Company Incorporation in Indonesia

Can foreigners incorporate a company in Indonesia?

Yes, PT PMA (Penanaman Modal Asing) is the form of a limited liability company that allows foreign shareholding up to 100% while still enjoying all the benefits of a PT company, which is traditionally reserved for Indonesian residents. Due to several reforms in the field of foreign direct investment (FDI), Indonesia now permits foreign businesses or individuals to incorporate and operate their companies through the PT PMA structure. As of recent updates, Indonesia has streamlined the investment process, making it more attractive for foreign investors by reducing bureaucratic hurdles and offering incentives in various sectors.

Foreigners incorporating a PT PMA in Indonesia can not only incorporate and own their businesses entirely but also enjoy the same benefits as domestic companies. These benefits include the ability to sponsor working visas for foreign employees, including themselves, facilitating smoother operations and the ability to bring in essential expertise. Additionally, the World Bank's Doing Business Report has highlighted Indonesia's significant improvement in the ease of doing business, ranking it 73rd in 2020, up from 91st in 2017. This upward trend reflects the country's commitment to fostering a more business-friendly environment, making it a compelling destination for foreign investors.

What is the structure of a PT PMA company?

1. Directors:

A minimum of one director is required. There is no local director requirement; a director can be a foreigner or a local Indonesian resident. Please note that if the director is a foreigner, having a valid work permit is a must. Corporate directors are not allowed. A director must be a legal natural person who is legally residing in Indonesia to take care of the company's day-to-day activities.

2. Shareholders:

A minimum of two shareholders are required. In PT PMA, there must be at least one foreign shareholder. Shareholders can be corporate or natural persons from any part of the world. There can also be Indonesian residents as shareholders but it is not mandatory. Up to 100% foreign ownership is allowed for most business classifications if the industry is not mentioned in the Negative Investment List. Shareholders can also serve as directors or commissioners.

3. Commissioners:

A minimum of one commissioner is required. There is no local commissioner requirement; a commissioner can be a foreigner or a local Indonesian resident. Please note that if the commissioner is a foreigner, then having a valid local work permit is mandatory.

4. Share Capital:

PT PMAs are classified as large-scale enterprises in Indonesia and hence the minimum value of the investment plan for each business activity is IDR 10 billion (approximately USD 618,000). The minimum paid-up capital or deposited capital is IDR 10 billion (approximately USD 618,000). Including a local shareholder doesn't reduce the minimum paid-up capital requirement unless they own 100% of the company.

To verify the required investment amount, PT PMAs must provide proof of funds. This can be achieved through a Capital Statement Letter affirming shareholder financial capability or by depositing the funds directly into the company's bank account. The specified capital amount, as outlined in the Deed of Establishment and notarised, can be utilised for various business expenses, including employee salaries, operational costs, and product expenditures.

5. Office Space:

Having a registered office address in Indonesia is mandatory. Foreign companies are allowed to use a virtual office, dedicated desk, or serviced office in Indonesia as their business address.

Documents required for a company formation in Indonesia

To incorporate a company in Indonesia, you need to prepare and submit various documents. These documents are essential to comply with Indonesian regulations and ensure your business operates legally. The documents will be used in KYC due diligence procedures, application preparation, and stage of documents submission to the authorities.

Proposed Company Details:

1. Company Name: Provide three name options in Bahasa Indonesia.
2. Business Activities: Detailed description of the company’s purposes and objectives.
3. Share Details: Number of shares, share classes (if any), rights attached, and nominal value.
4. Power of Attorney: Signed by each shareholder for submission.
5. Domicile: Proof of a registered address in Indonesia can include:
   • Rental Agreement: Between the company and building management
   • Domicile Statement: Issued by the company and acknowledged by the building management.
   • Building & Land Tax Receipt (PBB): Including current year payment.
   • IMB or Certificate of Ownership: If the building is owned.
   • Lease Statement: If applicable.

