Doing Business Comparison Between Indonesia and Vietnam
Table of contents Investment Environment in Vietnam and IndonesiaForeign Ownership Limitations in IndonesiaForeign Ownership Limitations in VietnamForms of Foreign Investment in Indonesia and in VietnamForeigners Establishing a PMA Company in IndonesiaEstablishing a company in VietnamForeigners Investing as an Unincorporated Entity in Indonesia or in VietnamIndirect Foreign Investment in Indonesia and in VietnamMajor Types of Taxes […]
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Indonesia and Vietnam are both among the fastest growing economies in the world. Besides being part of the Association of Southeast Asian Nations (ASEAN) and APEC, they both have large and rapidly growing populations and many other similarities.Many international investors have found Indonesia and Vietnam an attractive destination, improving ranking of both countries on this year’s ease of doing business. Recently Emerhub made its second expansion in 2016 (first one being to Bali) and opened an office in Ho Chi Minh City. Because of that we have put together a guide that gives you an understanding of how to do business in Vietnam and Indonesia and what are the similarities and differences.This article gives an overview of the possibilities of economic progress in densely populated countries- Indonesia and Vietnam. The investment climate, forms of legal entity, taxation, business practices and the key labor legislations in Indonesia and Vietnam for your evaluation while considering whether to start a business in Vietnam or Indonesia or in both markets will be discussed later.
With relatively high economic growth and stable natural increase of population, Vietnam and Indonesia remain two of the fastest- growing Asian economies with high GDP growth in recent years.
GDP growth in Vietnam vs. Indonesia
Source: World Bank and GoogleThe table below shows both Indonesia and Vietnam’s recent results of important macroeconomic indicators and the chart below shows recent trends in foreign direct investment for comparison between Indonesia and Vietnam as well as both countries’ recent results of other important macroeconomic indicators.As we may witness it based on the chart, both countries are listed among the top ten of the most popular destinations for transnational corporations’ foreign direct investment since 2010 to 2016 by the recent United National Conference on Trade and Development Survey.* The minimum salary in Vietnam is due a raise of no more than 400, 000 VND.
The new Indonesia 2016 Negative List replaces the previous 2014 Negative List. Investors who wish to invest a PMA Company in Indonesia should consider and consult to us regarding whether the line of business that will be built is in accordance with this regulation. If particular line of business is not listed in the regulation, thus it is open to 100% investment without condition.In the table below you can find examples of industries that are now 100% open to foreign investment that used to be previously either closed or restricted.
|Business Line||Negative List 2014||Negative List 2016|
|Crumb rubber industry||Closed for FDI||100%|
|Tourism (restaurants, bar, café, leisure, sports and arts facilities)||51%|
|Film industry (distribution, editing, subtitling, production facilities)||Closed for FDI|
|E- commerce and marketplace platforms of more than IDR100 billion (USD$7.3 million) in value||Closed for FDI|
|Telecommunication testing equipment||95%|
|Toll road concession||95%|
|Management and disposal of non- hazardous waste||95%|
|Pharmaceutical raw materials||95%|
The 2016 Negative List has simplified the categories for the business lines that are open for investment (foreign and domestic) with requirements. The categories are now:
- Business lines that are reserved for or subject to partnership with micro, small and medium enterprises (“Local SME”) as well as cooperatives (“Koperasi”)
- Business lines with foreign ownership limitations
- Business lines with location requirements
- Business lines with special licensing requirements
- Business lines reserved for 100% domestic (Indonesian) ownership
- Business lines with a higher foreign ownership in the context of cooperation of the Association of Southeast Asian Nations (ASEAN)
Most of the foreign ownership limitations in the service sectors specified under Vietnam’s WTO Commitments.Decree No. 60/2015/ND-CP, effective on 1 September 2015 (“Decree 60”), introduces a significant change to foreign investment in listed and other public companies. Foreign investors who were only allowed to hold up to 49% of the equity in the public are not allowed to have an unlimited proportion of voting shares in Vietnamese public companies (including listed companies) subject to certain exceptions.In the table below are some of the popular industries for foreign investments where the allowed foreign ownership is restricted.
|Business Sector||Foreign Ownership Cap|
|Service incidental to agriculture, hunting and forestry||51%|
|Audio- visual services||51%|
|Entertainment services (incl. theatre, live bands and circus services)||49%|
|Electronic games business||49%|
|Maritime transport services||49%|
|Services auxiliary to all modes of transport (incl. container handling services, but excl. services provided at airports)||50%|
|Advertising services||Less than 100%|
|Banking services (in the form of a joint stock commercial bank)||30%|
|Logistic services||49% – 51% (depending on the specific services)|
|Non facilities- based telecommunications services||65%|
|Facilities- based telecommunications services||49%|
|Security services||Less than 50%|
* Vietnam is currently a signatory to certain international treaties and has certain commitments to the World Trade Organisation (WTO), each of which mandates foreign ownership restrictions in certain business sectors.
