Indonesia: Navigating the Legal
Landscape for Chinese Investors
Michael S. Carl
[email protected]
SSEK Legal April 29, 2018
Consultants
Indonesia – The Promise
President Joko Widodo (Jokowi) is trying to improve the ease of
doing business in Indonesia and mitigate the challenges commonly
faced when investing in Indonesia.
“What we need to do is improve ease of doing
business in this country. Ministerial regulations
should always refer to the objective. They should
not scare investors away.” – President Jokowi in a
cabinet meeting on July 24, 2017
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Why Invest in Indonesia
Economic • Global economic growth will be driven by emerging markets and
developing countries (with E7 economies including Indonesia)
Growth
• By 2030: Indonesia is predicted to be 5th largest economy in world
Large Population • Currently: 261 million
- Workforce • By 2045: 309 Million
• Working Age: 52% by 2045
Rising Middle
Class - Large • Forecast to be 135 million by 2020
Consumer Base • Forecast to be 80% of the population by 2045
• Large reserves of minerals: bauxite, nickel, iron ore
Abundance of
• Large reserves of coal
Natural
• Large reserves of natural gas
Resources
• Plantation commodities
• Ocean resources
Sound • Return of Sri Mulyani Indrawati as Minister of Finance
Macroeconomic • Public debt management (28% of GDP)
Policy • Budget deficit (3% of Government expenditures)
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Jokowi and Foreign Investment
Jokowi’s Economic Policy Package
Deregulation, de-bureaucratization and enhanced law enforcement
Objective is to increase Indonesia’s industrial competitiveness
Deregulation:
Harmonizing regulations; revoking redundant and irrelevant
regulations
De-bureaucratization:
Simplification of licensing, fewer administrative requirements,
electronic applications, one-stop integrated service, clear standards
and procedures
Law enforcement and certainty of doing business:
Damage control channel, eradication of extortion, clear sanctions
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Jokowi and Chinese Investment
Jokowi actively seeks Chinese investment
Favors infrastructure and manufacturing
sectors
Agreement to jointly develop infrastructure
projects in North Sumatra, North Kalimantan
and North Sulawesi
“China Desk” with Mandarin-speaking
officials in the Capital Investment
Coordinating Board (“BKPM”)
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Chinese Investment in Indonesia
China among the top 5 investors in Indonesia in 2017
China’s investment in 2017 included the following sectors:
electricity, financing of ports and power plant construction, and
nickel smelters
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Chinese Investment in Asia (% of GDP)
25
20
15
Public Investment
10 FDI
Tourism
5 Export
Source: Bloomberg, August 2016
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Chinese Investment in Indonesia
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Chinese Investment in Indonesia
BKPM report 2016: Investment Realization into Indonesia in 2017
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Rise of Chinese Investors in Indonesia
One Belt One Road initiative by Chinese Government
Investments in various sectors such as e-commerce, power, mining,
mineral processing, real estate, ports and other infrastructure
Key investments include:
• China Hongqiao Group - First alumina smelter in Indonesia
• China Shenhua Group - Several major IPP projects such as
Jawa-7 and Sumsel-1
• China Fortune Land Development - Indonesian township
development project
• Country Garden - Hotel and other property developments
• Alibaba - Lazada Group
• Didi Chuxing - Grab
• China Construction Bank - Bank Windu
• Xiaomi - Joint venture for manufacturing of smartphones
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Establishing a Business and
Legal Presence in Indonesia
Foreign Direct Investment must be in the form of a locally
incorporated company (PT PMA)
Foreign Investment Licensing is administered by the BKPM
Minimum amount of investment is generally IDR 10 billion for each
business field (certain business fields require higher investment,
e.g. industry)
Minimum issued and paid-up share capital is Rp 2.5 billion
(equivalent to approximately USD 200,000)
Permitted ratio of Equity Capital to Indicative Loan (1:3 – 1:6)
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Negative Investment List
In principle, all business fields are open for PMA, unless otherwise
stipulated in the Negative List
The Negative List stipulates business fields that are:
completely closed for PMA; and
open for PMA with certain requirements, such as
shareholding percentage, partnership with local business
enterprises, special license, etc.