Personal Documents for Directors, Shareholders, and Commissioners:

For Foreigners:

1. Copy of colored passport with at least 18 months of validity.
2. Proof of a foreign residential address.
3. Resume and contact information.
4. National identity card, if available.
5. Recent passport-sized photo with a red background.

For Locals:

1. ID card (KTP) and Taxpayer Identity Number (NPWP).
2. Family card (KK).
3. Recent passport-sized photo with a red background.

Corporate Documents for Corporate Shareholders:

For Foreign Legal Bodies:

1. Certificate of Incorporation.
2. Memorandum & Articles of Association/Constitution and Amendments.
3. Certificate of Incumbency.
4. Proof of the registered address.
5. Board of Directors structure and corporate chart.
6. Corporate representative details and board resolution.

For Local Legal Bodies:

1. Copy of the Article of Association (AKTA) and amendments.
2. Copy of company taxpayer identity number (NPWP).
3. Copy of Deed of Establishment (SK Kemenkumham)
4. Copy of Domicile Letter from the sub-district.
5. Copy of Business License (SIUP/NIB).
6. Copy of Company Registration Certificate (TDP/NIB).

Additional Requirements:

1. If you're not immediately depositing the paid-up capital, provide a Capital Statement Letter confirming shareholders' funds availability post-incorporation.
2. Written confirmation that directors, shareholders, and other key individuals are not Politically Exposed Persons (PEPs).
3. Principal place of business address.
4. Source and origin of funds used in the business.
5. Expected location of the company’s customers and suppliers.
6. Information on the beneficial owner if different from the named shareholder.

How do I incorporate a company in Indonesia?

Incorporating a company in Indonesia involves a series of steps that ensure compliance with local regulations. This guide provides a concise and straightforward overview of the process for both local and foreign companies, specifically PT PMA (foreign-owned companies).

Step 1 - Apply for a Company Name

Reservation: The first step in company registration in Indonesia is to reserve your company name with the Ministry of Law and Human Rights (MOLHR). The name must consist of at least three words in Bahasa Indonesia for local companies, while PT PMA companies can use names in English or other languages.

Approval Criteria: Ensure the name is not misleading, against morality, or similar to existing company names. Approval usually takes one working day, and you can reserve the name for up to 60 days.

Step 2 - Draft and Notarize the Articles of Association

Preparation: The Articles of Association (AKTA) must include details such as company name, location, objectives, business activities, and capital structure. This document serves as the manual for your business operations.

Notarization: A notary public must draft and notarize the Articles of Association. All shareholders need to sign this document before submission.

Step 3 - Obtain the Deed of Establishment

Submission and Ratification: Submit the notarized Articles of Association to the MOLHR for ratification. Upon approval, the MOLHR issues the Deed of Establishment (SK Kemenkumham), officially recognizing your company as a legal entity.

Letter of Domicile: Obtain a letter of domicile from the local government, confirming the company's operational address. This is required for further registrations.

Step 4 - Register for a Taxpayer Identification Number (NPWP)

Application: Register with the local tax authority to obtain a Taxpayer Registration Number. This is essential for fulfilling tax obligations and opening a corporate bank account.

Methods: Applications can be made online through the Directorate General of Taxes or by visiting a local tax office.

Step 5 - Obtain a Business Identification Number (NIB)

Online Submission: Apply for the NIB through the Online Single Submission (OSS) system. The NIB integrates various business registration aspects, including import licenses and BPJS (social security) registration.

Step 6 - Secure Additional Licenses and Permits

Business Licenses: Depending on your business classification, you may need additional licenses, such as a Commercial License, which can be obtained through the OSS.

Employee Commitments: Register for national social security insurance (BPJS) and submit employment reports (WLK) as required by Indonesian law.

Step 7 - Finalize All Registrations

Publication: The Articles of Association and other necessary documents must be submitted to the State Printing Office for publication in the State Gazette. This step is handled by a notary and is required within 14 days of obtaining all necessary approvals.

