8 Major Challenges for Foreign Investors to Start Their Businesses in Indonesia
Despite the rise of religious conservatism, racial issues, and economic uncertainties, there are still foreign investors wanting to do business in Indonesia. Doing this simply out of faith, wits, and other capabilities like resourcefulness and intelligence are not good enough.
From the beginning, there are things that anyone must be aware of before deciding to do this:
1. The Business Set-Up
From the beginning, foreign investors must realize that they can only start their business in Indonesia by setting up their companies with these two available options:
- A foreign investment limited liability company or well-known as Perseroan Terbatas Penanaman Modal Asing/PT. PMA in Indonesian.
- A representative office or well-known as Kantor Perwakilan Perusahaan Asing/KPPA in Indonesian.
Each legal entity has their own requirements, from work permits, visa sponsorship, foreign ownership restrictions, the minimum capital, time to establish, and the estimated costs.
2. The Construction Permits
When it comes to expats doing business in Indonesia, there are construction permits to deal with. Some may take about 158 days in acquiring, and 13 procedures are involved. They have to consult with The Zoning Department and have some certificates acquired. Then, they can register with the land and building tax office and also the regional office of The Ministry of Industry and Trade.
3. Getting Electricity
No companies can operate well without the proper electricity. After obtaining a certificate of Guaranteed Electrical Installation or JIL (Jaringan Instalasi Listrik) and Certificate of Operation Worthiness or SLO (Sertifikat Layak Operasi) from the Indonesia Electrical Contractors Association or AKLI (Asosiasi Kontraktor Listrik Indonesia), then foreign investors can go from there. Another costly endeavour may consist of external works and final connection.
4. The Property Registration
To start a business in Indonesia, an expat business person must register a property, which usually takes 22 days. There are also six procedures to follow, which include:
- Getting a land certificate examination.
- Paying tax on the acquisition.
The downside of this is the cost, which is way higher than the OECD norm.
5. Getting Credit
Credit scoring counts, especially for expat business people wanting to start their businesses in Indonesia. To improve credit environment, some of the ways include improving the asset-based lending system and promoting a real property registration system.
6. Investors’ Protection
Fortunately, Indonesia is in the top 50 in the world when it comes to protecting investors. Do not forget to catch up with the news in case there are other changes regarding investors’ protection, both for locals and expatriates.
7. Paying Taxes
Every year, there are 51 tax payments to be made, which take 259 hours of company’s average time to deal with. Those hours consist of:
- 25% company income tax (which takes 75 hours to process)
- Social security contributions and VAT (184 hours to deal with).
This has always been the major challenge for expats starting a business in Indonesia. A lack of transparency and corporate governance breed widespread corruption. There are also industrial disputes, and if one cannot survive these bureaucratic hindrances, their business might get seriously stalled or closed down.
Despite these eight major challenges, some foreign investors still manage to start and keep their businesses in Indonesia. One of their strategies is to have an inside link.
ABOUT THE AUTHOR: Bimo Prasetio
Bimo has experience in assignments related to foreign capital investments and corporate restructuring. He is assisting his clients in relation to their companies/affiliates/subsidiaries in Indonesia, as well as the establishment of the foreign investment companies and local companies. He also assists his clients in regulatory compliance required, providing legal advice regarding corporate matters, drafting documents/agreements and representation.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.