Step-by-Step Guide to Setting Up a Subsidiary Company in Indonesia

Foreign businesses consider opening a subsidiary in Indonesia for many reasons. This may include but isn’t limited to hiring local talent, expanding operations, setting up liaison teams, and market entry.  Foreign businesses also have strategic reasons for setting up a subsidiary in Indonesia. The archipelago’s proximity to vibrant economies such as Singapore, Australia, Vietnam, Thailand, among many others. 

Over the past two decades, the government has introduced a slew of investment policies and Special Economic Zones (SEZ) to improve the ease of doing business.  Foreign entrepreneurs and investors can take advantage of these reforms to enter the archipelago and do business.

This article guides you through setting up a subsidiary in Indonesia.

Although many subsidiaries in Indonesia exist, foreign investors use two business structures – Foreign Investment Company (PT PMA) and representative offices. To use which structure largely depends on the strategic reasons to set up a subsidiary in Indonesia.

Foreign Investment Company (PT PMA)

In Indonesia, a foreign-owned company, is any limited liability company with foreign capital. The New Investment Law governs PT PMAs (Perseroan Terbatas Penanaman Modal Asing). Law No.25/2007 defines PT PMAs as an investment entity using which a foreign investor can perform business activities in Indonesia. 

This subsidiary offers many advantages such as:

1. Legal provision to establish a subsidiary anywhere in Indonesia
2. Complete control for a foreign investor over the company in Indonesia
3. Reduced risk of finding a local partner

Representative office (KPPA)

When a foreign enterprise needs to test the waters before setting up a subsidiary in Indonesia it can set up a representative office or the KPPA. Representative offices are formed to research the market and set up offices to liaise and manage as an affiliate to the parent company abroad. 

A KPPA is usually set up in preparation for incorporating a foreign-owned corporation or a PT PMA. However, it can neither generate any revenue nor perform activities pertaining to sales, purchase transactions, etc.

Thus a KPPA has the following advantages:

1. Helps you establish a relationship with your partners in Indonesia
2. Serves to gather information for market research
3. Acts as a forerunner to developing a foreign-owned company in Indonesia

Expanding into Indonesia has many advantages. Pro-business governments generally lure businesses with several favorable policies for expansion into their country. Indonesia is no exception. 

With over 19 Special Economic Zones to set up base, businesses can expand into the country to tap local talent and the economy,

Indonesia offers these special advantages for businesses:

• Exemptions from Corporate Income tax for 5 – 20 years
• 100% corporate tax reductions for companies set up in Indonesia’s Special Economic Zones
• Free Trade Agreements in Europe and Australia for ease of trade
• No set up costs for representative offices

Generally, setting up a subsidiary in Indonesia endows a slew of benefits offered by the government. Since there are only two entities for foreign businesses, here is a side-by-side representation of the two business structures’ benefits.

Since foreign companies can set up two forms of subsidiaries in Indonesia, let us clearly explain the steps for each of these entities.  

Setting up a wholly foreign-owned entity (PT PMA)

• Name: As a first step, the foreign company should register its name. The name must be approved by the Ministry of Investment. The words encompassing the name should be vulgar or obscene.
• Deed of Incorporation: The company must submit a Deed of Incorporation in Indonesian. It should include the articles of association and should be in accordance with the same. A notary must oversee this entire process. The Deed of Establishment must contain the following:

1. 1. Identity of the founders
   2. Composition of the Board of the Directors
   3. Shareholders of the company 

• Setting up your legal entity: The foreign business must submit the Deed of Incorporation as a third step. Their Ministry of Law and Human Rights will approve the foreign business’s legal entity.
• Obtaining a Tax ID (NPWP): Businesses must obtain a valid Tax ID to acquire business licenses. Moreover, to undertake any banking activities and fulfill tax obligations, businesses must acquire a Tax ID.
• Proof of address: The foreign company must have a foreign domicile to prove the location of the business.
• Application of NIB: A unique company profile number guarantees an immediate operation, provided that no additional licenses are needed. Alongside NIB, Business License(s) and Location Permit will also be granted one day following the registration via OSS. NIB also serves as an import license and customs identification number for the customs clearance process.
• Apply for sector-specific licenses: Each sector has different licenses based on the business sector. For instance, tourism and specific trades may require a tourism license and trade license, respectively.

