Introduction on Foreign Investment in Indonesia

Introduction on Foreign Investment in Indonesia

by: Inda Rahadiyan, S.H.

The Law on Foreign Investment of Indonesia/ Undang-Undang Penanaman Modal Asing (UU-PMA No.1 Tahun 1967)[1] has been amended several times. The purpose of this Law is to encourage foreign investment participation in Indonesia’s economy. It is intended to be in line with the international tendency to make investment more ‘favourable’ especially in developing countries. This Law also issued to encourage the import of foreign capital into the country. Foreign investment is regarded as essential for the growth of the country’s economy, particularly in the industrial sector, where capital, advanced technology and management skills are not yet available domestically.

The Indonesian Government recognizes that foreign capital investment has a major role to play in the development of the country’s economy. Foreign investment is a ‘must’ and also the whole policy of the Government to make the climate for investment by foreign capital to be more attractive. In effort to reach this goal, the government of Republic Indonesia also do manything ways to ammendement this Law. It can be seen from the various amandement made recently. The creation of a favourable climate for foreign investment has become a continous government programme for the development of the country’s economy.

However, on the other hand, it should be kept in mind that consistent with the Government’s policy, foreign capital investment should be looked at as a complementary means for the acceleration of the country’s economic development. Self reliance and the development of the country’s own economic potential are to remain the principal bases of the country’s economic development.

Investmen Under The Law Number 25 of 2007 Concerning Investment[2]

·         Art 1 (1) defines the meaning of Investment

any kinds of investing activity by both domestic and foreign investors for running business within the territory of the Republic of Indonesia

·         Based on Art 1 (1) investment is all of investment activity by domesctic or foreign investors.

·         Art 1 (3) defines foreign investment (Penanaman Modal Asing/PMA) as

any investing activity for running business within the territory of the Republic of Indonesia, made by any foreign investor using either foreign capital entirely or joint capital with domestic capital.

·         Based on Art 1 (3) foreign investment (PMA) is investment activity by foreign investor alone or in partnership with domestic investor (joint venture)

·         Art 1 (6) defines foreign investors included

foreign citizen, foreign corporation, or foreign state making investment within the territory of the Republic of Indonesia.

·         Based on Art 1 (6) foreign investors do not have to form in company.

·         Art 1 (8) defines foreign capital as

any capital owned by any foreign country, individual foreign citizen, foreign corporation, foreign legal entity, and/or Indonesian legal entity, whose capital is owned partially or entirely by foreign party.

·         Based on Art 1 (8) foreign capital included capital that owned by:

1.      foreign country

2.      individual foreign citizen

3.      foreign corporation

4.      foreign legal entity

5.      Indonesian legal entity, whose capital is owned partially or entirely by foreign party.

·         Art 3 about Principles and Purposes

(1) Investment shall be conducted based on the principles of;

      d. equitable and non discriminatory treatment against country of origin

          elucidation of art 3 section 1 subsection d;

Principle of equitable and non discriminatory treatment against country of origin is the principle of non discriminatory service treatmnent between domestic investors and foreign investors, or between investors of one foreign country and investors of another foreign country based on provision of laws and regulations.

             Based on this article we could give the commentary that:

Law No. 1 of 1967 and Law No. 6 of 1968 which set up separate regime for foreign and domestic investment are both repealed.

·         Art 4 about Major Investment Policies

(2) In the adoption of major policies as intended by section 1, the government shall;

      a. accord equitable treatment to domestic investors and foreign investors with due              

          regard to national interest.

       Elucidation of Article 4 section (2) subsection a;

         Equitable treatment is that the government does not discriminate treatment  

         against investors having invested in Indonesia, unless provided otherwise by 

         provisions of laws and regulations.

     b. Ensure the legal certainty, business certainty and business safety for investors     

         starting from the licencing process to termination of investment activities in

         accordance  with provisions of laws and regulations.

(3) Major investment policies as intended by section (1) and section (2) shall be  reflected in General Plan for Investment.