The two principal forms of foreign investment in Indonesia and Vietnam are as following.
Direct Foreign Investment in Indonesia and in Vietnam
The direct foreign investment in Indonesia is regulated by Law No. 25 of 2007 regarding investment and its implementing regulations (the Investment Law). Under the Investment Law, any form of direct foreign investment in Indonesia must be in the form of a limited liability company. The investment must be by way of the foreign investor holding shares in the company. A company established with foreign investment capital is known as a ‘PMA Company’.Foreign direct investment requires approval from BKPM (the Capital Investment Coordinating Board), however certain industries require approval from other relevant authorities as well. Business activities are classified under KBLI codes. It is crucial to use a trusted agency like us to help you get the correct KBLI code from the BKPM to conduct a business in Indonesia and to obtain a simpler approval from BKPM. This is also relevant to Vietnam, the approval is from DPI, Department of Planning and Investment. Similarly, any foreign investors in Vietnam can directly engage in the Vietnamese market in several ways, and the choice of investment form depends primarily on your investment aim. The legal forms available to foreign investors are a single or multiple member limited liability company or a joint-stock company. In most sectors it is also possible to register a branch of a foreign company. It is important that the parent company engages in the same activities as the branch. In general, investors are free to choose between establishing a limited liability company and a joint-stock company. If you are not sure which type of investment is suitable for your business sector, Emerhub is here to guide you.
The first process we will help you with is to request the company name in advance and submitting the Principal License (Izin Prinsip).The minimum capital requirement for establishing a PMA company currently stands at 10 billion IDR or the equivalent of $1.2 million USD, with a minimum value of at least 2.5 billion IDR or $300,000 USD (25% of the minimum capital requirement) must be paid for the initial investment.Paid up capital is the minimum value of the initial investment required to establish a PMA, which is 25% of the minimum capital requirement (at least 2.5 billion IDR or $300,000 USD). After you have met with the minimum payment required, we will assist you with the following required documents, in order to obtain your Principal License.
- Application form of Principal License
- Applicant’s identifications if the investor is an individual. For foreign investor, the identifications required are a copy of all pages of his or her passport, notarized and then legalized at the nearest Indonesian Consulate. For Indonesian investor, a copy of his or her ID Card (KTP) and Tax ID Number (NPWP)
- Detail of activity plan and work flow chart for manufacturing company, or a description of the business activities for a service company
- Letter of recommendations from relevant ministries or related government agencies concerned, as needed
- In the case of change in capital structure, evidence of change in capital structure
- Signatures and stamps of the applicants or the proxies, in a form of power of attorney for the proxies assigned to sign or conduct the application of Principle License Application form
- For certain types of business, BKPM may require presentation in front of BKPM officials
After BKPM has granted principal license, we can then proceed with the process of incorporating a PMA Company.
There are three main types of vehicles for foreign investment in Vietnam, whether wholly foreign-owned (FOEs), a joint venture with Vietnamese partners (JVEs), and public limited companies (JSCs).
The Vietnam limited liability company (wholly foreign- owned LLC)
Emerhub provides full services for foreigners wishing to set up these companies. The diagram below shows the required and our offer for you to successfully open your limited liability company.
The Vietnam joint venture company (partly foreign- owned LLC)
The required details and services needed to set up a Vietnam joint venture company are like foreign- owned LLCs, but are more complex in some cases, such as that it is taking more time and effort to build the right relationship with the partner.Our company is here to partnering with you, and as a Joint Venture with your business, we have complementary abilities and resources such as distribution channels, supply chain with drive simplicity and flexibility, understanding of Vietnamese Law and knowledge about the investment market in Vietnam. We will make sure that your business may have strong potential growth and remained firm in the market.