Below are the documents needed to open a subsidiary in Indonesia

• The ID of the founders (Passport for foreigner, KTP for Indonesian)
• Tax ID of founders (NPWP or Nomor Pendaftaran Wajib Pajak)
• Articles of Association
• Deed of Company Establishment
• Letter of Approval by Ministry of Law and Human Rights
• Letter of Domicile

As stated above, businesses can take the form of a 

• Wholly owned foreign entity (PT PMA) 
• Representative office. 

Businesses can decide this based on their strategic objectives in Indonesia. 

For instance, setting up a PT PMA subsidiary in Indonesia involves an exhaustive process and requires capital investment. 

However, a representative officer requires no such capital to set up.

The laws on setting up a subsidiary in Indonesia affect the number of shareholders needed to establish a company and up-front capital. Generally, an LLC requires one director, two Indonesian shareholders, and one commissioner to supervise the company. 

These laws vary based on the business size and the type of business. 

Moreover, businesses setting up a subsidiary in Indonesia must be aware of the  Positive and Negative Investment Lists. The government restricts foreign businesses from investing in certain sectors found in these Investment Lists.

Businesses that are entirely open for foreign investment are: 

• Cold storage business 
• Distribution affiliated with production
• Direct selling through marketing networks, and brokers
• Opening bars, cafes, restaurants, and sports facilities
• Biomass pellet industry
• Communication and information sector business where investments are greater than IDR 100 billion are allowed for 100% foreign ownership

Businesses which are closed for foreign investment are: 

• Class-I narcotics and cultivation
• Casinos
• Fishing of endangered species
• Utilization of corals found in nature for the production of jewelry, souvenirs, building materials, etc.
• Chemical weapons production
• Industrial ozone-depleting substances industries and industrial chemicals

When incorporating a subsidiary in Indonesia, businesses owners need to be aware of the following taxes:

1. Corporate income tax
2. Value Added Tax (VAT)
3. Luxury Goods Sales Tax 

All taxes are levied on the subsidiary by the central government. Moreover, there are also taxes levied by the administration in the province. 

Taxes are paid to the government for a particular year or period to the state treasury.

The government has reduced several complications and bureaucracy to start a business in Indonesia. Moreover, the Ministry of Investments or the Badan Koordinasi Penanaman Modal (BKPM) has encouraged financial and tax-related incentives to encourage foreign investors. 

Incentives are granted to businesses which: 

• Employ a local workforce who make practical contributions to the company in exchange for monetary income
• Are environmentally friendly and sustainable
• Operate in a pioneering industry
• Add to infrastructure development
• Are export-oriented

Tax holidays

The government completely exempts businesses from the Corporate Income Tax (CIT) due for 5 to 20 years from the commencement of commercial production. After 20 years, companies can avail exemptions for up to 50% for two years.

Tax benefits in special economic zones

The Indonesian government offers 100% corporate tax reductions for up to 25 years for businesses operating in SEZs, provided they meet investment requirements.

Import and excise duties

Businesses that procure capital goods to develop SEZs can see exemption from import duties, tax on the import, and excise duties for five years. For tourism SEZs, entry of goods to be sold in shops and consumable raw materials are exempted from excise duties.

The government has also signed several Free trade agreements with Europe and Australia to ease costs in trade. In 2020, the government signed the Regional Comprehensive Economic Partnership (RCEP). One of the benefits of this agreement offers a 92% tariff reduction on traded goods.

Key Considerations

Setting up a subsidiary in Indonesia needs exhaustive preparation. Some companies acquire the services of a company that helps in incorporating companies. Regardless, before you embark on your venture, consider the following questions.

What type of subsidiary do you need in Indonesia?

If you need to generate revenue and own a  foreign entity in Indonesia, then you must choose a PT PMA. However, if you want to find your product or service’s fit in the local market before incorporating a subsidiary, then a representative office would be the best option.

Is the industry open to foreign investment?

As discussed above, Indonesia maintains a Negative Investment List and a Positive Investment List. Make sure you check the list before venturing into Indonesia for foreign investment.

Multiplier’s global employment solution helps you expand into Indonesia without a subsidiary. 

With Multiplier, you can directly hire in Indonesia without building local infrastructure and undergoing the hassles of acquiring physical addresses, completing paperwork, setting up payroll, etc. 

Multiplier EOR completely replaces the need for setting up a Representative Office to test the new markets in Indonesia. For instance, with Multiplier’s SaaS-based EOR solution, you can set up sales teams to explore your product’s potential or market opportunities in the archipelago.