The decision of setting up a joint venture instead of a entirely owned Indonesian entity comes down to many factors in Indonesia. It might be a strategic reason or a requirement from the law.
Right from the beginning there are three important aspects to keep in mind when considering to set up a joint venture with an Indonesian company:
- There is no separate legal entity for joint ventures in Indonesia
- It is not easier to buy shares in an existing locally owned company than starting a new one from zero
- Any foreign ownership in a limited liability company turns a PT (limited liability company) into a PT PMA (LLC. company with foreign direct investment) and thus makes it regulated accordingly
There is one legal arrangement that resembles joint venture in Indonesia – it’s called Joint Operations and it can be used by construction companies (where one of the parties is foreign construction representative office) for time-bound projects. More about construction company licenses can be found here.
Before proceeding with a Joint Venture Company
In many cases, especially if one or several of the joint venture parties bring proprietary technology, a joint venture agreement is signed. Joint venture agreement can regulate different aspects of the joint venture, such as who are the parties, purpose, structure, equity, capital, future financing, board, reserved matters, technology, non-compete, warranties, exit provisions, deadlock, confidentiality, exclusivity, subject to contract, Governing law, Conditions precedent, and target timetables.
The Joint Venture agreement will secure interests of both parties, as many of the points above are not mentioned in the Article of Association of the Company.
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Joint ventures as PT PMA-s
In cases where an Indonesian company and a foreign-owned company decide to jointly establish and/or own a company the legal format used is PT PMA. From the legal perspective there is no difference whether the PT PMA is solely owned by foreign investors or not.
In many situations foreign companies are forced into including a local partner by the law. This is when their industry falls to negative investment list and 100% foreign ownership is not allowed. In such cases a company can look for an active local partner or have a nominee shareholder than holds the necessary amount of shares without any control over the company. The former can be regulated by contracts and is safe practice if handled by experienced advisor.
If your industry is not in the negative investment list, then only go for a joint venture for strategic purposes, such as gaining local insights, having existing market share etc.
Acquiring shares in an existing company
From the legal perspective it’s faster and easier to start a new limited liability company than acquire shares in existing ones. Therefore our advice here is same as in the previous point – consider setting up joint venture if it also makes strategic sense.