·         Art 5 (2) about form of Investment

Foreign investment must be in the form of a limited liability company under Indonesian Law, and domiciled within the territory of the state of The Republic of Indonesia, unless provided otherwise by law.

·         Art 6

(1) The government shall accord equitable treatment to all investors of any countries that caary out investment activities in Indonesia in accordance with provisions of laws and regulation.

(2) Treatment as intended by section (1) Shall not apply to investors of a country that has acquired previleges by virtue of a treaty with Indonesia.

   Elucidation of Art 6 section 2

   ‘priviledges’ is, inter alia, priviledge related to custom unit , free trade zones, common  

    market, monetary units, institutions of a similar kind, and bilateral, regional, or  

    multilateral agreement between the Government of Republic Indonesia and the

    government of foreign country concerning particular priviledges in the conduct of

    investment.

Comment and analize

Comparing to The Law Number 1 of 1968 and The Law Number 6 of 1968, these laws separate regimes foreign and domestic investment are both repealed.

There is no provision for foreign investments permit .

Regulating about contract work on mining field is not applicable based on Law Number 25 of 2007.

The provision on Law number 6 of 1968 that foreign enterprises could not participate in trade and industry after 31 December 1977 is not applicable. This is understandable because these provisions are discriminatory.

·         Art 7 about Nationalization

(1) The government shall take no measures of nationalization or exprpropriation against 

   the proprietory rights as intended by section (1), the the government shall pay 

  compensation tha amount of which shall be established by market value.

   Elucidation of Art 7 section 1;

  ‘market value’ means value that is established in accordance with the Internationally –

   accepted by an independent appraiser named by the parties.

            (3) If both parties fail to reach an agreement of compensation or damages as intended by 

                section (2), the settlement thereof shall be made through by arbitration.

                Elucidation of Art 7 section (3);

                ‘Arbitration’ is a method of settling a private dispute outside the court of law based on

                written agreement by parties to a dispute.

               

                Comment and Analyses;

-          While nationalization is not intended, if it does take place there shall be compensation based on market value. Any dispute shall be resolved through arbitration.

-          Provision on this article repealed provision under tha Law Number 1 of 1967 and reflect International Customary Law. This provision further than United Charter of Economic Rights and Duties of State s of 1974 on Standard of compensation.

·         Art 8

(1) Investors may transfer assets they own to parties the investors desire in accordance with provisions of laws and regulations.

(2) Assets not counting assets as intended by section (1) shall be assets that are determined by law as assets controlled by the assets.

(3) Investors shall be granted the following right to transfer and repatriate in foreign currencies, inter alia;

a.      Capital;

b.      Profit, bank interest, dividens and other income;

c.       Funds that are needed;

1.      To purchase raw materials and component,s, intermediate goods or finished goods,; or

2.      To replace capital goods in order to protect the viability of the investment.

·         Art 10

(1) In addressing their labor need, investment companies must give precedence to Indonesian national worker

(2) Investment companies shall be authorized to engage foreign national experts for specified office and expertise in accordance with provisions of laws and regulations

(3) Investment companies must improve the competency of Indonesian-national workers through job training in accordance with provisions of laws and regulations

(4) Investment companies that employ foreign worker must conduct training and transfer technology to Indonesian national workers in accordance with provisions of laws and regulations

           

Conclusion; based on this article

Investors must give priority to Indonesian national worker but may use foreign workers in current position.

·         Art 12

(1) All business sector or business types shall be open to investment activities, except for business sector or business types that are declared to be closed and open with requirements

Elucidation of Article 12 section 1;

Business sector and business types that are closed and open with requirements are provided for by Regulation of the President of Republic of Indonesia in a list based on the standard for classifications of business sectors or business types applicable in Indonesia, to wit classification on Klasifikasi Baku Lapangan Usaha Indonesia (KBLI) and/or the International Standard for Industrial Classification (ISIC)

(2) Business sectors that are closed for foreign investors shall be;

a.      production of weapons, ammunition, explosive devices, and armaments, and

b.      business sectors that are explicity  declared to be closed by law

Ellucidation of Article 12 section 2;

‘Explosive devices’ are devices use in the interest of defense and security

(3) Government by virtue of Regulation of the President shall establish business sectors closed to investment, both to foreign investment and domestic investment, based on the following criteria; soundness, morals, culture, the environment, national defense and security, as well as other national interest.

