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Foreigners who want to invest directly in Indonesia (as shareholders in a company) need to set up a foreign direct investment limited liability company. In Indonesia this legal entity is called the PT PMA (short for Perseroan Terbatas Penanaman Modal Asing). Usually, foreigners set the PT PMA up from scratch. However, there is also the possibility to change a local PT into a PT PMA through acquisition. How does that work exactly? What are the terms & procedures. And what are the risks? The "guidebook" consists of Law No. 40 of 2007 on Limited Liability Companies (the Company Law) and Law No. 25 of 2007 on Capital Investment (the Investment Law).
A local PT (perseroan terbatas) is a limited liability company that is fully owned by Indonesian individuals (or Indonesian companies), thus foreigners cannot own a stake in this type of company (not even the smallest stake). Therefore, because the shareholders are Indonesian, it is also a much easier process to establish a PT than to register a PT PMA (as the local PT is subject to much less restrictions).
Acquiring a Local PT by a Foreign Individual or Company
The Indonesian shareholder of a local PT can decide to sell his shares - or part of his shares - to a foreigner or foreign company (just like the PT, the PT PMA needs to have at least two shareholders). However, it means that this legal entity has to be converted into a foreign-owned company (PT PMA). There are several important matters that need to be taken into account when a foreigner decides to acquire a local PT and turn it into a PT PMA.
But first, lets take a quick look at the advantages of acquiring an existing PT. The advantage of buying a locally-owned PT is that you will not need to start building brand awareness from scratch (if the local PT indeed has a strong brand or customer base in Indonesia). You can also take advantage of the local PT's existing licenses, office space, employees, experience & knowledge, contracts, and distribution channels.
Now what are the risks involved - or matters that need careful attention - when a foreigner wants to convert a local PT into a PT PMA?
(1) The business sector has to be open to foreign investment! The Indonesian government does not allow foreign investment in all sectors. Some sectors are fully closed to foreign investment, some sectors are fully open to foreign investment, while others are partially closed (meaning the foreign investor can only hold a specific maximum stake in the PT PMA; the remaining shares have to be controlled by Indonesian individuals or Indonesian companies). Investors from ASEAN member states can enjoy a higher percentage of foreign share ownership in certain business fields.
Hence, when you are planning to buy a local PT, then you need to find out first whether - and to what extent - the entity is subject to restrictions after the change into a PT PMA. It would be a big waste of money if you purchase a local PT and soon learn that you cannot use it as you had originally planned. Restrictions to foreign investment can be found in the Negative Investment List (in Indonesian: Daftar Negatif Investasi), a document that is compiled - and regularly revised (!) - by the Indonesia Investment Coordinating Board (Badan Koordinasi Penanaman modal, or BKPM).
What can be done if you have purchased a local PT and then find out that foreign ownership in the business field is restricted to - lets say - 67 percent? Well, you can simply try to sell or give the 33 percent of shares to an Indonesian individual or company and then conduct your business in Indonesia. You could also use a nominee shareholder, that is a (often) unrelated Indonesian third-party who is then officially registered as the holder of the remaining 33 percent of the shares. A more drastic solution would be to change the business field of the local PT into one that allows 100 percent foreign ownership (this change of field could mean, however, that you cannot carry out your desired business activities as you had planned earlier).
For companies located in Special Economic Zones (in Indonesian: Kawasan Khusus Ekonomi, or KEK) different foreign ownership requirements prevail.
Back to the Negative Investment List. Often we are asked whether a new revision to the Negative Investment List can impact negatively on the existing PT PMA?
For example, two foreigners control 100 percent of the shares in a PT PMA that is engaged in the restaurant business (lets say a restaurant chain on Bali). Then, in the latest revision to the Negative Investment List, the Indonesian government restricts foreign ownership in the restaurant business to - lets say - 75 percent. Do the foreigners now need to sell part of their shares to an Indonesian citizen or company? The answer is no.
If you have registered a foreign-owned company (PT PMA) in a certain sector in accordance with prevailing Indonesian law and then, suddenly, a revision to the Negative Investment List is made that places certain restrictions to PT PMAs in your business field, you will not be affected. In other words, it does not retroactively changes the legal consequences that existed before the enactment of the revision. However, this does not mean that ex post facto law does not exist in Indonesia. But it will require higher law to have this power (for example Law No. 4/2009 on Mineral and Coal Mining, also known as the "2009 Mining Law").
Meanwhile, PT PMA companies that are listed in the capital market are not subject to the Negative Investment List. However, they can still be subject to sector-specific shareholding restrictions prescribed in other laws.
(2) Conduct legal due diligence! There are many small, medium-sized and big PTs in Indonesia. However, not all of them have carefully arranged all necessary permits to conduct their business. It is also possible that the local PT still has plenty of outstanding taxes and financial obligations. It could also be involved in legal disputes with a third-party. As such, it is worth the costs and time to conduct legal due diligence in order to know whether the local PT is not plagued by any financial, fiscal and legal troubles.
You may find out that the local PT does not have all necessary permits to conduct your desired business activities through the new PT PMA. Hence, you should save some time to arrange these new permits. It is also important to inform the relevant authorities about certain changes that occur due to the acquisition of the local PT. For example, if you acquire a local importer (hence converting it into a PT PMA), then various data regarding its import identification number (API-U or API-P) need to be revised. The change in structure of the company needs to be reported within a 30-day period.
(3) Minimum capital requirements! Turning the local PT into a foreign-owned PT PMA implies that other minimum capital requirements - those specifically designed for foreign ownership - kick in. The Indonesian government does not want foreigners to own small companies in Indonesia (in order to protect the domestic small and medium-sized enterprises or entrepreneurs). Therefore, the minimum paid up capital requirement is set at IDR 2.5 billion (approx. USD $185,000) per business classification, while the investment plan is set at IDR 10 billion (approx. USD $745,000). In case, you want the PT PMA to be active in two separate business classifications, then the investment plan will double to IDR 20 billion.
Whether you own 100 percent of the shares in the PT PMA or only 1 percent (while an Indonesian party owns the remaining 99 percent), these minimum requirements stay the same. In case the local PT had less authorized capital than is required for the PT PMA, then the capital simply needs to be increased in order to complete the acquisition.
An investment plan needs to be drawn up that states how the IDR 10 billion will be used to develop your business in Indonesia (including working and fixed capital, but the value of land or property cannot be included in the amount). This investment plan, which needs to be realized within a five-year period, needs to be presented to BKPM. They will assess whether it is a sustainable plan. If approved, then you will obtain the principle license (in Indonesian: izin prinsip).
Besides this minimum authorized capital requirement of IDR 10 billion, the PT PMA is also required to deposit 25 percent of that capital (IDR 2.5 billion) as paid-up capital. This paid-up capital can be used for all business activities of the PT PMA. In reality, however, the paid-up capital is rarely deposited (for example sent to an Indonesian bank account). Usually a capital statement letter is signed with the shareholders, stating that the shareholders have the sufficient funds to inject the capital into the PT PMA after the incorporation.
Indonesia Investments can assist you with the acquisition of a PT or the establishment of a PT PMA. For questions about legal & business entities in Indonesia you can contact Indonesia Investments here
Last Update: 24 October 2017