Investing in Indonesia: Recent Developments

Indonesia at a Glance

Indonesia is a pivotal nation in South East Asia, abundant in natural resources and having a population of approximately 253 million people, making it the world's fourth most populous nation. Due to its strengthening economic and political progress, Indonesia now represents one of Asia's best potential growth opportunities in the eyes of many investors.


Structures for Conducting Business and Investing in Indonesia

International investors can invest in and/or establish a presence in Indonesia through various structures. The principal structures are: a limited liability company; a representative office; direct participation by a foreign company in certain sectors; and direct shareholding in a publicly listed company. Each structure has different legal and taxation implications.

Indonesian Companies

Companies in Indonesia are regulated under Law No. 40 of 2007 on Limited Liability Companies (“Company Law”) and its subsidiary regulations. The Indonesian Company Law is derived from the European civil law system and Indonesian companies consequently have some of the characteristics of companies in European jurisdictions. Companies in Indonesia have limited liability and have most of the standard features found in other jurisdictions. The Articles of Association of an Indonesian company can be based on model articles but is generally moderately tailored to the desires of the shareholders. Trusts are not an investment structure recognized by Indonesian law.

Foreign Representative Offices

Indonesian law allows foreign companies to establish representative offices in Indonesia. The activities of representative offices are limited to supervision, liaison, coordination and managing the interests of the foreign company or its affiliates in Indonesia and other countries (if applicable). In this respect, the representative office may conduct marketing and other indirect business activities such as market research, customer liaison, quality assurance and after sales service. Foreign representative offices may not conduct business activities within the country, but should refer business back to the foreign company with any transactions occurring in the foreign jurisdiction. Foreign representative offices may enter into leases, maintain offices and employ staff.

Direct Participation

In some sectors, such as under a Production Sharing Contract in the oil and gas industry, foreign companies may conduct their own income generating activities in Indonesia directly.

Capital Markets

Indonesian capital markets are regulated by Law No. 8 of 1995 on Capital Market and the implementing regulations issued under that law, the Capital Market Law, and by the Indonesian Financial Services Authority, known as Otoritas Jasa Keuangan or OJK. The Indonesian Stock Exchange also issues regulations and rules related to listing of companies and securities trading. The Capital Market Law also provides for the establishment and regulation of various types of mutual funds, which provide another avenue for foreign investment in the country.

Other Methods of Conducting Business

There are also a number of other business structures in operation, mostly consisting of various forms of partnership. However, partnerships are not open to foreign participation because a partnership must consist only of Indonesian natural persons. Cooperatives also limit foreign participation.

The Venture Capital Model

Venture capital companies (“VCC”) also offer an opportunity for foreign investment and the incentive of tax exempt income. A VCC is able to invest in other businesses in the form of equity participation, quasi-equity or profit/revenue sharing. Investment is permitted for a period of up to ten years; however, it may be extended for additional five years subject to certain conditions. VCC investments must be directed specifically for the purpose of development of new invention and technology, helping enterprises in development stage or those facing financial difficulties, or towards developing engineering and research projects.

VCCs are subject to the jurisdiction of the Minister of Finance and not the Indonesian Investment Coordinating Board (see “Regulation of Foreign Investment—The Negative List” below). Foreign ownership in a VCC is allowed up to a maximum of 85%. The minimum paid-up capital requirement for a wholly domestic VCC is IDR10,000,000,000 (US$860,000¹) and IDR30,000,000,000(US$2.6m²) for a partly foreignowned joint venture VCC.

A VCC can be a shareholder of foreign invested companies (“PMA Companies”) and large scale wholly Indonesian owned companies (“PMDN Companies”). A VCC’s participation in PMA Companies and PMDN Companies is now treated as domestic capital participation, which means companies that are owned by a majority foreign owned VCC are not PMA Companies that would otherwise be subject to the restrictions of Indonesia's negative list.

