How to Start a Business in Indonesia

How to Start A Business in Indonesia: A Complete Guide

  • InCorp Editorial Team
  • 18 June 2024
  • 10 minutes reading time

With a current political and economic climate supporting foreign investments, Indonesia has become a lucrative target for many foreign investors. So, how to start a business in Indonesia has frequently come to our minds. In this article, we would like to discuss what every foreign investor should consider before starting a business in Indonesia.

How to Start a Business in Indonesia as a Foreigner

Starting a business in a foreign country can be both exciting and challenging. With its vibrant economy and diverse market, Indonesia business incorporation offers promising opportunities for foreign entrepreneurs. If you’re considering venturing into this dynamic landscape, follow these comprehensive steps to navigate the process of starting a business in Indonesia as a foreigner.

Plan Your Business Expansion

Before starting your business in Indonesia, it is important to conduct a thorough market research. This involves identifying any gaps in the market, understanding the local consumer preferences, and analyzing your competitors. 

Once you have gathered this information, you can then formulate a solid business plan which should include your objectives, target market, value proposition, and revenue projections. Having a well-defined plan not only guides your actions but also demonstrates your commitment to the Indonesian authorities.

Choose the Right Business Structure

Selecting an appropriate business structure is crucial. As a foreigner, you can opt for a Limited Liability Company (PT PMA), which allows foreign ownership. Collaborate with a legal consultant to determine the most suitable structure for your business. Register your business name and obtain a unique tax identification number (NPWP).

Capital and Investment

Indonesia requires foreign-owned businesses to meet a minimum capital requirement. To comply with this regulation, you need to prepare the necessary funds and deposit them in a local bank account. Your investment plan should align with the regulations set by the Indonesia Ministry of Investment/BKPM. Additionally, you should prepare financial statements and a feasibility study to demonstrate your business’s viability.

Obtain Necessary Licenses and Permits

Navigating the regulatory landscape in Indonesia requires acquiring the appropriate licenses and permits. Work closely with legal experts to secure necessary approvals from relevant authorities such as the BKPM and local government agencies. Joint permits include the Business License (Izin Usaha) and Location Permit (Izin Lokasi).

Employment and Visas

If your business requires hiring local employees or bringing in expatriates, you must comply with Indonesia’s labor laws. Obtain the necessary work permits and visas for your foreign employees. Consider partnering with a professional employer organization (PEO) to streamline the employment process and ensure compliance with employment regulations.

Things to Consider Before Start a Business in Indonesia

Before you decide to start your investment in Indonesia or to start opening a business in Bali or anywhere else in Indonesia, you need to know step by step of company formation in Indonesia, and you need to consider the following things:

Type of Business

Please note that some sectors or industries are prohibited or limited to foreign investment. The list is written in the Positive Investment List. In the list, some sectors limit foreign ownership from zero (0) to ninety-five (95) percent. This will lead you to a further question: Should you find a local partner(s) or not? However, foreigners can fully own some businesses (100%).

Type of Company

Since the government of Indonesia wants to protect its micro, small, and medium enterprises, there is a policy stating that to open a business in Indonesia. The company needs to be registered as a foreign limited liability or PMA. To start a business in Indonesia as a foreign company, it must meet requirements regarding minimum investment and paid-up capital.

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Human Resources Issue

Although Indonesia is listed as the fourth most populated country in the world, with over 60% of the total population in their productive ages (15-60 years old), not all have sufficient skills to participate in the industrial and commercial world.

The education sector does not spread equally in its large territory. This condition causes companies to face difficulties in finding talent pools, especially in areas outside Java Island.

On the other hand, hiring foreign talents also requires complex requirements. This will become a challenge that every PMA needs to solve. Some successful PMAs in Indonesia address this issue by providing considerable training to fill the talent shortage gap.

Therefore, you must selectively choose human resources based on your needs to avoid more costs by hiring unskilled or unsuitable people.

Start a Business in Indonesia with Diverse Markets

Indonesia is not only the biggest archipelago nation in the world but also the most complex and fragmented market. Considering that there are many races, languages, religions, customs, and values, you cannot treat Indonesia as a single market entity. Every target group has its own needs that the business needs to address.

Complicated Bureaucracy and Inconsistent Laws

Before starting your business in Indonesia, you must highlight that the bureaucracy in Indonesia is so long and complex, including international trade in Indonesia. And make any foreigners who are new to this environment feel overwhelmed.

Although the government has already started some online systems and a One-Stop-Service Center to cut the bureaucracy, there are still some complex processes.

