Comparison of foreign-owned company, local company and representative office in Indonesia

Do you have plans to pursue company registration in Indonesia, but you still don’t know how to register your company in Indonesia? Are you still confused about what type of legal entity is the most suitable for your business?

If so, this article will give you a business overview set up and better understanding of the possible types of company registration in Indonesia.

Indonesia has several types of companies, which commonly confuses foreign investors when choosing the most suitable legal entity for their business activities. Each form of company certainly has its respective advantages and disadvantages, and we have selected the three most common types of companies in Indonesia for this article.  We describe the differences between these forms below.

Local Company (PT PMDN)

One of the available legal entities in Indonesia is a limited liability company. Limited liability company, also called “PT,” is the most popular and most widely used form of business entity in Indonesia for carrying out business activities in various fields. In addition to having a clear legal basis as provided for in law No. 40 year 2007 on limited liability company, PT is considered the only one option for foreign investors who want to expand in a business that is closed to foreigners.  PT is a company founded by a minimum of two local people as responsible shareholders, limited from the debt of the company.

The advantages of the Indonesian PT are:

1. Shareholder liability is limited for the company’s debt
2. Can easily get additional funds/capital, for example by issuing new shares
3. The viability of the company is more secure
4. Efficient use of leadership, because the leadership can be replaced at any time through a general meeting of shareholders
5. Company management has a clear responsibility to the owner or shareholders
6. Set out clearly by law and other regulations, a limited liability company binds and protects the company’s activity
7. The company registration request, less minimum capital investment, is specifically based on company size: small IDR 600 million, medium IDR 600 million – 10 billion, large IDR more than 10 billion.
8. The company can have three main business activities.
9. Usually no limitations apply, and it can use all open government tenders.

However, the Indonesian PT also has disadvantages, such as:

1. It is a subject to a separate tax, and dividends received by shareholders will be taxed
2. The company’s trade secrets are less secure, as all activities should be reported to the shareholders
3. The founding process takes more time and money than other entitities
4. The dissolution process, changes to articles of association, mergers and takeovers require time and money, as well as approval by a General Meeting Of Shareholders (RUPS).
5. The company is 100% owned by local shareholders and foreigners must apply to local shareholders for a reliable nominee agreement.

Foreign-owned company (PT PMA)

Foreigners who want to create or build a business in Indonesia tend to create a PT PMA. What is a PT PMA? PT PMA (Penanaman Modal Asing) or Foreign Investment Company, is the establishment of capital for the purpose of doing business in the Republic of Indonesia by a  foreign investor, by using foreign capital fully or in part with a domestic investor. Before an investor decides to register a PT PMA in Indonesia, he has to investigate his exact business activities regarding the Negative Investment List, which notes foreign ownership limits in certain business classifications. It issued by the Investment Coordination Board, also called  BKPM. The minimum investment plan is US$1 million, which is allocated in Indonesia for land, building, work capital, etc. The minimum paid-up capital required is US$250,000, which shall be deposited after the company is established and bank account is issued. After incorporation, the company is required to submit an Investment Activity Report and monthly tax reports, even if the company does not have any activities and owes no taxes.

As for the advantages of PT PMA in Indonesia:

1. PT PMA has same rights and responsibilities as local companies
2. Minimum of two shareholders (can be individuals or legal entities)
3. Minimum organizational structure is one Director and one Commissioner
4. Easy and quick license permits
5. The granting of special customs facilities at PMA
6. On-site tax or import duties are lower
7. The foreign investor owns 100% or less of the company
8. Can sponsor many foreign employees

However, a PT PMA in Indonesia also has disadvantages, such as:

1. The company must make monthly tax reports
2. The company is required to provide reports on business activities to the BKPM every 3 months so that the BKPM may monitor the company’s development
3. The minimum investment plan is US$1 million

Representative Office in Indonesia (KPPA)

Another business entity is called KPPA or representative office of a foreign company. KPPA is an office established by a foreign company to take care of its business activities in Indonesia. This can include preparing to establish a foreign-owned company.

The activities a Representative Office can undertake in Indonesia are limited. These include:

1. Activities in its role as a supervisor, connector, coordinator and caretaker of company interests or of its affiliate companies in Indonesia and/or outside of Indonesia. The representative office in Indonesia is not allowed to seek income or pursue sales transaction activity and purchases of goods and services.

2. Perform market research for items or products based on company requirements.
3. Sales monitoring in Indonesia for the company’s marketing activities.
4. The representative office must be located in the capital of the province and in an office building.

The Representative Office is required to have KPPA permission to conduct its activities. A petition for permission to have a Representative Office in Indonesia and foreign nationals working for the company must be submitted to the head of the Capital investment Coordination Board, also called BKPM.
The following is required to set up a Representative Office:

1. Articles of Association of the foreign companies that will be represented
2. A designation letter from the foreign company that will be represented
3. Photocopies of the passports (for foreigners) or ID cards (for citizens) who will be the representative executives
4. Statement of willingness to live and work as the Executive Representative only, and not conduct other business
5. A power of attorney, if the petition is not filed by the foreign company’s management

The Representative Office in Indonesia is usually the first step for a foreign company in building its business in Indonesia. It is commonly used as feasibility assessment before establishing a PT/PMA. After the Representative Office shows that an examination of its products proves they are marketable and suitable for the Indonesian market, then the foreign companies can create a PT PMA or foreign capital investment limited liability company.

The comparison summary of 3 mentioned entities in our article:

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