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Timeline for Company Incorporation

The entire process of company incorporation in Indonesia, particularly for a PT PMA, typically takes between 4 and 6 weeks. Here is a rough breakdown:

1. Company Name Approval: 1 working day
2. Notary Preparation of Articles of Association: 3 working days
3. Signing and Notarization: 1 working day
4. Deed of Establishment Approval: 3 working days
5. Taxpayer Registration Number: 2 working days
6. Certificate of Domicile: 10 working days
7. Final Approvals and NIB Registration: 2 working days

Compliance requirements post-incorporation

After successfully completing the company's incorporation in Indonesia, maintaining compliance with ongoing regulations is crucial for smooth operations and legal standing. This section outlines the essential compliance requirements for both local and foreign companies, including PT PMA (foreign-owned companies), to help you navigate the regulatory landscape effectively.

1. Company Registry Requirements

Under Article 29 of the Company Law, the company registry must contain the following information, up-to-date with any changes:

1. Company Information: Address, business activities, capitalization, and period of incorporation.
2. Stakeholders' Details: Full names and addresses of shareholders, board members, and commissioners.
3. Legal Documents: Number and date of the deed of establishment, amendments, and Ministerial approvals.
4. Notary Information: Name and domicile of the notary who prepared the deeds.
5. Financial Information: Balance sheet and profit and loss statement from the relevant financial year.

2. Annual General Meeting of Shareholders (GMS)

The annual GMS should be conducted no later than six months after the end of the accounting year. The meeting can be held at the company's domicile or business location, or via teleconference. The following reports should be submitted during the GMS:

1. Financial Statements: Including cash flows, balance sheet, profit and loss statement, and equity changes.
2. Board Reports: Details of board members and their activities.
3. Company Changes: Any changes in company structure or activities.
4. Social Responsibility: Reports on social and environmental responsibilities.

3. Accounting Requirements

The financial year-end for Indonesian companies aligns with the calendar year (1 January to 31 December). If your company's financial year differs, the reporting deadline is four months post the financial year-end. Auditors are appointed during the GMS and the appointment is assigned by the board of commissioners.

4. Investment Activity Report (LKPM)

The LKPM, or Laporan Kegiatan Penanaman Modal, is a quarterly report detailing the progress of investment activities. It must be submitted through the OSS system and includes:

1. Investment Realization: Actual investments made.
2. Labor Realization: Number of local and foreign workers.
3. Production Realization: Total production output and export values.
4. Partnerships and Obligations: Including social security, SME partnerships, and environmental management.
5. Company Issues: Any operational challenges and proposed solutions.
   The LKPM submission deadlines are:
   • Q1 - Before 10th April
   • Q2 - Before 10th July
   • Q3 - Before 10th October
   • Q4 - Before 10th January

Failure to submit the LKPM can result in warnings and potential sanctions, including the revocation of business licenses.

5. Annual Tax Return (SPT)

The annual tax return, known as SPT, must be submitted by the end of the fourth month following the fiscal year-end. This includes:

1. Individual Income Tax Returns: Forms 1770, 1770 S, and 1770 SS.
2. Company Annual Income Tax Returns: Forms SPT 1771 and SPT 1771/$.

6. Tax Payment and Filing Deadlines

1. Corporate Income Tax: Monthly payment by the 15th and filing by the 20th of the following month; annual filing by the end of the fourth month after the tax year ends.
2. Personal Income Tax: Monthly payment by the 15th and filing by the 20th of the following month; annual filing by the end of the third month after the tax year ends.
3. Withholding Tax: Monthly payment by the 10th and filing by the 20th of the following month.
4. VAT and LST - Payment before the VAT return filing deadline; monthly filing by the end of the following month.

Work visas (KITAS or KITAP) for foreign investors and employees

When incorporating a company in Indonesia, obtaining a work visa is mandatory for foreign members of the company before they can start working. This ensures compliance with Indonesian immigration laws and allows foreign employees to legally reside and work in the country. There are two main types of work visas in Indonesia: KITAS and KITAP.

