Key changes relevant for investment structuring 

​Speed read

Last month, BKPM issued a new regulation (Reg. 13/2017) that sets out, among other things, new rules governing how to obtain investment approval for investors. The primary intention is to simplify the process of obtaining investment licenses and facilities. In practice, it remains to be seen how effective this will be. Some new provisions introduced by Reg. 13/2017 may also affect the investment structures that will be chosen by investors. In this article, we focus on the discussion of the key changes that may be important for investors when structuring their investment in Indonesia.

In December 2017, the Indonesian Investment Coordination Board (BKPM) issued Regulation No. 13 of 2017 on the Guidelines and Procedures for Investment Licensing and Facilities (Reg. 13/2017). Reg. 13/2017 contains, among other things, a new set of rules governing how to obtain investment approval. Reg. 13/2017 took effect on (i) 2 January 2018 for the one-stopservice at the central BKPM and (ii) will take effect at the latest 2 July 2018, for the one-stopservice at BKPM at a provincial/regency/city level.

Key changes

We outline below six key changes introduced by Reg. 13/2017 that may be relevant for investors seeking to structure their investment in Indonesia:

1. The requirement for PMA (Penanaman Modal Asing - foreign investment company) companies’ subsidiaries to convert into PMA companies

Article 6(3) of Reg. 13/2017 now clearly sets out that foreign direct investment includes investments made by a PT (Perseroan Terbatas – Limited Liability Company) with a PMA company status. Furthermore, Article 20(5) requires the conversion of a PMDN company (Penanaman Modal Dalam Negeri – a domestic/local investment company) to a PMA company to be followed by the conversion of its subsidiaries into a PMA company. Reg. 13/2017 does not provide further clarity on the due date of the conversion and only requires such conversion to be made when the subsidiaries conduct any corporate actions. As there is no definition of what constitutes a corporate action, these could include any of a broad range of corporate actions such as change of capital, a merger and acquisition, a declaration of dividend, and stock splits. It is worth noting that BKPM had formerly stipulated the requirement for PMA companies’ subsidiaries to convert into PMA companies back in April 2013. Nonetheless, such stipulation was later revoked in September 2013.

2. Divestment obligations could be set aside

Article 16.6 of Reg. 13/2017 allows PMA companies to disregard the divestment obligations stated in the investment licences issued by BKPM prior to the effective date of Reg. 13/2017 provided that there is a company’s shareholders resolution that contains:

  • for a joint venture company, a statement from the Indonesian shareholders that they do not wish to claim for (or they waive) the share ownership in accordance with the divestment requirement; or

  • for a PMA company that is wholly owned by foreign parties, a statement from the foreign shareholders confirming that they have not committed to any agreement with any Indonesian parties to sell their shares.

For the above to take effect, the PMA companies must obtain an amendment of the Investment Registration from the BKPM to remove the divestment obligations. In the event of any claims in the future by an Indonesian party in connection with the divestment requirement, the liability will be with the shareholders of the company.

Furthermore, Reg. 13/2017 also permits those shares which have been sold to Indonesian parties as a result of the fulfilment of divestment obligations to be bought back by, among others, foreign individuals and foreign entities. The foreign shareholding after the buy-back must continue to comply with the foreign ownership limitation under the prevailing laws.

3. Exemption from the need to obtain Investment Registration or Pendaftaran Penanaman Modal

Based on Reg. 13/2017, the initial investment approval, which was previously known as the in-principle licence, is now replaced by an Investment Registration or Pendaftaran Penanaman Modal. The Investment Registration or Pendaftaran Penanaman Modal, however, is only mandatory when starting businesses (as set out in Article 10(1)) which: (a) involve construction activities; (b) require investment facilities; (c) may potentially cause environmental damage; (d) relate to state defence, management of natural resources, energy and infrastructure; or (e) for other businesses, if required under the relevant laws and regulations.

Furthermore, Article 11(2) of Reg. 13/2017 states that investments in certain lines of business can be directly granted a Business Licence of Izin Usaha if it (i) has obtained legal entity status with its share ownership being in line with the limitation under the prevailing laws, (ii) has secured a taxpayer registration number and (iii) had an office. As such, the regulation implies that if a company meets the criteria of (i) to (iii) above and is not undertaking any of (a) to (e) above, such company may directly apply for a Business Licence or Izin Usaha and need not seek an Investment Registration or Pendaftaran Penanaman Modal.

The exemption from the requirement to obtain the Investment Registration or Pendaftaran Penanaman Modal illustrates BKPM’s attempt to simplify the process of obtaining investment approvals. It is unclear, however, how the exemption will work in practice, especially as notaries and the Ministry of Law and Human Rights typically require BKPM’s initial approval to process respectively the deed of establishment of a PMA company and the required notification and/or approvals.

4. PMA companies are required to meet “large scale business” qualification in order to obtain an indefinite Business License

Reg. 13/2017 introduces the concept of PMA companies that are qualified as “large scale business”. PMA companies that are qualified as “large scale business” are those companies meeting either one of the following requirements:

  • it has net assets of more than IDR10,000,000,000 (approximately USD740,741 with USD1 = IDR13,500) excluding land and buildings based on its latest financial statement; or

  • it has annual sales of more than IDR50,000,000,000 (approximately USD3,703,704 with USD1 = IDR13,500) based on its latest financial statement.

Generally, a Business Licence is valid as long as the company remains in operation. Article 34(2) of Reg. 13/2017, however, sets out that PMA companies which have not yet satisfied the “large scale business” qualification as set out above may only be granted a Business License that is valid for one year (but may be extended for another year). In order for the PMA companies to be granted with an indefinite Business License, it must meet the “large scale business” qualification as set out above.

5. Emphasising the nominee arrangement prohibition

Law No. 25 of 2007 on the Investment prohibits any agreement made between an Indonesian party and a foreign party which contains a nominee arrangement stipulating that the Indonesian party will hold shares in Indonesian companies on behalf of the foreign party. Violation of this provision may result in the agreement being declared null and void. Reg. 13/2017 confirms this prohibition and further adds that, if required, the (Indonesian) shareholders must provide a written statement registered with a public notary confirming that his/her shareholding is truly his/hers and is not being held for and on behalf of another party.

6. Longer period for venture capital companies to own shares in investment companies

Venture capital companies, based on the previous regulations, could only become shareholders in investment companies for up to 15 years (consisting of an initial period of ten years and a one-off extension of five years). Under Reg. 13/2017, venture capital companies are now allowed to own shares in investment companies for up to 20 years (consisting of an initial period of ten years, and two extensions for a maximum of up to ten years).

Transitional provisions

  • Companies which obtained Investment Registration based on Head of BKPM Regulation No. 12 of 2009 on the Guidelines and Procedures for Investment Licences must apply for a Business Licence within six months as of the effective date of Reg. 13/2017. This refers to the investment registrations issued by BKPM during the period of 23 December 2009 – 12 April 2013. Failure to apply for a Business Licence prior to the required due date will result in the revocation of the Investment Registration by BKPM.

  • An In-Principle Licence issued before the effective date of Reg. 13/2017 will continue to be valid until its expiry date. The application to obtain the Business Licence however will be processed based on the guidelines provided under Reg. 13/2017.

  • PMA companies which have secured a Business Licence but have not met the requirements of a “large scale business” must apply for a new Investment Registration and comply with the requirements applicable to a “large scale business” if they wish to start a business as described in Article 10.1 of Reg. 13/2017