Shareholders of a VCC are required to comply with certain requirements. Notably, fund sources for the payment of paid-up capital of the VCC cannot be in the form of a loan nor can the funds be sourced through money-laundering activities. Additional requirements are applicable to the board of directors and board of commissioners of VCCs— namely that a member of the board of directors or the board of commissioners should have at least two years' experience in a VCC, banking or other financial institution. In performing its business, VCCs are prohibited from raising funds directly from the public in the form of giro deposits, savings deposits or other equivalent forms. VCCs, however, may issue promissory notes, subject to compliance with applicable prudential principles.

Regulation of Foreign Investment – The Negative List

The Indonesian government encourages foreign investment in most areas of the economy. However, there are still certain restricted sectors of the economy for both historical and developmental reasons. The government is continuously reviewing these areas and streamlining existing laws.

The Indonesian Investment Coordinating Board (“Badan Koordinasi Penanaman Modal” or “BKPM”) is Indonesia's foreign investment approval agency for investments in sectors other than financial institutions and listed entities, where the OJK has jurisdiction). The BKPM oversees the foreign investment regime in Indonesia and grants approvals for foreign investments in private companies. In carrying out this role, BKPM oversees and implements a “negative list” which is the mechanism pursuant to which Indonesia regulates those business sectors that are closed, or open with conditions, to direct foreign investment. The negative list does not, however, apply to indirect or portfolio investments made through the domestic capital market.

On 24 April 2014, the President of the Republic of Indonesia signed Presidential Regulation No. 39 of 2014 (“New Negative List”) revoking and replacing Presidential Regulation No. 36 of 2010 (“Old Negative List”). The New Negative List, unlike the Old Negative List, now expressly states that business sectors not specified in either of the Lists are open, without conditions, to foreign investment. This eliminates the previous uncertainty under the Old Negative List regarding the status of business sectors not identified in the List. In the past, business sectors not identified in the Old Negative List were considered, at least in theory, to be completely open to investment. However, at a practical level it remained subject to prevailing policy to determine if the business was closed or open to foreign investment at any one time and what conditions, if any, applied. The New Negative List’s express statement offers greater certainty to investors assuming it is implemented in practice.

Changes in Restrictions Under the New Negative List

Several business sectors previously not mentioned in the Old Negative List and generally considered open up to 100% foreign investment are now subject to restrictions under the New Negative List, namely:

  • Distribution and warehousing, now restricted to a maximum of 33% foreign ownership;
  • Cold storage, now restricted to a maximum of 33% foreign ownership if located in Java, Sumatera and Bali, or a maximum of 67% foreign ownership if located in Kalimantan, Sulawesi, Nusa Tenggara, Maluku and Papua;
  • Treatment and disposal of non-hazardous waste, now restricted to a maximum of 95% foreign ownership; and
  • Public opinion polling and market research, now restricted to a maximum of 51% foreign ownership.

Certain businesses previously open to foreign investment on a restricted basis have come under further restrictions, including:

  • Oil and gas construction services, now divided into several separate business lines with separate foreign ownership limitations, namely: (i) construction of platforms – maximum foreign ownership of 75%, (ii) construction of spherical tanks—maximum foreign ownership of 49%, and (iii) offshore pipeline installation —maximum foreign ownership of 49%, whilst certain other types of oil and gas construction services are restricted entirely to domestic ownership;
  • Survey service activities, previously categorized under non-construction oil and gas supporting services and open under BKPM policy to a maximum of 95% foreign ownership, are now specifically categorized and split into survey activities for (i) oil and gas, (ii) geology and geophysics and (iii) geothermal, each of which is restricted to 49% foreign ownership, except for geothermal survey which remains at 95%;
  • Onshore oil and gas drilling, well operation and maintenance services, oil and gas design and engineering services, previously open to a maximum of 95% foreign investment, is now reserved for domestic investment only; and
  • Offshore oil and gas drilling, previously open to a maximum of 95% foreign ownership, now restricted to a maximum of 75% foreign ownership.

