Arbitrase Nasional Indonesia)
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STRUCTURE FROM COUNTERPART RISK MANAGEMENT AND ENFORCEMENT PERSPECTIVE – Option C: Arbitration Foreign Arbitration Award •Indonesia is a signatory to NY Convention of 1958 on Recognition of Foreign Arbitral Awards (ratified through Presidential Regulation no 34/1981) •International arbitration award may be enforced by Indonesian courts if: – International arbitral award is issued by signatory country of NY Convention – Valid arbitration agreement and subject matter – Must be limited to matters of trade/commercial nature – Must not be contrary to public order or decency Problem: •If “losing” party disputes registration and enforcement of international arbitral award, back to civil court process. See Disclaimer
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STRUCTURE FROM COUNTERPART RISK MANAGEMENT AND ENFORCEMENT PERSPECTIVE – Option C: Arbitration LOCAL ARBITRATION AWARD FROM BANI •Within 30 days of arbitral award, arbitrator will submit and register such award with District Court bailiff •Chairman of District Court must order enforcement of arbitral award within 30 days of registration of request for enforcement •Prior to issuance of order of enforcement (perintah pelaksanaan), Chairman of District Court is required to review: – Whether Arbitral award is founded upon enforceable arbitration agreement – Whether arbitral dispute is legally subject to resolution through arbitration – Whether arbitral award contradicts public order and decency/morality
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08 PERCULIAR FEATURES OF INDONESIAN LAW FOR FOREIGN INVESTORS
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PECULIAR FEATURES OF INDONESIAN LAW FOR FOREIGN INVESTORS Plan your timing! • Pursuant to Law No. 24 year 2009, Art 24 para (1) requires the transaction documents to be in bahasa if it involves Indonesian individuals or business entities - Use bilingual documents or sign in English and translate later • If a corporate action, such as merger or acquisition, results in change in control, the corporate action must be advertised and the corporate action may not close within 30 days of the advertisement • If such a corporate action takes place and the workers are not willing to continue their employment, the worker shall be entitled to severance pay
• No concept of “trusts” in Indonesia
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09 PARTING WORDS
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PARTING WORDS 1.Indonesia is not Singapore • The Laws are different • The Legal and Court Systems are different • Timing is different 2.Get the Partner, Target and Terms right • They are hard to change 3.Choose the right Advisors • Financial & Tax Advisors • Good financial advice is critical • Many structure offshore for tax and other reasons • Indonesian Lawyers • Always a must for onshore Legal Due Diligence and legal advice • Offshore Lawyers • To conduct offshore Legal Due Diligence and legal advice • Accountants • To conduct Financial Due Diligence and Financial Modelling See Disclaimer
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MAIN CONTACTS Julian Kwek Head, Indonesia Desk Director, Corporate & Finance Tel: +65 6531 2451 Email: julian.kwek@drewnapier.com Aaron Kok Associate Director, Corporate & Finance Tel: +65 6531 2299 Email: aaron.kok@drewnapier.com
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