PR 44/2016 increased maximum foreign shareholding for PPP,
Pharmaceuticals, Venture Capital Financing, Port Facilities and
Energy
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Negative Investment List: Maximum Foreign Shareholding
Business Activity Foreign Ownership Restriction
Electricity generation (capacity 100% for foreign shareholding with a PPP arrangement
more than 10MW), transmission during the concession period
and distribution
Otherwise, maximum 95%
Oil and gas construction services:
a. Platform Maximum 75%
b. Spherical tanks Maximum 49%
c. Conduit installation on the sea Maximum 49%
Operation and Maintenance Maximum 90%
(O&M) of geothermal facilities
Construction of electricity- Maximum 95%
generating installation and O&M of
electricity installation
Geothermal drilling services Maximum 95%
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Negative Investment List: Maximum Foreign Shareholding
Business Activity Foreign Ownership Restriction
Insurance Maximum 80%
Venture capital Maximum 85%
Leasing Maximum 85%
Pharmaceuticals Maximum 85%
Mining services 100% opened for foreign investment
Manufacturing 100% opened for foreign investment
Plantation (minimum area 25 hectares) Maximum 95%
Smelter 100% opened for foreign investment
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Establishing a Business and
Legal Presence in Indonesia
Other Options for Establishing a Business Presence (Non FDI)
No. Type of Business Presence Remarks
1 Representative Offices KPPA is a precursor to establish a PT PMA
BKPM Representative Office (KPPA) KPPA and KP3A are merely the liaisons of the
Principal and are not permitted to generate
if the Principal engages in the provision income in Indonesia
of services
Foreign Trade Representative Office
(KP3A)
if the Principal engages in the trade
of goods
2 Construction Services Business Entity BUJKA License from Ministry of Public Works
(BUJKA) (MOPW)
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Nominee Structure
• A nominee shareholder is a person or a company that is the registered
holder of shares of a company on behalf of the real owner. However, the
ownership is simply ostensible and the nominee shareholder is essentially a
name on the documents.
• Nominee structure is prohibited under Indonesian Investment Law, thus
enforceability is questionable. Nonetheless it is commonly used.
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Beneficial Ownership
• Presidential Regulation No. 13 of 2018 regarding the Implementation of the
Principle on Recognizing Beneficial Ownership of Corporations in the
Framework of the Prevention and Eradication of Money Laundering and
Criminal Acts of Terrorism Financing (March 5, 2018) (“Regulation”)
Implementation of global standards for anti-money laundering and
combating the financing of terrorism
Corporations must disclose their beneficial owner
The government plans to establish a database of beneficial owners
of all Indonesian companies
Increases risk of exposure of nominee structure
Possible tax consequences
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Land Ownership
Customary Land
Primary Titles Secondary Titles
(Tanah Adat)
• Right of Ownership • Right to Lease • uncertified land
of Freehold Title (Hak Sewa) • governed by adat
(Hak Milik) • Right to Share or customary law
• Right to Cultivate Cropping (Hak
(Hak Guna Usaha Usaha Bagi Hasil)
or “HGU”) • Right of Land
• Right to Build (Hak Pledge (Hak Gadai
Guna Bangunan or Tanah)
“HGB”) • Right of Lodging
• Right to Use (Hak Menumpang)
(Hak Pakai)
• Right to Manage
(Hak Pengelolaan
or “HPL”)
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Land Ownership
Land titles that can be held by a Foreign Investment Company
• Right to Build (HGB): can be attached to HPL land or Hak Milik land; can be
acquired by way of sale and purchase or capital contribution (inbreng)
• Right to Use (Hak Pakai): can be attached to HPL land or Hak Milik land; can
be acquired by way of sale and purchase or capital contribution (inbreng)
• Right to Cultivate (Hak Guna Usaha): solely for the purposes of agriculture,
plantation, fishery and animal stock business; can be acquired by way of sale
and purchase or capital contribution (inbreng)
• Right to Lease (Hak Sewa): no time limitation
Land titles that can be held by a Foreigner*
• Right to Use (Hak Pakai): can only be attached to State land, HPL land or Hak
Milik land
• Right to Lease (Hak Sewa)
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Validity Period of Land Titles
No time limit
Hak
Milik Open to re-
50 years extension
HGU
25 years
Open to re-
HGB 30 years extension
20 years
Open to re-
Hak extension
25 years
Pakai
25 years
As long as the HPL land is utilized in accordance with the HPL
HPL stipulation granted by the government
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Land Ownership
Economic Policy Package
Chairman of National Land Agency (BPN) Regulation No. 17 of 2015 regarding the
Services and Regulation Standards of Agrarian, Spatial Layout and Land for
Investment Activity (“Chairman of BPN Reg 17/2015”) simplifies the land licensing
process and therefore shortens the time period.