(4) Criteria and requirements of business that are closed and open with requirements as well as a list of business sectors that are closed and open with requirements shall be regulated by Regulation of the President, respectively.

(5) Government shall establish business sectors that are open with requirements based on the national interest  criteria, to wit protection of national resources, protection and enhancement of micro, small and medium enterprises, and cooperatives, supervision of production and distribution, increase of technology capacity, domestic capital participation, as well as cooperation with business entities named by government.

Comment;

-          Article 12 provides all sectors open to investment axcept as may declared in the Regulation of President to be closed or open with requirements.

-          This provision differ from the Law Number 1 of 1967 which has been revoked.

·         Article 14

(1) Every Investor shall be entitled to enjoy;

a.      Certainties of rights, law and protection

Elucidation of Art 14 section 1 subsection a;

‘certainty of rights’; means the government ensures investors have access to right provided that the investors have fulfilled specified obligations.

‘certainty of law’; means the Government ensures to plays laws and provisions of laws and regulations as the basic foundations in every measure and policy for investors.

‘certainty of protection’; means the government ensures investors have access to protection when carrying out investment activities.

b.      Transparent information about business sectors engaged;

c.       Rights to services, and

d.      Various forms of simplified facility consistent with provisions of laws and regulations.

Ø  Article 14 means that; all investors are entitled to certainty as to rights and Law, to transparent information and to service.

·         Article 15

Every investor shall have obligations;

a.      To apply the principle of good corporate governance;

b.      To implement Corporate Social Responsibility;

Elucidation of Article 15 item b;

‘Corporate Social Responsibily’, means a responsibility mounted in every investment company to keep creating relationship which is in harmony, in balance and suitable to the local community’s neighborhood, values, norms and culture.

c.       To make a report on investment activities and submit it to the Investment Coordinating Board

Elucidation of Article 15 item c

An investment report that contains an update of investments and obstacle an investors faces is submitted periodically to the Investment Coordinating Board and the regional government responsible for the field of investment.

Comment;

Based on this article, article 15 requires investors to practice Good Corporate Governance and to report their activities to BKPM.

There is no provision about how the report to be set up and implemented.

 

·         Article 17

Investors engaged in a non renewable resource business must allocate funds by progressive stages for location recovery in compliance with the stasndard environmental feasibility, the implementation of which shall be regulated in accordance with provisions of laws and regulation.

Eludication of article 17;

This provision is intended to anticipate environmental damage that results from investment activities.

Based on this article, article 17 higlights the obligation of mining and resource investors to rehabilitate their areas.

·         Article 18

(1) The Government shall grant facilities to investors who make investment

(2) Investment facilities as intended by section (1) may be granted to an investment;

a.      That expands its business; or

b.      That makes new investment

(3)  An investment to receive facilities as intended by section (2) shall be an investment  that meets at least one of the following chriteria;

a.      Absorb many workers;

b.      Falls under a high priority scale

c.       Is engaged in infrastructure constructions

d.      Transfer technology

e.      Is enganged in a pioneer industry

Elucidation of Article 18 section (3) sub section e

‘Pioneer industry’ is an industry that has wide-ranging links, gives added values and high externality, introduces new technology, as well as has strategic values for the national economy.

Besides on this article; facilities are available to investors under certain conditions although investors may qualify in one of many ways to receive facilities.

·         Article 19

Facilities as intended by article 18 section (4) and section (5) shall be granted based on national industry policy adopted by the government

Elucidation of article 19;

There is current policy published before this Law: The National Industrial Development Policy of 2005 issued by Department of Industry Republic of Indonesia

Based on Art 19 the possibility of reduction in income tax, import duty, land and building tax and accelerated depreciation are to be set out in a Ministry of Finance Regulation and depend on industrial policies.

