Investment in Indonesia
Indonesia has a New Investment Law No.25 of 2007 (April 26, 2007) (“Law 25/07”). The Law 25/07 supersedes both Law No.1 of 1967 regarding Foreign Investment (January 10, 2007) and Law No.6 of 1968 regarding Domestic Investment (July 3, 1968).
Law 25/07 integrates the previous investment laws and its implementing regulations to some extent, but affirmatively addresses some of the impediments frequently cited by foreign investors doing business in the country. Noteworthy changes including those relating to investment approval procedures, land titles, and incentives.
Law 25/07 introduces new issues e.g. Corporate Social Responsibility and Dispute Settlement mechanism – International Arbitration.
Law 25/07 also introduces one door-integrated services pursuant to licensing and non-licensing process. The process runs from the application stage until the issuance documents both licensing and non–licensing is conducted in one place.
Moreover, Law 25/07 introduces the regional autonomy whereas the regional autonomy has right, authority and obligation of an autonomous region to regulate and self-manage its affairs and the interests of the local communities in accordance with laws and regulations. (Art.30 Law 25/07).
Law 25/07 will be the main legal umbrella for investment in Indonesia. Law 25/07 becomes the pillars supporting the investment climate. The government offers various attractive packages including equal treatment of every investor by observing national interest, bureaucracy reform in investment services and fiscal incentives. It shows the efforts of the government to make the investment climate more attractive, competitive and fair.
The followings are highlights of New Investment Law:
- Equal Treatment
Law 25/07 treats domestic and foreign investors equally.
- The principle that foreign and domestic investors are equal before law (Art.3(1)(d) Law 25/07);
- The principle that foreign and domestic investors shall have equal opportunity (Art.4(2) Law 25/07);
- All investors shall be treated equally (Art.6(1) Law 25/07); and
- Recognizes that bilateral agreements regarding investment may be made (Art. 6(2) Law 25/07).
Note that this does not limit the government rights to determine certain businesses are closed for foreign investments, or that there are certain conditions which must be met before foreign investors may invest in certain other businesses, e.g. the Negative List and unwritten policy by BKPM on the minimum capital requirements for establishment of the Foreign Investment Company in Indonesia (current policy, the minimum capital requirement is in the amount of USD 250.000).
- One Door Integrated Services
The Investment Coordinating Board (“Badan Koordinasi Penanaman Modal or BKPM”) is intended to be sole institution having the authority process the investment licenses (excluded certain businesses such as mining and oil and gas sectors, banking etc).The stop services will be provided through a delegation or assignment the power from an institution or an agency currently having licensing authority.In order to implement One Stop Services (“OSS”), some of local regions have issued the local regulations and set up OSS unit/body.
- Immigration Service Facilities
Law 25/07 provides the possibility of a 2 year temporary stay permit and re-entry permit for multiple entries for up to 2 years if the foreign investors fulfill the criterias.
- Land Title
Law 25/07 now allows for an extended land ownership depending on the types of land rights and the criteria shall be met.
- Tax-related incentives
The government grants equal treatment both foreign and domestic investment in the Capital Investment facilities.The facilities will be provided to the investment company that is willing to expand the investment and invest in new capital investment.Criteria of the investment expanding their investment or investing new capital will be granted certain facilities including (refer to Art.18 Law 25/07):
- income tax reduction;
- custom exemption to machineries, capital goods and tools;
- custom exemption on raw materials;
- VAT exemption;
- Accelerated amortization and depreciation; and
- Incentive on land and building tax.
The government also recently issued Government Regulations No.1 of 2007 regarding the Facility of Income Tax for Investment on Certain Business Sectors or Regions (January 2, 2007). The certain business sectors amongst others are: food processing industries, packaging industries, plastic goods industries, cement industries, furniture industries, seafood processing industries, etc. Furthermore, the Government also issued the following regulations e.g. Ministry of Finance No.16/PML/03/2007 regarding Granting Income Tax Facilities for Investment on Certain Business Sectors or Certain Regions, Directorate General of Tax No. Per 67/PJ/07 of 2007 regarding Procedure of Granting Income Tax for Investment on Certain Business Sectors and/or Certain Regions.
- Nationalization and Expropriation
Government will not execute any nationalization action or take over the ownership rights of the investor, unless by law.
In the event government takes action of nationalization or takes over the ownership rights as mentioned above, then the government willl grant compensation, which amount will be specified based on the market value.
Market value is determined pursuant to the internationally-accepted methods adopted by an independent appraiser named by the parties.
If there is no consensus on the amount of compensation among the parties, the dispute shall be settled through arbitration.
- Transfer and Repatriation
Law 25/07 confirms that foreign investors has rights to freely transfer and repatriate in foreign currency, relating to profits or proceeds liquidation or sale of investment, as long as taxes and other financial obligations payable to the Indonesian government have been satisfied (Art.8 Law 25/07). Further, the foreign investor is obliged to give reports on fund transfer.
- Corporate Social Responsibility
The investors that manage unrenewable natural resources shall allocate funds progressively for the preservation of the area to attain the environmental and social standards as required by prevailing laws and regulations.
- Development of Investment for Micro-Scale, Small-Scale, Medium-Scale Business and Cooperative Enterprise
The government specify the business sectors that are reserved for micro-scale, small-scale and medium-scale business and corporative enterprises, and those sectors open in cooperation with large-scale. Additionally the government will attempt to achieve the development of micro-scale, small-scale and medium-scale business through establishing partnership programs enhancing the capacity to compete.
Furthermore, the government encougares the development of the micro-scale, small-scale, medium-scale business and cooperative through partnership program, enhancement of capacity to compete, supporting innovation and market extension and wide distribution of information.
Recently, the government issued the Instruction of the President of the Republic Indonesia No.6 of 2007 regarding Policies to Accelerate Development of the Real Sector and Empower Micro, Small and Medium Enterprises (June 8, 2007) and Law 20 of 2008 regarding Micro, Small and Medium Scale Enterprises ( July 4, 2008).
- International Arbitration for Investment Dispute
Law 25/07 specifically stipulates that any investment dispute involving the Indonesian government and foreign investors shall be resolved through an international arbitration agreed by the parties. Whilst the dispute emerges between government and domestic investors is reffered to arbitration or court.