4 Laws and Regulations to Know When Investing in Indonesia

When you are planning to invest in Indonesia, there are four key laws and regulations that form the foundation of your business operations as a foreign investor. They dictate how you must structure your company, how you get licensed, how you hire your team, and how you can legally live and work in the country.

This article breaks down these four essential laws, explaining what they are, and why they matter for your business in Indonesia.

1. The Corporate Law (Law No. 40 of 2007)

For any foreign investor, your starting point is the Indonesian Corporate Law. This is the law that defines the structure and rules for the limited liability company, both local (Perseroan Terbatas or PT) and foreign-owned (PT PMA or Perusahaan Penanaman Modal Asing). 

Here are key provisions of the Indonesian Corporate Law: 

1. Company Formation and Operation: outlines the legal requirements to incorporate a limited liability company. This includes specific criteria such as having 2 shareholders, minimum capital requirement and business activities.
2. Corporate Governance: defines the roles and responsibilities of the Board of Directors (BOD) and Board of Commissioners (BOC).
3. Shareholder Rights: This includes voting rights in the company. Shareholders are generally not personally liable for the company or losses beyond their shareholding, unless specific conditions are met (e.g., misuse of the company for personal interest in bad faith).
4. Capital Structure: The law also specifies the capital structure of companies with the  minimum authorized capital set at Rp. 50,000,000, with an obligation to fully pay up subscribed capital.
5. General Meeting of Shareholders (GMS): All major decisions, like amending the company’s articles or appointing directors, must be approved by a General Meeting of Shareholders (GMS), which holds the ultimate authority in the company.

If you need assistance, Emerhub’s local experts advise you on the appropriate structure and handle the business setup process on your behalf.

2. Head of BKPM Regulation No. 4 Year 2021

The Investment Coordinating Board (BKPM) is Indonesia’s primary government agency responsible for investment promotion and facilitation. This regulation is crucial because it directly impacts the practical aspects of obtaining business licenses and approvals for foreign investments. It introduces a risk-based approach to licensing, which aims to streamline the process instead of a one-size fits all approach. 

To better understand this regulation, here are key provisions of BKPM Regulation No. 4 Year 2021 for PT PMAs: 

• Risk-Based Licensing (OSS-RBA): implements the Online Single Submission Risk-Based Approach (OSS-RBA) system. This means that the type and complexity of the business license you need will depend on the risk level associated with your business activity, as classified by the Indonesian Business Classification (KBLI) codes.
• Minimum Paid-up Capital: PT PMA is classified as a Large Enterprise, making minimum issued/paid-up capital requirement of at least IDR 2.5 billion, unless otherwise stipulated by statutory regulations.
• Minimum Investment Requirement: For each KBLI business field and project location, your company must commit to a minimum investment of IDR 10 billion, including land and building costs. 
• Licensing and Administrative Procedures: sets out guidelines to conduct licensing, registration, facility applications, and supervision through the OSS system.
• Investment Facilities and Immigration Support: addresses investment support measures such as immigration facilities (e.g., permit conversions for foreign workers), facilitation of import duties exemptions, and other investment amenities to promote ease of doing business in Indonesia.
• Alternative Legal Entities: under this regulation, a Representative Office (RO) operates outside the scope of the minimum paid-up capital and investment thresholds. It recognizes ROs as low-risk entities under the risk-based system.

3. Indonesian Labor Law, Law No. 13 Year 2003 (Manpower Law)

The Indonesian Labor Law (Law No. 13 of 2003) outlines the fundamental rights and obligations between employers and employees. It is designed to protect employee rights whether they are local or foreign. Understanding this law is crucial for establishing fair employment practices, avoiding disputes within your business in Indonesia. 

Here are key provisions of the Indonesian Manpower Law: 

1. Employment Relationship:
   1. Types of Employment Contracts: Whether permanent employment, or fixed-term employment
   2. Probation Period: Limited to a maximum of three months for permanent employees.
2. Working Hours:
   1. Standard working hours were defined as 7 hours a day/40 hours a week (for 6 working days) or 8 hours a day/40 hours a week (for 5 working days).
   2. Provisions for overtime work, including specific rates for overtime pay.
3. Leave and Holidays:
   1. Annual Leave: Mandated a minimum of 12 working days 
   2. Maternity Leave: Provided 1.5 months before and 1.5 months after childbirth (or 3 months in total).
   3. Sick Leave: Provisions for paid sick leave, requiring medical certificates.
4. Termination of Employment:
   1. Outlined specific grounds for termination (e.g., resignation, redundancy, misconduct, retirement).
   2. Stipulated calculations for severance pay, long service pay, and compensation for rights (e.g., unused annual leave, relocation costs). These calculations were often considered generous from an employer’s perspective.
   3. Required negotiation through bipartite (employer-employee) and tripartite
5. Foreign Workers:
   1. Required employers to obtain a permit (IMTA) to employ foreign workers and prioritize Indonesian workers.
   2. Mandated skills transfer programs and the appointment of Indonesian counterpart workers.

4. Immigration Law, No. 6 Year 2011

The Immigration Law, No. 6 Year 2011 governs entry, stay, and activities of foreign nationals within the country. It outlines different visa types, stay permits, and your obligations as an employer hiring foreign staff. 

Here are key provisions of the Immigration Law, No. 6: 

1. Stay Permits for Foreign Nationals: 
   1. Foreigners who intend to stay for an extended period  need to obtain a stay permit. These permits are generally tied to their employment and are issued based on a sponsor (your company). There are different types of stay permits, including:
      1. Visit Visa: For tourists, social visits, business meetings, etc.
      2. Limited Stay Permits (Izin Tinggal Terbatas – ITAS/KITAS): For those working, investing, studying, family reunification, retirement, etc. These are typically for 1-2 years and extendable.
      3. Permanent Stay Permits (Izin Tinggal Tetap – ITAP/KITAP): For long-term residents, often after a certain period of ITAS or for specific categories like spouses of Indonesian citizens.
   2. Stipulates that stay permits must be used in accordance with their purposes (e.g., investor visa does not permit employment/ other activities).
2. Prohibitions and Sanctions: 
   1. The law grants broad powers to immigration authorities for oversight and enforcement. Non-compliance can lead to severe penalties, including Administrative Actions such as:
      1. Imposing administrative fines (e.g., for overstaying Rp.1,000,000 per day)
      2. Deportation: Forcibly removing foreign nationals who violate laws (e.g., overstaying beyond 60 days, violating visa purpose, engaging in harmful activities).
      3. Blacklisting (Entry Ban): Prohibiting foreign nationals from re-entering Indonesia, which can be extended up to 10 years or even for life for serious threats.
      4. Exit Ban: Temporarily preventing individuals (both foreign nationals and Indonesian citizens for specific legal reasons) from leaving Indonesia.
   2. Criminal Provisions: details various criminal offenses related to immigration violations, such as misuse of Stay Permit document,  with corresponding imprisonment terms and significant fines.

Emerhub leverages over 14 years of experience and industry knowledge to guide you through Indonesia’s complex regulatory landscape.  With our strong network of highly skilled consultants and multiple strategically located offices across Indonesia, Emerhub provides tailored corporate secretarial services from company incorporation, licensing, tax reporting, work permits, and compliance management and more. 

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