Indonesia: Implications Of Foreign Ownership Of Indonesian Companies

Last Updated: 29 November 2018
Article by   SSEK
Most Read Contributor in Indonesia, August 2019

Indonesian investment law makes a clear distinction between locally-owned companies and foreign-owned companies. There is also a negative list (commonly referred to as the "DNI" in Indonesian) which regulates the specific sectors that are open and closed to foreign investment. The DNI also regulates the specific proportion of equity that a foreign investor may have in a specific line of business.

Indonesia has been going through bureaucratic reforms to improve the efficiency of its internal processes to encourage foreign direct investment. This has resulted in an amendment of the DNI and the recent creation of an online process commonly referred to as the "OSS" or "Online Single Submission," which is currently managed by the Coordinating Ministry for Economic Affairs. 

OSS System

Through the OSS system, a company can apply for a Business Identification Number (Nomor Induk Berusaha or "NIB"), which is an identification number that also functions as a Company Registration Certificate (Tanda Daftar Perusahaan), an Importer's Identification Number (Angka Pengenal Import) and a Customs Identification Number (Nomor Induk Kepabeanan). A company that obtains an NIB is also automatically registered as a participant in Indonesia's health social security and manpower social security programs.

Subsequent to obtaining an NIB, a company must apply for a business license and commercial/operational license, if so applicable, via the OSS system. While a business license is required for all companies, a commercial/operational license is not always required. A commercial/operational license is only required if a company engages in certain business activities that require certain technical standards, certifications and/or licenses.

Depending on the line of business of the company, its business license may be issued by different authorities (e.g., the Capital Investment Coordinating Board, the Indonesian central bank, the Indonesia Financial Services Authority, etc.). The business license for most lines of business, if not related to payment systems, financial services, or other reserved sectors, will be issued through the OSS system.

Indonesian Regulation

Notwithstanding the improvements, foreign investors often experience difficulties when navigating the regulatory landscape in Indonesia. In practice, there are instances where some foreign investors resort to the use of nominees when investing in a sector where foreign investment is either prohibited or regulated. This often results in an opaque landscape as the shareholding of a company (both domestic as well as foreign investment companies) is often not easily available from the public register. In addition, beneficial equity ownership and trusts, while they may exist in reality, are structures that are prohibited under Indonesian law. Experience and good local knowledge are essential attributes that you look for in your professional advisors.

It is also worthwhile to appreciate that in the event of a dispute, claimants often find the dispute resolution process challenging.

Foreign investors have long used nominee arrangements to participate in industries on which the DNI imposes foreign equity restrictions. Such arrangements are contractual in nature and they grant foreign investors some measure of control over their investments in a company through a power of attorney granted by the nominee and a debt relationship with the nominee. This is often coupled with a charge over the nominee's shares in the company and an assignment of dividends. Such arrangements tend to create very complex issues in litigation.

Changing Landscape

However, with the advent of President Joko Widodo's policies, the corporate landscape in Indonesia is changing at a far quicker pace than in the last two decades. Following the tax amnesty exercise to encourage high-net-worth Indonesians to legitimately declare their hidden assets and return their capital to Indonesia, President Joko Widodo on 1 March 2018 signed Presidential Decree Number 13 of 2018 on the "Implementation of the Principle of Recognising Beneficial Ownership of Corporations in the Framework for the Prevention and Eradication of Money Laundering and Criminal Acts of Terrorism Funding" (the "Decree"), a new law which is now in force.

The effect of the Decree is that all Indonesian corporations must now report on the structure of their beneficial ownership. This reporting obligation also applies to Indonesian corporations that had already been established at the time the Decree came into force on 5 March 2018.

While certain local regulators have already had such rules in place, the Decree applies nationally and will reinforce the power of the Indonesian authorities to act against financial crimes, corrupt activities, tax avoidance, money-laundering and illegal monopoly activities by companies. In time, the application of the Decree should also greatly increase the success rate of recovery of assets by the Indonesian authorities.

The main focus of the Decree is on the ownership structures where any individual holding 25% or more of a company's shares or capital, or 25% of the total voting rights, or receives 25% or more of the profits, having the authority to appoint or dismiss the board of directors and board of commissioners, or anyone who has the authority or power to affect or control the company without having to obtain authorization from any party, or receives benefits from the company's activities, or is the true owner of the funds used for the ownership of such company's shares, will be deemed a beneficial owner.

This Decree will make foreign investment in certain industries more cumbersome. Foreign investors who are already engaged in business in Indonesia in contravention of the rules regulating the limits on foreign investment will be at a higher risk of being identified and thereafter penalised.

They should consider appointing counsel to determine what is acceptable under the new rules. In particular, contractual arrangements whereby the economic benefit of the business of the company can be transferred to non-shareholders should also be analysed in light of the new definition of beneficial ownership. This will ensure that the Indonesian operations will be fully compliant with the new regulations.

For foreign investors looking to enter the Indonesian market at this stage, the incorporation of local Indonesian companies should be done in compliance with the new rules as set out in the Decree, subject to the DNI. Compliance will also ease the process of incorporation with the Indonesian authorities and ensure good corporate governance from the incorporation of the new company.

With Indonesia maintaining its position as a regional powerhouse, the implementation of the Decree has come at just the right time. The increase in transparency can ensure steady economic growth.

This article was prepared by SSEK Legal Consultants and RHTLaw Taylor Wessing

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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