The retail industry continues to be closed to foreign investment. An important inclusion in the New Negative List is the express mention of e-commerce business being reserved for domestic investment only. Prior to the issuance of the New Negative List the position regarding e-commerce business was unclear.

Lastly, the crumb rubber industry is open only to domestic investment and transfer of shares to a foreign entity is prohibited.

Harmonization of Sector-Specific Regulations

Restrictions on foreign investment in certain businesses have also been imposed under the New Negative List in order to synchronize the New Negative List with existing regulations in respect of the relevant sectors. Several business sectors where foreign investment limits have been harmonized to align with sector-specific regulations, including:

  • Certain agricultural business lines, previously open to a maximum of 95% foreign ownership, now restricted to a maximum of 30% foreign ownership to conform with Law No. 13 of 2010 on Horticulture; 
  • Certain telecommunication sector businesses, previously subject to a partnership arrangement and open up to a maximum of 65% of foreign ownership, now restricted to a maximum of 49% foreign ownership to conform with telecommunication regulations; and
  • Alternative trading, previously open to foreign investment with conditions, now reserved only for domestic investment to conform with the Head of Indonesian Commodities Exchange Agency Regulation No. 103/BAPPEBTI/PER/03/2013 on Prohibition of Foreign Investment Participation for Future Trader and Future Trading System Organizer.

Whilst a not insignificant number of business sectors continue to face restrictions, several business sectors previously closed for foreign investment have now been opened, namely construction of terminals (land transport and cargo), now open to foreign investment up to a maximum of 49%; and performance of periodical testing of motor vehicles, now open to foreign investment up to a maximum of 49%.

Regulations with in the PPP Model

The public-private partnership (“PPP”) model is a major beneficiary of the New Negative List. The foreign investment limit for several businesses within the PPP model has been raised, including:

Port facilities (jetties, buildings, tugs at cargo container terminals, liquid-bulk terminal, dry-bulk terminal and ro-ro terminal), raised to a maximum of 95% during the concession period (foreign investment limits for investments outside the PPP model continue to be restricted at 49%);

Power plants with a capacity more than 10 MW, raised to a maximum of 100% during the concession period (foreign investment limits for investments outside the PPP model continue to be restricted at 95%);

Electric power transmission, raised to a maximum of 100% during the concession period (foreign investment limits for investments outside the PPP model continue to be restricted at 95%); and • Electric power distribution, raised to a maximum of 100% during the concession period (foreign investment limits for investments outside the PPP model continue to be restricted at 95%).

The manufacture of pharmaceuticals, including manufacture of drug raw materials and medical products, has been increased from 75% to 85%.

Through the New Negative List, Indonesia has also shown its commitment to the ASEAN Economic Community (“AEC”) by providing preferential treatment in certain sectors to ASEAN member nations. Although it falls well short of an opening of the doors to fellow member states. We set out several of the preferential opportunities for ASEAN members below:

  • Motion picture advertising, advertisements, posters, stills, photographs, slides, negatives, banners, pamphlets and folders, previously closed to foreign investment, are now open to foreign investment up to 51%;
  • Other accommodation: motels are open up to a maximum of 70% foreign investment, to the extent that it is not contrary to local regulations; and
  • Golf courses located in Java and Bali are open to a maximum of 70% foreign investment, to the extent that it is not contrary to local regulations. Courses located in provinces other than in Java and Bali are open to 100% foreign investment.

The New Negative List manifests Indonesia's intention to channel investment into sectors of the economy it considers in need of additional investment, whilst reducing investment opportunities in areas that no longer justify high (or any) foreign investment or sectors that should remain protected. ASEAN investors will continue to benefit as the AEC heads toward greater integration.


About the Authors

Toby Grainger is a Partner of Ashurst and a Senior Foreign Legal Consultant at Oentoeng Suria & Partners

Satyam Sharat is a Foreign Legal Consultant at Oentoeng Suria & Partners

Alwin Redfordi is a Senior Associate at Oentoeng Suria & Partners



1. Approximate value based on June 28, 2014 exchange rate.
2. Ibid.