KITAS (Limited Stay Permit)

The KITAS, or Limited Stay Permit, is a temporary residency permit that allows foreigners to live and work in Indonesia for a specific period, typically up to 12 months, with the possibility of extension. This permit is suitable for those who are on short to medium-term assignments in Indonesia. Key aspects of KITAS include:

Types of KITAS - Work KITAS, Spouse KITAS, Retirement KITAS, and Student KITAS.

Eligibility - Foreign employees, investors, and family members of Indonesian citizens or KITAP holders.

Application Process - Involves obtaining a work permit (IMTA), sponsored by an Indonesian entity, followed by the issuance of the KITAS.

KITAP (Permanent Stay Permit)

The KITAP, or Permanent Stay Permit, is a long-term residency permit that allows foreigners to reside in Indonesia indefinitely. This permit is ideal for expatriates who have lived in Indonesia for an extended period and wish to settle permanently. Key aspects of KITAP include:

Eligibility: Holders of KITAS for a minimum of three consecutive years, foreign spouses of Indonesian citizens, and investors.

Application Process: Requires sponsorship by an Indonesian entity or individual, proof of long-term residency, and fulfillment of other specific requirements.

Benefits: Provides greater stability and fewer renewal processes compared to KITAS. KITAP holders can work without needing a separate work permit and have similar rights to Indonesian citizens in terms of property ownership and business operations.

VAT and tax considerations for PT PMA companies

Corporate Income Tax

General Rate: The corporate income tax rate for PT PMA companies in Indonesia is 25%.

Small Enterprises: Companies with a turnover of up to IDR 4.8 billion (approximately USD 320,000) are eligible for a reduced tax rate of 0.5% until the turnover exceeds the threshold.

Income Tax for Employees

Tax Residents: Employees who are tax residents are subject to a progressive income tax rate ranging from 5% to 30%. Additionally, they must contribute to social security taxes, which include:

1. Pension insurance: 1%
2. Old-age insurance: 2%
3. Healthcare contribution: 1%

Non-Tax Residents: Non-tax resident employees are subject to a flat income tax rate of 20%. Furthermore, a 5% tax may be applied to the sale of certain shares or assets owned by non-tax residents.

Other Corporate Taxes

1. Social Security Taxes: Employers must contribute to employee social security taxes, including:
   • Old-age insurance (JHT): 3.7%
   • Pension insurance (JP): 2%
   • Healthcare contribution: 4%
2. Value-Added Tax (VAT): The general VAT rate is 11%. Registration for VAT is mandatory once the sales turnover exceeds IDR 4.8 billion.
3. Land and Building Tax: The rate varies depending on the location and value of the property.
4. Luxury Goods Sales Tax: Ranges from 10% to 75%, applicable to specific high-end items.
5. Duty on Acquisition of Rights to Land and Building (BPHTB): The rate varies.
6. Local Government Taxes: Rates vary based on local regulations.
7. Stamp Duty: A fixed amount of IDR 6,000.

Value-Added Tax (VAT)

VAT Registration and Compliance

Threshold: VAT registration becomes mandatory when a company’s sales turnover exceeds IDR 4.8 billion (USD 320,000).

Rate: The general VAT rate is 11%.

Filing: Companies must submit quarterly VAT returns and pay the VAT within 40 days after the end of the VAT period.

Non-Taxable Goods and Services

Certain goods and services are exempt from VAT, including:

Goods: Meals and drinks provided in restaurants and hotels, natural resources like crude oil and natural gas, essential commodities like rice and eggs, and gold bars for government reserves.

Services: Religious services, entertainment, hotel, parking, catering, educational, medical, public transportation, financial, and labor services.

VAT Reporting and Invoicing

Monthly Reports: VATable entrepreneurs (PKP) must report their VAT and business activities monthly by the end of the following month.

Penalties for Non-Compliance

Late Filing: A fine of IDR 500,000 for late VAT returns.

Late Payment: A monthly charge of 2% on the outstanding VAT amount.

Incomplete Invoices: Penalty of 2% of the tax base for failure to generate timely and accurate invoices. Invoices must be retained for a minimum of ten years.