A representative office and a branch office can be established depending upon the line of business.The advantage of investing as an unincorporated entity in Indonesia or in Vietnam is that it requires no large capital investment and is a relatively easy and fast way.In contrast to Indonesia, to set up a representative office and a branch office in Vietnam, a parent company must have had conducted business in its home country for at least 1 year and at least 5 years for a branch office. Our sister company, Emerhub will also assist you with any questions regarding the establishment of a representative office or a branch office in Vietnam.The restricted activities of a foreign representative office in Indonesia or a representative office and a branch office in Vietnam are quite similar. They are not permitted for the following activities and purposes:
- Search for income from sources inside Indonesia or Vietnam, including carrying out activities or doing anything related to the engagement in and/or sales and purchases of goods or services with a company or individual inside Indonesia or Vietnam, and/or
- Participate in any form in the management of a company, a subsidiary or branch office in Indonesia or in Vietnam.
The primary form of indirect foreign investment into Indonesia and Vietnam is through the country’s stock exchange, which is regulated by the Financial Service Authority, or Otoritas Jasa Keuangan (OJK) in Indonesia and by authorized banks in Vietnam.If required, Emerhub and Emerhub will be pleased to assist you with listing your company on The Bursa Efek Indonesia in Indonesia or on The Ho Chi Minh City Stock Exchange in Vietnam.
Most business activities and investments in Indonesia and in Vietnam will be affected by the following taxes:
- Corporate Income Tax
- Individual Income Tax
- Value Added Tax (VAT)/ Sales Tax
- Withholding Tax
- Social Insurance, Unemployment Insurance ad Health Insurance Contributions
Corporate Income Tax
The general corporate income tax rate in Indonesia and in Vietnam is 25% in Indonesia 20% in Vietnam. Corporate Income tax rates in Indonesia and in Vietnam are levied in a following table.
|Type of Business in Indonesia||Tax Rate(%)||Type of Business in Vietnam|
|Public companies with minimum listing at least 40%||20%||20%||Enterprises with revenue no more than VND 20 billion|
|Companies with at least 40% of its shares traded on the stock exchange||20||32 – 50||Operating in petroleum, gas and other natural resources sectors|
|Small enterprises (i.e., gross turnover below IDR 50 billion||12.5||10 – 20||Education, training and health care, and to newly established entities in certain economic zones and areas with difficult socio-economic conditions|
|Below IDR 4.8 billion||1||–|
Individual Income Tax
Individual income tax rates in Indonesia are progressive rate between 5% – 30%, meanwhile Vietnam personal income tax rates are progressive between 5% to 35% with non- residents are taxed at a flat tax rate of 20% and non-employment income is taxed at rates from 0.1% to 25%.The following unified progressive tax rates are applicable to Indonesian or Vietnamese or foreign nationals in within each country.
|Individual Income Tax|
|Taxable Income(million IDR)||Tax Rate(%)||Taxable Income(million VND)||Tax Rate(%)|
|Residents||Non- Residents||Residents||Non- Residents|
|Up to 50||5||20||Up to 5||5||20|
|> 200||15||20||5 – 10||10||20|
|250 – 500||25||20||10 – 18||15||20|
|More than 500||30||20||18 – 32||20||20|
|32 – 52||25||20|
|52 – 80||30||20|
Value Added Tax/ Sales Tax
The VAT rate in Indonesia and in Vietnam is typically 10%. This rate may be increased or decreased to 15% or 5% depending on the government regulation.Certain limitations for the 0% VAT apply to export of taxable tangible and intangible goods and services.
Withholding tax shall be payable at the following rates.
|Type of Taxable Income|
|Resident||Non- Resident||Resident||Non- Resident|
|Technical Assistance and Service Fee||2||20||10||10|
|Employment License||Must immediately obtain a Limited Stay Visa (Visa Tinggal Terbatas)||If working >3 months require a work permit|
|Validity||Minimum 6 monthsMaximum 2 years||Maximum 36 months|
|Employer’s Responsibilities||– Must appoint Indonesian citizens as assisting partners to the foreign workers, so that they can be trained in the foreign worker’s expertise– Must pay an amount for each expatriate employee into a skills and development fund managed by the Department of Manpower.||– Must have a training plan and specific apprenticeship agreements to train Vietnamese employees to replace foreign employees– At least 20 per cent of the total number of the managers, executive directors and experts of the enterprise must be Vietnamese citizens.|
Compulsory Insurance Contributions
|Compulsory Insurance Contribution Rates|
|Social Insurance||Health Insurance|
|Employee Contribution||Employer Contribution||Employee Contribution||Employer Contribution|
|1 – 2||7||0.24 – 3.80||17||0.5 – 1||1.5||4||3|
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