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On the other hand, the policies or laws are often inconsistent and changed (for example, regarding the Positive Investment List and the Bankruptcy Law). This should be put into your awareness that keeping up-to-date with the recent laws and policies is very important to start a business in Indonesia.

Unequally Shared Infrastructures

The development in Indonesia has long been focused on the area of Java Island (6 Provinces: The Capital City of Jakarta, Banten, West Java, Central Java, The Special Region of Jogjakarta, and East Java). All the infrastructure and facilities are highly concentrated on this Island. Therefore, doing business in these 6 Central Java provinces has been a trend for so long.

However, there are also some other big cities on other islands that foreign investors target. All you need to consider is researching to match your business with the places with the most significant potential to support your company.

Plenty of Natural Resources and Raw Materials

Indonesia has plentiful and diverse kinds of natural resources. If you need natural resources and raw materials to run your business, make sure you know where you can get them quickly. Consider that Indonesia consists of islands that are spread over a vast territory. The distribution of goods can be extremely costly.

Regardless of the business sectors, many foreign companies expect to run profitable businesses in huge markets with fast-growing economic conditions.

You may wonder what business entity you should choose to legally operate your business in Indonesia. Further, we will help you understand Indonesian Company Law.

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What are the Benefits of Starting A Business in Indonesia?

Commencing a business in Indonesia, often referred to as the Gem of the Equator, presents numerous advantages, including:

  • Economic Dominance: Holding the position of the largest economy in Southeast Asia.
  • Talented Workforce: Boasting a highly skilled and youthful labor pool.
  • Consumer Expenditure: Exhibiting substantial levels of consumer spending.
  • Evolving Business Landscape: Witnessing a continual enhancement in the business environment.
  • Strategic ASEAN Hub: Positioned strategically within the ASEAN region.

The decision to relocate the capital aligns with Indonesia’s aspirations for improved mobility, resilience against natural disasters, and robust infrastructure development, further elevating the allure of commencing a business in this vibrant nation.

Why Foreign Investors should Consider to Start A Business in Indonesia?

Indonesia features 19 Special Economic Zones (SEZs), fostering a favorable environment for businesses, whether local or international. Company setup in these zones comes with exclusive benefits, including:

  • Import duty tariff reductions
  • Tax allowances
  • Tax holidays
  • Investment allowances

Super deductions for R&D and vocational activities to access these perks, investors must meet specific conditions designed to enhance job creation and infrastructure. Guided by the principles of convenience, certainty, efficiency, and transparency, the Ministry of Investment has instituted unique policies to attract diverse investments, both foreign and domestic.

Which Company Type Is The Most Suitable for Your Business?

Suppose you have seen the potential of this archipelago country and considered taking part in its business sector. In that case, you need to know what kind of investment you can perform in Indonesia to set up a company in Indonesia.

To start a business in Indonesia, you can open a representative office or make a direct foreign investment (PT. PMA).

You Need A Representative Office to Start A Business in Indonesia

The representative office (RO) is set up for specific purposes, such as promotion, marketing, buying-selling agents, or market research. You will generally get an operational license for two years as an RO.

A Foreign Direct Investment (PMA)

To invest directly in Indonesia, you must establish a limited liability company. And it’s owned wholly or partly by a foreigner(s) that is called PT. PMA (or simply PMA). There are many legal documents to prepare and some requirements the company should meet.

The establishment of PMA is governed by Law No. 25 year, 2007 (Investment Law) and Law No. 40, 2007 (Company Law).

Before establishing an RO or a PMA, you must also know about the Negative Investment List. This is because some industries in Indonesia are strictly closed or partially closed to foreign investment. The list is subject to revisions by the central government of the Republic of Indonesia, so you have to keep yourself up to date about it.

For the sectors or industries that are partially closed to foreigners, you still can run your business or PMA in Indonesia with the existence or co-partnership with Indonesian citizens.

A Local PT (PMDN)

Domestic investment refers to the activity of conducting business in Indonesia using domestic capital by domestic investors (WNI). Compared to foreign direct investment (PT. PMA), the process of registering for a local PT (PT. PMDN) is more convenient for investors. 

A local entity can take the form of a legal corporate or individual business, as long as it follows the provisions of laws and regulations. However, in sectors open to both domestic and foreign investments, domestic investors may face increased competition from foreign entities.

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What’s the Process after Deciding Your Business Type?

After you have understood the negative investment list and decided the type of investment you want to have. You can start preparing some prerequisite documents to establish your company so that you can start running a business in Indonesia.

You must know that the bureaucracy is somewhat complex because the company registration process deals with various government institutions. And it comes to deals from the lowest level to the ministry level.

