New Positive Investment List
A few months ago, in one of the articles dedicated to one of the most dynamic economies in Southeast Asia, Indonesia, I discussed what I believe to be the key factor contributing to this dynamism in recent years: the liberalization process of foreign investment in Indonesia. This was initiated by the enactment of Presidential Decree 10/2021, on February 2nd, concerning Business Investment Lines. This decree brought about, among other changes, the repeal of Presidential Decree 44/2016, dated May 16th, regarding Closed and Open Sectors with Conditions for Investment; the reform of Law 25/2007, dated April 26th, on Investments; the development of Law 11/2020, dated October 5th, on Job Creation (better known as the “Omnibus Law”); and ultimately, the replacement of the famous Negative Investment List with another, the Positive Investment List.
Groups of Sectors Open to Investment
This led to the establishment of four main groups of sectors open, with varying degrees of conditions, to investment: a) Priority sectors (245); b) Sectors subject to certain requirements or limitations (46); c) Sectors open to large companies, including foreign companies, but subject to a mandatory association with cooperatives and micro, small, or medium enterprises (51); d) Sectors reserved for cooperatives, micro, small, or medium enterprises (112); and e) Sectors completely open to foreign investment in Indonesia because they are not included in any of the previous groups. In this last case, the possibility for a foreign investor to exceed the traditional 49% limit and reach 100% ownership became a reality in sectors such as oil and gas, electricity, ports, pharmaceutical industry, hospitals, or telecommunications, among others.
An important question in this context is whether a foreign investor can acquire land or not. This issue, due to its sensitivity, is subject to certain limitations that prevent the investor from having absolute ownership (“Hak Milik”) of it, as outlined in Circular IMI-0820.GR 01.01, dated December 20th, 2022. The reason for this limitation is the need to protect land from foreign investment in order to reserve it for Indonesians. This means that while a foreign investor cannot acquire it outright, they can lease it, usually for a period of 30 years, renewable for another 30. Nevertheless, one way to partially circumvent this issue is by establishing a PT PMA, which I will refer to next, and having it acquire the land. However, it is important to note that the types of land available in these cases are limited to certain categories.
Legal Vehicles for Channeling Investment
The most common form, according to Article 5 of Law 25/2007, is the limited liability company with 100% foreign capital (PT PMA), which requires, as key prerequisites, having at least two shareholders, whether individuals or legal entities. These shareholders can potentially also serve as commissioner and administrator, respectively; and a minimum fully paid-up capital of about USD 660,000, depending on the current exchange rate of Indonesian rupiah to dollar. Besides the PT PMA, there is another option: the branch office. This option does have some restrictions due to its lack of separate legal personality and its dependence on the parent company’s business objectives. However, it does not have the high capital requirement of the PT PMA since it only needs to demonstrate the financial capacity necessary to carry out its activity.
Requirements for Executing Investment
Among the requirements that a foreign investor must consider when making an investment—particularly if it is a legal entity—is obtaining a license. This is processed through the digital platform “Online Single Submission” (OSS), currently “One Single Submission Risk-Based” (OSS RBA), following the reform carried out by Government Regulation 5/2021 on February 2nd. As a result of this reform, business activities are classified according to their risk level—low, medium, or high—which will determine the type of license required: simple or complex. The latter are reserved for sectors such as energy, trade, industry, transportation, education, or tourism. Once obtained, the license is valid as long as the investor is executing their business plan unless it is revoked. However, other specific licenses may also be required.
Incentives for Foreign Investment in Indonesia: Fiscal and Non-Fiscal
Like other countries in the region, Indonesia offers fiscal and non-fiscal incentives to attract foreign investors. In terms of fiscal incentives, these include tax allowances, tax holidays, or super tax deductions. Non-fiscal incentives include tariff exemptions. Tax allowances are specifically designed for new capital investments or increases in existing ones and can reach up to 30% of corporate tax (CT) over six years for high-value investments with high labor absorption and local content. Tax holidays can reach up to 100% of CT for five to twenty years for investments starting from USD 30.875 million in sectors incorporating new technologies and having strategic value for the Indonesian economy. Finally, super tax deductions can be up to 300% of R&D expenses.
In addition to these fiscal incentives for foreign investment in Indonesia that I just mentioned, there are other specific incentives aimed at investors conducting business in Special Economic Zones (KEKs), Integrated Economic Development Zones (KAPETs), Free Trade Zones (FTZs), Industrial Zones (KIs), or Nusantara (IKN), the new capital. I will only briefly mention these before concluding this concise summary with non-fiscal incentives such as tariff exemptions. These exemptions align with political, economic, or social objectives and are not foreign to Indonesia either—especially concerning foreign investment—with exemptions on importing machinery, goods, and materials necessary for local production ranging from 100% (for main equipment, spare parts, raw materials or consumables) to 50% (for auxiliary equipment).