Note:

The consession as note above are not as specific as in repealed Law No 1 of 1967 The details in related to it now depend on The Minister of Finance that no specific right on grants.

·         Article 22

(1) Simplified services and/or permission of land titles are intended by Article 21 item a may be granted and extended all at once in advance, and its renewable based on request of the investors for the following;

a.      Right to cultivate may be granted for a period of 95 (ninety five) years by being granted and extended all at once in advance for a period of 60 (sixty) years, and renewable for a period of 35 (thirty five) years;

Elucidation of Article 22 section (1) subsection a:

Right to cultivate is acquired by being granted and extended all at once in advance for a period of 60 (sixty) years, and renewable for a period of 35 (thirty five) years

b.      Right to build may be granted for a period of 80 (eighty) years by being granted and extended all at once in advance for a period of 50 (fivety) years and renewable for a period of 30 (thirty) years;

Elucidation of Article 22 section (1) subsection b:

Right to build is acquired by being granted and extended all at once in advance for a period of 50 (fifty) years, and renewable for a period of 30 (thirty) years;

c.       Right to use may be granted for a period of 70 (seventy) years by being granted and extended all at once in advance for a period 0f 45 (forty five) years and renewable for a period 0f 25 (twenty five) years;

Elucidation of Article 22 Section (1) subsection c:

Right to use is acquired by being granted and extended all at once in advance for a period of 45 (forty five) years, and renewable for a period of 25 (twenty five) years.

Notes:

-          Article 22 provides that titles and extensions may be granted from the start, so that the initial grant of HGU becomes 60 (sixty) years in effect, HGB becomes 50 (fivety) years on effect, Hak Pakai becomes 45 (forty five) years in effect immediately.

-          Based on this article there is no new land titles are created. This article simply supplement the way that the rights available under the basic land law; The Law Number 5 of 1960 are administered. While The Law Number 5 of 1960 allows that extensions to initial titles may be granted it is not specific as to when. Now, this law provides that in certain circumstances, extensions will be granted immediately at the time when the initial title is granted. This consession woud appear no effect if existing titles are being bought.

-           These course hasno effect on an Indonesian individual investor who purchased freehold (Hak Milik).

(2) Land titles as intended by section (1) may be granted and extended all at one in advance for the following investment activities, inter alia;

a.      An investment that is made for a long term and linked to structured changes in the in the Indonesia economy aimed at improving competitiveness

b.      An investment with an investment risk level that requires a long term return on capital based on the types of investment activities carried out;

c.       Investment that need no large areas;

Elucidation of Article 22 section (2) subsection c

‘Large area’ it mean size of a land that needed for investment activities by considering population densities, business sectors or business types specified by laws and regulations.

d.      Investment with the state land title, and;

e.      Investment that do not undermine a sense of public justice and does not harm the public interest

(3) A land title is renewable upon evaluation that the land remains in good use and cultivation confirming to the condition, nature, and purpose the title is granted

(4) The granting and extension of land titles that are granted all at once in advance and renewable as intended by section (1) and section (2) may be terminated or cancelled by the government if an investment company abandons the land, harms the public interest, uses or cultivate land inconsistent with the objectives and purposes of the granting of its land titles, as well as violates the provisions of laws and regulations concerning lands.

·         Article 23

(1) Simplified services and/or permission in connection with immigration facilities as intended by Article 21 subsection b may be granted;

a.      For investments that need temporary foreign workers to realize investments;

b.      For investment that need temporary foreign workers to service machines, other production aids, and after sales service; and

c.       To prospective investors to explore possibilities for investments

d.      The granting of a multiple re-entry permit to

This article opens eligibility to any business needing foreign labour, and article 23 (4) provides that the grant of the 2 year and permanent stay visas require a recommendation of BKPM.

(2) Simplified services and/or permission in connection with immigration facilities to be granted to investments as intended by section (1) item a and item b shall be granted after investors have received recommendation from the Investment Coordinating Board.