Contact the Indonesia Investment Coordinating Board (BKPM) for the first step. Even though BKPM already had a One-Stop-Service Center (OSS-C) to improve its services and cut bureaucracy.

You may be overwhelmed by the small details if you are a new person and also because you are unfamiliar with the local rules and language.

Guide to Doing Business in Jakarta

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Why Choose InCorp to Start A Business in Indonesia?

If you are new to this field and unfamiliar with the local rules and language, you may be overwhelmed by the small details. That’s exactly why our company is here to seamlessly guide you through every step, starting from registering your business entity to helping you ease up the daily business process.

Our expert consultants at InCorp Indonesia ensure a smooth and successful journey in establishing your business in unfamiliar territories, especially Indonesia. With our expertise, you can confidently overcome challenges and turn uncertainties into opportunities. Welcome to a tailored experience designed to elevate your business aspirations.

Verified by

Daris Salam

COO Indonesia at InCorp Indonesia

With more than 10 years of expertise in accounting and finance, Daris Salam dedicates his knowledge to consistently improving the performance of InCorp Indonesia and maintaining clients and partnerships.

Frequently Asked Questions

    A newly established PMA company in Indonesia is typically provided with import facilities, tax holidays, tax allowances, or investment allowances.

    • Import facilities
      Investors in Indonesia, particularly in manufacturing, may benefit from import tax exemptions for capital goods and raw materials through the Master List Facility. The imported goods must meet specific criteria, such as not being produced locally or not meeting industry demand despite local production.
    • Tax holiday
      The government offers CIT reductions of 50% or 100% for 5–20 years for listed pioneer industries, based on investment value. After this period, a CIT reduction of 25% or 50% applies for two fiscal years. Non-listed sectors can also apply by meeting criteria demonstrating pioneer industry status.

      • Pioneer industries are industries that have a wide range of connections, provide additional value and high externalities, introduce new technologies, and have strategic value for the national economy.

    • Tax allowance
      For companies in certain designated areas or regions, the government may provide the following tax concessions:
      Net income reduction up to 30% of the amount invested, prorated at 5% annually for six years, on condition that the assets invested are retained for the same duration.
      Accelerated depreciation and/or amortisation deductions
      An extension of tax losses carried forward for a maximum of ten years
      A 10% (or lower if treaty relief is available) withholding tax rate on dividends paid to non-residents
      The applicant eligible has to meet high-level-criteria for the above tax facilities:
      High investment value or for export purposes
      High manpower absorption
      High level of local content
    • Investment allowance
      The government offers a reduction in net income of up to 60% of the investment, distributed at 5% annually over six years of commercial production, contingent upon the retention of invested assets for the same duration. To qualify, applicants must meet business line eligibility criteria and employ a minimum of 300 Indonesian workers in the project.
    • Super deduction
      This facility could be granted to certain businesses, such as:
      60% reduction in net income of the amount of tangible fixed assets invested for labor-intensive industries, distributed throughout a certain time frame.
      Up to 200% reduction in the gross income of the amount spent for human resources development in certain competency activities.
      Up to 300% reduction in gross income of the amount spent for certain R&D activities in Indonesia.

    Indonesian Company Law establishes a two-tier governance system with Directors managing day-to-day operations and representing the company, while the Board of Commissioners supervises and advises them. The articles of association may empower board of Commissioners to provide consent or assistance to Directors for specific legal acts.

    According to Presidential Regulation No. 10/2021 and the amended version, all businesses are open for domestic and foreign investment with these limitations and classifications:

    • Eight businesses are closed to foreign investment and may be operated by the central government.
    • Designated business sectors or joint ventures with cooperatives (koperasi) and micro, small, and medium enterprises
    • Open businesses are subject to specific conditions, such as those that are exclusively available to 100% local investors, those with restricted foreign shareholding, and investments requiring special licenses

    Certain sectors are closed to foreign investment, including narcotics cultivation, gambling, and environmental conservation activities.

    In Indonesia, the necessity of hiring Indonesian employees by foreign companies typically arises from commercial requirements, regulatory mandates in specific sectors like construction or shipping, or as part of employing foreigners to fulfill knowledge transfer obligations.

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The information is provided by PT. Cekindo Business International (“InCorp Indonesia/ we”) for general purpose only and we make no representations or warranties of any kind. We do not act as an authorized government or non-government provider for official documents and services, which is issued by the Government of the Republic of Indonesia or its appointed officials. We do not promote any official government document or services of the Government of the Republic of Indonesia, including but not limited to, business identifiers, health and welfare assistance programs and benefits, unclaimed tax rebate, electronic travel visa and authorization, passports in this website.