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On 11 December 2017, Indonesia’s Investment Coordinating Board (Badan Koordinasi Penanaman Modal – “BKPM”) enacted a new regulation (No. 13 of 2017) on Guidelines and Procedures for Capital Investment Facility and Licensing (“Regulation 13”). Regulation 13 revokes and replaces five existing BKPM procedural regulations1 in an attempt to simplify the Indonesian direct capital investment regulatory framework and provide investors with more efficient investment licensing services. Despite this intention, we note that there appear to be certain changes introduced by Regulation 13 that may potentially make things more complicated for investors (as will be elaborated below).
Regulation 13 took effect on 2 January 2018 in respect of foreign capital investments and other types of capital investments which fall under the authority of Indonesia’s central government. In respect of the types of capital investments which fall under the authority of the relevant local government, Regulation 13 will take effect as of 2 July 2018.
Set out below is a summary of the key changes introduced by Regulation 13.
Investment Registration and Business Licence
Regulation 13 replaces the concept of an initial In-Principle Licence (Izin Prinsip) with the concept of an Investment Registration (Pendaftaran Penanaman Modal), as the initial capital investment approval that must be obtained by PMA2 or PMDN3 companies engaging in certain capital intensive business activities (eg, business activities that require building construction as part of their preparatory activities or that may enjoy certain investment facilities) before they can apply for a Business Licence for the investment and commence commercial activities.
However, with respect to:
- business activities that do not require (i) building constructions as part of their preparatory activities or (ii) import duty exemption for machinery/capital goods; or
- existing companies that already have a Business Licence intending to convert their status into PMA or PMDN companies,
Regulation 13 now allows such companies to directly apply for a Business Licence (without first obtaining the Investment Registration), provided that, such companies (i) have been duly incorporated in compliance with any share ownership restrictions under applicable laws, (ii) have obtained a Taxpayer Registration Number (Nomor Pokok Wajib Pajak – NPWP), (iii) already have an office/business place and (iv) commence commercial business activities within one year after the issuance of the Business Licence.
Potential issues in practice
On its face, Regulation 13 appears to provide flexibility for investors who plan to engage in the types of business activities mentioned in point (1) above to decide whether they would like to (i) first apply for an Investment Registration (particularly for investors who have yet to establish a company) or (ii) directly apply for a Business Licence (particularly for investors who have established a company and fulfilled the above requirements).
That said, it remains unclear at the moment if the investors referred to above, who have yet to establish a company, would actually have such flexibility in practice as the new modified BKPM online licensing system (Sistem Pelayanan Informasi dan Perizinan Investasi Secara Elektronik – “SPIPISE”) does not seem to allow them to choose to first apply for an Investment Registration. Investors (particularly foreign investors) would typically opt to take this approach in practice, so that they can get a formal approval from BKPM that they are allowed to engage in the proposed business activities before they proceed with establishment of a company.
Under the new modified SPIPISE, the investors referred to above are currently forced to reverse the process, whereby they must first establish a company (including injecting capital) and then go to BKPM to directly apply for a Business Licence. This would in practice expose the investors (particularly foreign investors) to the following risks:
- There is no guarantee that BKPM would eventually approve the proposed business activities and issue the Business Licence. If BKPM does not approve the proposed business activities to be undertaken by the newly established company, the investors would need to liquidate the company in order to repatriate their capital and this may take some time and cost in practice.
- In the event the company has foreign shareholders, it is also not yet certain whether the notary would be willing to proceed with the company establishment without a formal approval from BKPM and whether the Ministry of Law and Human Rights’ online system for company establishment will be ready to adopt this new development.
Although it remains to be seen whether or not BKPM would modify the SPIPISE to accommodate the new principles, we understand that internal discussions among the BKPM officials on this issue are still on-going and we are hopeful that BKPM’s eventual policy on this issue is likely to support improving the Indonesian investment climate.
Confirmation that PMA companies must engage in a large scale business and potential impact on capitalisation of PMA companies
The provisions under Regulation 13 regarding minimum investment and capitalisation of foreign investment (PMA) companies at the initial stage are largely the same as the previous BKPM regulation4, namely the following is required: (i) a minimum investment of more than Rp10,000,000,000 (excluding land and buildings), (ii) a minimum paid up and issued capital of Rp2,500,000,000 and (iii) a minimum share participation of Rp10,000,000 for each shareholder.
However, at the time when PMA companies wish to apply for a Business Licence5, Regulation 13 essentially will now require PMA companies to have fulfilled the minimum requirements of a large scale business, namely: (i) having net asset value of more than Rp10,000,000,000 (excluding land and buildings) or (ii) having annual sales value of more than Rp50,000,000,000. If a PMA company is not yet able to meet the above requirements, such PMA company may obtain a ‘temporary’ Business Licence that is valid for one year and extendable (one-time only) for another one year period.
It seems that during the validity period of the ‘temporary’ Business Licence, the PMA company in question will be expected to grow its business, so that it is able to meet the minimum requirements of a large scale business which will then enable it to apply for the ‘permanent’ Business Licence. It is not clear what happens if after the expiry of the extension period of the temporary Business Licence the PMA company is still not able to meet the minimum requirements of a large scale business. One possible option in practice is for the shareholders of the PMA company to inject new capital in order to increase the PMA company’s net asset value to be more than Rp10,000,000,000.