Elucidation of Article 23 section (2);

Recommendation is given after an investment has complied with the provisions of foreign worker employment in accordance with the provisions of labor laws and regulations.

(3) A foreign investors shall be granted the following facilities:

a.      The granting of a non-permanent residence permit to a foreign investor for a period of 2 (two) years;

b.      The granting of a chance in the status of non permanent residence permit to an investor into the status of permanenet residence permit after the investor has resided in Indonesian for a period of 2 (two) consecutive years;

c.       The granting of a multiple re-entry permit with a validity period of 1 (one) year for a period of not exceeding 24 (twenty four) months counted from when the non-permanent residence permit is granted; and

d.      The granting of a multiple re-entry permit to the holder of a permanenet residence permit with a validity period of 2 (two)

e.      The granting of a multiple re-entry permit to the holder of permanenet residence permit for a period of not exceeding 24 (twenty four) months counted from when the permanent residence permit is granted

 (4) A non-permanent residence permit for a foreign investors as intended by section (3) item a and item b shall be granted by the Directorate General of Immigration on the recommendation of the Investment Coordinating Board.

Notes:

There are the regulations on foreign employment and immigration issued before this law:

1.      The Government Regulation of Republic of Indonesia Number 32 of 1994 Concerning Visas, Entry Permits, and Immigration Permits as ammanded by The Government Regulation of Republic of Indonesia Number 18 of 2005 and The Government Regulation of Republic of Indonesia 38 of 2005

2.      Kepmenkeh No.M.02-IZ.0110/1995 Concerning Transit Visa, Visit Visas, Non-Permanenet Residence Visas, Entry Permits, and Immigration Permits as ammanded by Kepmenkeh No.M.01-IZ.01.10.2003 and Permenkumham No.M.01-IZ.01.10/2007

3.      Permenakertrans No.07/Men/IV/2006 Concerning Simplified Procedures for Obtaining a Foreign Worker Employment Permit as ammanded by Permenakertrans No.15/Men/IV/2006

4.      Permenkumham No.M.06-IL.01.10/2006 Concerning Provision of Special Facilities in the Field of Immigration in Special Economic Zones.

Based Article 23 we can note that unless a recommendation from BPKM obtained, it is apparent that the current one year visa system applies, the longer multiple re-entry permits do not depend on BKPM recommendation eventhough for the one year visa holder. Also note that for permanent visa is actually a 5 (five) year visa. There is no specific requirement for an enabling regulation to put all this into effect, therefore the is no guidance as how to it will be effected.

·         Article 24

Simplified services and/or permission in connecting with import permission facilities as intended by Article 21 item c may be granted for import of:

a.      Goods to the extent not against the provisions of laws and regulations that govern trading in goods;

b.      Goods that bear no negative impact on safety, security, health, the environment, and morals of the nations;

c.       Goods for the purpose of plant relocation from abroad to Indonesia; and

d.      Capital goods or raw materials fro own production needs.

Note:

Based on this article, there is no specific requirement for an enabling regulation, no indication as to what facilities may be granted or who will grant them, and no indication as to how an investor may qualify.

·         Article 25

(1) Investors who make investment in Indonesia must comply with the provisions of Article 5 of this law

(2) Validation of establishment of a domestic investment business entity in the form of a legal entity or nonlegal entity shall be made in accordance with provisions of laws and regulations

(3) Validation of establishment of a foreign investment business entity in the form of a limited liability company shall be made in accordance with provisions of laws and regulations.

Note:

 The regulations of Validation of legal entity and regional authority:

1.      Permenkumham No.837-KP.04.11/2006 concerning Delegation of Menkumham’s Authority in Granting Validation of Legal Entity of Limited Liability Companies to the Head of Regional Offices of Kemenkumham throughout Indonesia

2.      Permenkumham No.M.01.-HT.01.10/2006 concerning Procedures for Filing Applications for and Validation of Deeds of Establihment, Approvals, deliveries of Reports and Notice of Deeds of Amendments to the articles of Asscociation of limited liability companies.

