How to invest in Indonesia through a Representative Office

Indonesia has one of the most regulated markets in the world. Despite the recent improvements, it is still relatively hard for foreigners to fully capitalize on market potential.

Our mission is to make investment in Indonesia easier for foreigners. The are two legal entities that can be chosen for your investment in Indonesia: foreign representative office and PT. PMA.

A foreign company may establish a representative office in Indonesia in one of the province capitals. Its activity is limited to supervising and coordinating the business of its principal and branches but representative office in Indonesia is not allowed to make any business transaction with companies or persons in Indonesia either for export or import or domestic trading, but the representative office can:

• Obtain work permits for expatriate managers

• Obtain multiple entry visas for its expatriate personnel as well as exemption from exit-tax (SKFLN).

For foreign investors interested in exploring business opportunities in the Indonesian market, a representative office might be an efficient way to begin. Basically, it helps your company set up a branch, but with some major restrictions.  This form of business entity does not allow you to generate revenues and or do business directly under the name of the representative office. To open a representative office, you should have an existing parent company overseas to manage the representative office in Indonesia. The majority of representative offices focus on conducting market researchactivities as well as marketing and promotion through selling or buying agents. Some foreign investors prefer to set up a representative office first to grow the market in Indonesia before establishing a PT. PMA.

The representative office is led by one or more foreign or Indonesian citizens who are appointed by a foreign company or joint foreign companies as their representatives with the intention of :

• Handling the company or its affiliates concerns, and or

• Preparing the establishment and development of foreign direct investment companies, in Indonesia or in other countries and Indonesia.

The Advantages of Establishing a Representative Office in Indonesia

If you do not have prospective clients yet in Indonesia and want to explore your business perspectives in this country (through conducting market research), it might be better to open a representative office first (instead of a company). There are various advantages and disadvantages of opening a representative office in Indonesia.

• It is relatively easy and quick to set up

• No need for large investments or paid-up capital

• Less paperwork; you only need to report income tax for the employees as well as (rented) office space tax

The Disadvantage

•  You are not allowed to generate revenues, profit or engage in sales directly

There are 4 types of representative office which you can consider:

Although the revenue restrictions seem like a major disadvantage, you can still pursue other activities with an agent for the parent company, supervise the activities of your subsidiary/distributor, or simply do market research before deciding to enter Indonesia and set up a PT. PMA. It actually depends upon the type of representative office. There are 4 options to consider:

1. Foreign Representative office

2. Foreign Trade Representative office

3. Foreign Construction Representative office

4. Foreign Bank Representative office

While the first two options are used by vast majority of the companies, we also provide information about Foreign Construction Representative Office. The Foreign Bank Representative Office is a very rarely selected option.

I) Foreign Representative office (KPPA)

Establishing a foreign representative office (Kantor Perwakilan Perusahaan Asing – KPPA) allows you to basically create a market presence without almost any money. A Foreign Representative office is more general than a Foreign Trade Representative office and is usually set up for management reasons. The role is limited to:

Supervising, managing, liaising, coordinating and representing the parent company

From a legal point of view, it is relatively simple to establish such a presence in Indonesia. You must submit an application to the Indonesian Investment Coordinating Board (BKPM). This can be done either by the director or manager of the foreign company, or by the director candidate in Indonesia on behalf of the foreign company of the new representative office, who must be appointed prior to establishing a presence in Indonesia. Another option could be a power of attorney. This process may look simple, but there are several steps considered to be a part of the application that will certainly take you some time. Make sure you review the following points completely:

–  Appoint a business representative (expatriates are acceptable)
–  Collect all the documents needed

• Notarized letter of intent
• Notarized letter of appointment
• Letter of reference
• Resume and work permit of the company representative

– Submit application to BKPM

After all of the paperwork is complete, BKPM will issue the license, usually within one month. The license is valid for three years and until September 2013 could be extended for a maximum of two years. With the new regulation BKPM 12/2013, there are no limitations on extension of the license.

II) Foreign Trade Representative office (SIUP3)

In accordance with the Minister of Industry and Trade Decree No.: 402/MPP/Kep/11/1997. All foreign Trade Companies or Joint Enterprise (Association) of foreign companies that are willing to open their representative office in Indonesia, are required to obtain a license SIUP3A (Surat Izin Usaha Perwakilan Perusahaan Perdagangan Asing) from the Ministry of Industry and Trade of the Republic of Indonesia.

Only Foreign individuals or Indonesian individuals with high educational background and experience are eligible to manage the Representative Office.

The function of this individual is to serve as Head of Representative Office or Assistant to Representative and the educational background must be at least university graduated or equal to university graduate with 3 years experience in the field where she/he will be posted.

The Representative Office can act as selling agent and/or manufacturing agent and/or buying agent of their principal. In which the detail of their activities should be applied in accordance with article 3, The Minister of Industry and Trade Decree No. 402/MPP/Kep/11/1997 that is for the promotion and market research of import or export products.

Foreign expatriate who is intended to work at the Representative Office either as Head of Representative or as Assistant to representative are subject to The Minister of Man Power Decree No. Kep 682/MEN/85 regarding his/her working permit.