Process
Information on the availability of land 7 business days
Issuance of HGU 30 – 90 business days
Extension of HGU 20 – 50 business days
Issuance of HGB or Hak Pakai 20 – 50 business days
Extension of HGB or Hak Pakai 20 – 50 business days
Issuance of land certificate 5 business days
Settlement of complaint 5 business days
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Land Ownership
Economic Policy Package
Tax Treatment for Real Estate Investment Trust (REIT) in Minister of Finance Regulation
No. 200/PMK.03/2015 (“MOF Reg 200/2015”)
Before the promulgation of MOF Reg 200/2015:
1. Dividend received by REIT from Special Purpose Company (SPC) is subject to Article
23(1)(a) Income Tax (15% rate);
2. The transfer of real estate to REIT or SPC is subject to Article 4(2)(d) Income Tax
(generally, 5% rate)
Under MOF Reg 200/2015:
1. Dividend received by REITs from SPC is not used for the calculation of REIT’s taxable
income;
2. Dividend received by REITs from SPC and the transfer of real estate to an SPC or
REIT are exempt from Article 23(1)(a) and Article 4(2)(d) Income taxes;
3. Capital gain on a transfer of real estate is still subject to income tax;
4. REIT is considered as low-risk Taxable Entrepreneur (upon stipulation from Directorate
General of Tax) and is entitled to preliminary refund of VAT overpayment.
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Dispute Resolution
In Court Settlement (Indonesian Civil Code Proceeding/H.I.R)
- Via the appointed district court by the parties or the district court having
jurisdiction of the defendant (Article 118 of H.I.R)
Out of Court Settlement (Article 6 of Law Number 30 of 1999 on Arbitration and
Alternative Dispute Resolution (“Arbitration Law”));
- Negotiations
Negotiation
- Mediation
14 Days
- Arbitration
Mediation
30 Days
Arbitration District Court
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Enforcement of Foreign Arbitral Awards
Indonesia does not acknowledge foreign court judgments. Therefore, most parties
prefer to resolve commercial disputes by way of arbitration.
Indonesia adopted the framework for the enforcement of foreign arbitral awards in
accordance with the 1958 United Nations Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (the “New York Convention”)
Required steps for the enforcement of foreign arbitral awards:
Registration of the foreign arbitral award to the registrar of the Central Jakarta
District Court (“CJDC”). A registration by a representative of the party shall be
accompanied by powers of attorney from the party and the tribunal.
Once the deed of registration has been issued by the registrar of the CJDC,
submit an application to the Chairman of the CJDC for a “fiat exequatur” or
enforcement order.
Once fiat exequatur or enforcement order has been issued by the Chairman of
the CJDC, submit an application for aanmaning/notification to the parties.
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Enforcement of Foreign Arbitral Awards
Obstacles in enforcing foreign arbitral awards:
Ambiguity on the determination of international arbitral awards
The determination of the category of the arbitral award shall be based on a territorial
view of the seat of the arbitration; however, the application can be different in
practice. (e.g. the case of PT Lirik Petroleum v. PT Pertamina (Persero) and PT
Pertamina EP)
Delay
Registration of international arbitral award in Indonesia may require documents that
often take a substantial amount of time, such as the certification from the Indonesian
diplomatic representative in the issuing country. Further, there is no time limit for the
execution of fiat exquatur or enforcement order.
Lack of clarity on the definition of public order
Parallel litigation
The commencement of a parallel litigation or court proceedings often hinders the
enforcement of an international arbitral award, causing the Court to be reluctant to
enforce the said arbitral award. (e.g. Karaha Bodas Company LLC (KBC) v.
Pertamina Case)
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Tax Incentives
News reports indicate the Government of Indonesia is planning to introduce tax
holiday as a fiscal incentive to attract foreign investment.
Tax holiday for upstream companies depending on the level of investment
Investors with certain minimum investment (between 500 billion IDR - 1 trillion
IDR) may be exempt from corporate income tax obligation for 5 years.
Investors with minimum investment of 30 trillion IDR may be exempt from
corporate income tax obligation for up to 20 years.
After such period, the Ministry of Finance may grant a 50% discount for the
investor’s income tax based on its discretion
The Government is also planning to allow investors to apply for tax allowance in
parallel with its application for business license (Izin Usaha)
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