(4) An investment company to carry out business activities must obtain a license/permit in accordance with provisions of laws and regulations from an authoritized agency, unless provided otherwise by law.

(5) A license/permit as intended by section (4) shall be obtained through one-stop integrated services.

·         Article 26

(1) One-stop integrated services are aimed at helping investors have access to simplified  services, fiscal facilities, and information on investment;

(2) One-stop integrated services shall be carried out by an authorized investment institutions or agency that has assumed delegation or assignment of authorithy from an institution or agency authorized in licencing and nonlicencing at the central level, or from an institution or agency authorized to issue a license or nonlicense in provinces or districts/cities.

(3) Provisions concerning procedures and implementation of one-stop integrated services as intended by section (2) shall be regulated by Regulation of the President.

Notes:

-       Article 25 (5) and Article 26 provide that operating licences may be obtained through one door integrated services. These services may have the appropriate authority to licence delegated by national or regional bodies but the operating of that will be set out in a presidential regulation.

-       Redaction of this law is silent as to whether these one door services must be set up or simply may be set up.

-       This is worth nothing that during the life of the previous law, the only licences to be delegated to BKPM were the import licence and (for a time) the approvals of employment plans, apart from the investment approvals (interim and permanent) which were its own creations.

·         Article 27

(1) The government shall coordinate investment policies amongst the governmental agencies, between the governmental agencies and Bank Indonesia, between the governmental agencies and the regional governments, and amongst the regional governments.

(2) Coordination of the implementation of investment policies as intended by section (1) shall be made by the Investment Coordinating Board.

(3) The Investment Coordinating Board as intended by section (2) shall be led by a head and shall be led by a head and shall be directly responsible to the President.

Elucidation of Article 27 Section (3):

‘Directly Responsible to The President’ means that the Investment Coordinating Board, in the performance of its duties, assumes functions and takes direct responsibility to the president.

(4) The head of the Investment Coordinating Board as intended by section (3) shall be appointed and dismissed by the President.

Note:

-  This article provides that Government coordinates investment policy through BKPM, the chairman of which is directly responsible to the President. Then, Article 28 elaborates the duties of BKPM.

-  Redactional of these article (27 and 28) appears not to establish BKPM, which suggest that the organization established by Presidential Decree Number 33 of 1981 contiues. However Article 28 defines the role of BKPM since this defined in Law and also appears to be exclusive of any other duties. It would necessarily replace the definition of duties in Decree Number 33 of 1981. There is however a duty to determine procedures for the implementation of policy and services which is unclear as to its extent.

·         Article 30

(1) The Government and/or the regional governments shall ensure the business certainty and security in the conduct of Investment

(2) The local governments shall administer investment affairs that fall under the authority, except for the administration of investment affairs that become the Government’s affairs

(3) Administration of the governing affairs in the field of investment which is mandatory affairs of the local governments shall be based on the criteria of externality, accountability and efficiency in carrying out investment activities

(4) The conduct of investments that the scope of which is across districts/cities shall become the Government’s affairs

(5) The Conduct of investments that the scope of which is within one district/city shall become the district/cities shall become the provincial government’s affairs

(6) The conduct of investments the scope of which is within one district/city shall become the district/city government’s affairs

(7) The government affairs that become the power of the government in the field of investment shall be:

a.      Investment related to nonrenewable natural resources with a level of high environmental damage risk ….

Conclution:

There is a clear distinction between a foreign legal entity and an Indonesian entity whether partly or wholly owned by foreigners. This is in line with longstanding international private law that a company takes its nationality from the country of its incorporation, not the nationality of its owners. An Indonesian company with foreign shareholding is not a foreign company. The definition of foreign enterprise contained in repealed Law 6/1968 is now gone.[3]

---

[1] The Law Number 1 of 1967 Concerning Foreign Investment

[2] The Law Number 25 of 2007

[3] Law 25/2007 Law on Capital Investment Signed into law 2 May 2007 (commentary with specific reference to foreign investment), Commentary by Peter Fanning (Hutabarat, Halim & Rekan, and Chairman of IBC.