Indonesia has been gaining attention as a promising destination for business expansion and investment. With a rapidly growing market, favorable investment incentives, and a variety of Indonesia company formation types to choose from, understanding the landscape and legal requirements for company setup in Indonesia is crucial for companies eyeing Indonesia for their next venture.
Indonesia and its Growing Market
In 2023, Indonesia’s economy demonstrated steady growth, with Gross Domestic Product (GDP) reaching IDR 20,892.4 trillion and GDP per capita hitting IDR 75 million or USD 4,919.7. Despite a slight dip from the previous year, the economy expanded by 5.05%, with notable sectors like Transportation and Storage leading the production side growth at 13.96%. In the fourth quarter, Indonesia saw a 5.04% increase in economic growth, with robust performance in sectors like Public Administration and Defence. Regionally, provinces like Maluku Papua, Sulawesi, and Kalimantan showed significant growth reflecting the country’s spatial economic expansion. These economic indicators signal Indonesia’s resilience and potential for businesses considering entry into the market.
Moreover, Indonesia’s manufacturing sector sustained expansion for seventeen months, with the January 2023 Purchasing Manager Index reaching 51.3% up from 50.9% in December 2022. This resilience amidst global economic challenges underscores the importance of bolstering domestic demand and advancing downstream activities within the sector. Indonesia’s PMI has successfully outperformed several countries, including Malaysia, Vietnam, and South Korea, reflecting the country’s robust economic performance amidst regional dynamics and business license Indonesia.
Continuously Pushing Investment into the Market
Recent data from the Indonesian Investment Coordinating Board (BKPM) shows record breaking foreign investment in 2022, reaching USD 43 billion, a 44% increase from 2021. Combined with domestic investments, Indonesia saw a total of 1,207 trillion rupiah (USD 80 billion), largely in the metal mining and mining sectors, exceeding USD 16 billion. Looking forward, the government aims for 1,400 trillion rupiah (USD 92 billion) in combined investments in 2023 and 1650 trillion rupiah (USD 108 billion) in 2024.
The rise in investments came from government incentives that ease foreign and domestic investments to the country. Some incentives include long-term tax reductions for major investments, no import/excise duties, and a simplified immigration process.
Companies investing and registering a company in Indonesia in one of the 246 priority business lines grants companies fiscal perks. These include a 50% CIT reduction for investments between 100 billion rupiah (USD 6.6 million) and 500 billion rupiah (USD 33.3 million) for five years, and a 100% reduction for investments over 500 billion rupiah (USD 33.3 million) for 5-20 years. Additionally, tax allowances offer a 30% reduction in taxable income for six years, a 10% withholding tax rate on dividends and the option to carry forward tax losses for up to 10 years.
What are the business entities available in Indonesia?
There are 4 main business entities that you can set up in Indonesia.
- Perseroan Terbatas (PT) or Limited Liability Company
A limited liability company has its capital divided into two shares. Shareholders’ personal assets are protected in case of financial difficulties, as their liabilities are limited to the unpaid shares. PTs allow for easy sale of shares and ownership changes without the need for dissolution. There are two types: Local PT companies and foreign owned PT PMA companies
- Foreign-owned PT PMA
Foreign owned PT PMA companies allow 100% foreign ownership unless their industri is on the negative investment list, in which case joint ventures with Indonesian entities may be required. Minimum requirements include two foreign individuals or corporations, or a mix with local shareholders, along with a local director and either a foreign or local commissioner. The minimum investment capital is IDR 10 billion, with IDR 2.5 billion (25%) required as paid up capital, and the company must be categorized as a large company.
- Representative Office
A representative office in Indonesia serves as a suitable option for foreign companies seeking to explore the local market. It conducts market research, promotions, and acts as an agent for the parent company. The license usually lasts two years and can be renewed. It cannot generate profits locally, has no minimum capital requirement, and can employ both local and foreign staff.
Business Setup in Indonesia Varies in Process, Regulation, and Administration
In Indonesia, businesses are categorized by a Standard Industrial Classification known as KBLI. Choosing a specific KBLI code is essential for establishing a company as it determines the required permits and foreign investment limitations. While product distribution is not specifically classified under a single KBLI, it falls under the Wholesale and Retail Trade category. Wholesale trade is generally open for 100% foreign investment, except for certain products like fishery goods which require partnerships with local companies. Retail trade, on the other hand, is reserved for local entities. However, it’s important to note that specific goods may fall under different KBLI groups with varying regulations. Consequently, foreign distribution companies are typically restricted to wholesale trade and must appoint local distributors to reach end consumers, as outlined in the Minister of Trade Regulation Number 24 of 2021.
It is advised to talk with legal or a consultant in Indonesia with deep understanding for business setup in Indonesia for better softlanding process.
Moreover, the KBLI 43304 indicates that wholesale distribution, previously restricted to 67% ownership, appears to be fully open for foreign investment under the New Investment List. The telecommunications, media and technology sector also sees liberalization with businesses like cellular operators and internet service providers no longer subjected to the 67% foreign investment limit. However, the implementation of these changes and their impact on specific sectors may not be immediate, requiring further analysis and patience, particularly regarding integration into Indonesia’s online OSS business registration system.
Dissecting Indonesia’s Corporate Income Tax
Indonesia’s corporate income tax rate is set at 22%. Entities that may receive tax incentives are based on the following criteria:
- Publicly listed companies offering a minimum of 40% of total share capital receive a 3% tax reduction
- Companies with an annual turnover of 50 billion rupiah (USD 3.5 million) get a 50% tax cut on turnover up to 4.8 billion rupiah (USD 336,000)
- Companies with turnover below 4.8 billion rupiah (USD 336,000) are taxed at 0.5% on total turnover
A company is considered resident in Indonesia if it is registered and operates within the country. If a foreign company operates through permanent establishment in Indonesia, it is taxed at the same rates as resident companies. Conversely, a non-resident company, though incorporated abroad, earns revenue from activities conducted in Indonesia.
Whether you’re a small enterprise manufacturing gear with no prior sales in Indonesia or a company aiming to capitalize on the burgeoning automotive industry, we’ve got you covered.
At BI International, we understand the complexities of entering a new market. That’s why we offer a comprehensive suite of services designed to streamline your entry into Indonesia. From market entry consulting to sales channel profiling, from setting up your company to talent acquisition for your local team, we handle it all. Our systematic approach ensures a time-efficient process, allowing you to focus on what you do best – growing your business.
Whether you need dedicated personnel or require employment of record services to establish a legal presence, we tailor our solutions to meet your specific needs. Plus, our team takes care of accounting and tax compliance, ensuring smooth operations for your Indonesian venture.
Don’t miss out on the opportunities in one of Southeast Asia’s fastest-growing markets. Take the first step towards success by contacting BI International today. Let’s make your mark in Indonesia!