As the name already implies, this kind of representative office is used for trading as well as marketing. The permitted activities of a Foreign Trade Representative office with an active permit SIUP3A (Surat Izin Usaha Perwakilan Perdagangan Asing) are as follows:

1. Act as a buying or selling agent
2. Conduct market research and create promotional materials

It is necessary to understand that neither a Foreign Representative office, nor a Foreign Trade Representative office allows you to really do business. You are not permitted to sign or enter into any contracts, generate revenues or even engage in the management of a company in Indonesia.

In order to establish a Foreign Trade Representative office, you follow the same process as for Foreign Representative office (KPPA). The difference is that in this case, all documents such as the Letter of Intent or Letter of Appointment must be signed by a notary in the country of origin and legalized by the Indonesian Ministry of Foreign Affairs.

III) Foreign Construction Representative office (SIUJK)

Unlike the previous two cases, the construction sector is regulated by the Ministry of Public Works and also partially by BKPM. A permit (surat izin usaha jasa konstruksi – SIUJK) is required to operate in the construction area. It is important information to note that only large companies can qualify for the license, which is issued for three months with the possibility of extension. In late September, the Minister of Public Works (Minister) issued Minister Regulation number 10/PRT/M/2014 regarding Guideline Requirements for Giving Permission Foreign Construction Service Representative Office (New Regulation). The New Regulation for construction representative offices in Indonesia replaces the old Minister regulation 05/PRT/M/2011 (Old Regulation) which had a similar title. The New Regulation has become more comprehensive than the Old Regulation. The New Regulation sets clear requirements for the distribution of work between the Foreign Construction Representative Office and the Indonesian construction company.

Unless regulated differently by a related authority, for construction work the distribution of work in a Joint Operation is as follows:

1. At least 50 percent of the value of construction work is performed in Indonesia; and
2. At least 30 percent of the value of construction work is performed by the Indonesian construction company.

For construction planning work, the distribution of work in a Joint Operation is as follows:

1. The entire technical planning work is performed inside Indonesia; and
2. At least 50 percent of the value of construction planning work is performed by the Indonesian construction company.

The Foreign Construction Representative office allows you to:

1. Do market research and contact institutions and companies
2. Be involved in procurement of construction services
3. Appoint local and foreign manpower to head the office

What is needed to establish a Foreign Construction Representative office?

First, the application and all the necessary documents, must to be submitted to the Ministry of Public Works and the administration fee must be paid. The fee can amount to either $5,000 in the case of construction consultancy services sector, or $10,000 if target sector is construction implementation services.

The company applying for an SIUJK licence also has to do a lot of paperwork. Apart from the same requirements as for a KPPA, several items must be submitted along with the application  to prove that the company setting up the office has a good reputation, is big enough etc.

IV) Foreign Bank Representative Office in Indonesia

A foreign bank can open a representative office in Indonesia to act as a liaison office between the foreign bank and its customers in Indonesia. This type of representative office is regulated and monitored by Bank Indonesia, the Indonesian central bank. As a liaison office, the representative office cannot conduct banking activities in Indonesia, and is only allowed to:

1. provide information to third parties within Indonesia on requirements and procedures for establishing relations with its principal office/branch offices outside Indonesia
2. assist its head office/branch offices outside Indonesia in supervising credit collateral in Indonesia
3. act as proxies in making contact with institutions/agencies to represent the interests of its head office/branch offices outside Indonesia
4. act as supervisors of projects within Indonesia which are partially or wholly financed by its head office/branch offices outside Indonesia
5. undertake promotional activities
6. provide information on Indonesian trade, economic matters, and finance for foreign parties or vice-versa; and · assist Indonesian exporters in obtaining market access outside Indonesia through an international network of banks affiliated with the representative office or vice-versa.

The procedure for opening a representative office in Indonesia refers to the Decree of Director of Bank Indonesia No. 32/37 /KEP/DIR dated 12 May 1999. Here are the highlight guidelines of the procedure: The opening of a representative office must have permission from the Board of Governor of Bank Indonesia. The bank that intends to open a representative office in Indonesia should have a total asset that ranks top 300 in the world, which could be referred to as the bank rank’s issued by a credible international agency. The application letter should be signed by the Director of the bank and addressed to the Board of Governor of Bank Indonesia.

The application letter should also mention the reason to open a representative office in Indonesia. The application should be accompanied by: a copy document that mentions the total asset of banks is ranked top 300 in the world, the letter of assignment from Head office to the candidate of the head of the representative office in Indonesia, the curriculum vitae of the candidate of the head of the representative office in Indonesia, the letter that stated the candidate of the head of representative office will work exclusively for the bank (no double position in any other companies), the letter that stated no objection from banking authority where the head office located, to open a representative office in Indonesia. The letter of an objection / no objection to open a representative office in Indonesia will be given by Bank Indonesia within 30 days after all complete application is received by Bank Indonesia.

With regard to the application process, Bank Indonesia will:

1. Check the completeness and accuracy of the documents
2. Conduct an interview with the candidate of the head of representative office. For any other requirements time for getting the letter you need, you can our services overview.

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