PMA companies that have already obtained a Business Licence, but which have not met the minimum requirements of a large scale business as mentioned above, will be required to have complied with such requirements in the event they wish to apply for a new Investment Registration with BKPM (eg, for business expansion purposes).
PMA companies with existing Expansion In-Principle Licence with investment value below the minimum requirement
PMA companies that have an existing Expansion In-Principle Licence (Izin Prinsip Perluasan) from BKPM with an investment value lower than Rp10,000,000,000 (excluding land and building) must adjust their investment value realisation to be more than Rp10,000,000,000 (excluding land and building).
Obligation to convert status of subsidiaries of PMA companies
Regulation 13 confirms the interpretation under the Investment Law6 shareholdings by PMA companies in the Indonesian companies are themselves considered to constitute foreign capital investments. In the event of a conversion of a company into a PMA company, Regulation 13 requires that the subsidiaries of such company must also convert their status into PMA companies at the time when the relevant subsidiaries perform a ‘corporate action’. It is however not clear (i) what the term ‘corporate action’ means in this context and (ii) if such conversion obligation would apply retroactively in respect of the subsidiaries of an existing PMA company (ie, the subsidiaries of PMA companies that were already converted/established prior to Regulation 13 but which have non-PMA status).
In the event the subsidiaries of a PMA company have converted their status into PMA companies, they can continue to undertake their business activities but they must comply with applicable laws regarding foreign ownership restrictions or requirements in respect of the relevant business activities. Consequently, (i) if a business activity undertaken by the converted subsidiary of a PMA company is totally restricted for foreign investment, then the converted subsidiary must cease to undertake such business activity, or (ii) if a business activity undertaken by the converted subsidiary is partially restricted for foreign investment, a sell down by the parent PMA company of its ownership level in the converted subsidiary to a purely local shareholder may be necessary.
This is potentially a very significant issue and case-by-case analysis is advisable in the near future whilst practice develops in this regard. It should be noted that BKPM also previously attempted in 2013 to introduce a requirement for subsidiaries of PMA companies to themselves to be converted to PMA status. At that time, the conversion requirement (which will lead to many serious issues for numerous existing businesses) was dropped after opposition from the investment companies.
Portfolio investment and foreign investment in public listed companies
Regulation 13 confirms the exemption provided under the Investment Law and the Negative List7 that there are no foreign ownership restrictions in respect of any capital investment in a public listed PMA company that is made by way of an indirect or portfolio investment through domestic capital markets. It also maintains the position under the previous regulation that a public listed PMDN company will not be required to convert its status into a PMA company if no foreign investor is recorded in the deeds (constitutional documents) of such public listed PMDN company.
Nominee arrangement prohibition
Regulation 13 reconfirms the prohibition on nominee arrangements restriction under the Investment Law and provides that investors are prohibited from entering into any agreement and/or statement that declares that shares in a company are owned for and on behalf of other persons. As evidence of compliance with this prohibition, BKPM may now require an investor to provide a written statement that must be registered with a notary (waarmerking) regarding the same.
Removal of divestment requirement
Certain PMA companies are subject to an existing divestment requirement (included in the terms of their existing BKPM approvals and/or licences) pursuant to which the foreign shareholders of such PMA companies are obliged to divest a portion of their shares in the company to local persons. Regulation 13 provides that such divestment requirement can be relaxed and PMA companies can apply to BKPM for such divestment requirement to be removed based on an agreement of the shareholders of the PMA company, which must be confirmed in a general meeting of shareholders of the company, that:
- with respect to PMA companies jointly owned with Indonesian shareholders, the Indonesian shareholders do not wish to acquire the shares which are subject to the divestment requirement; or
- with respect to PMA companies wholly-owned by foreigners, the shareholders confirm that they have no commitment/agreement with any Indonesian persons to divest their shares.
Capital participation by Indonesian venture capital companies
Shares ownership by an Indonesian venture capital company (even if its shares are partly owned by foreigners) remains classified as a domestic shares ownership. Regulation 13 extends the period in which a venture capital company may hold shares in another company from 15 years to 20 years in total (an initial period of 10 years extendable twice with a total extension period of 10 years). It is, however, not clear whether the 10 year extension period can be given in one go or, alternatively, the extension will be given in two stages and, if so, whether there is a minimum or maximum requirement of years for each extension period.
Foreign Company Representative Offices (General)
Regulation 13 now provides that the licence to establish a general Foreign Company Representative Office (“FRO”) can be given for a maximum period of three years (unless the appointment letter issued by the principal foreign company states a lesser period) and may be extended from time to time in accordance with the period stated in the appointment letter.
Foreign Oil & Gas Company Representative Offices
Regulation 13 confirms that the licence to establish an Oil & Gas FRO can be applied for and obtained from BKPM. The Oil & Gas company FRO licence will be valid for a maximum period of three years and may be extended from time to time.
Regulation 13 contains a number of transitional provisions as follows:
Companies that have obtained an Investment Registration issued under BKPM Regulation No. 12 of 2009 on Guidelines and Procedures of Investment Licensing, must apply for a Business Licence within a period of 6 (six) months after the effectiveness of Regulation 13 or otherwise the relevant Investment Registration may be revoked.
In-Principle Licences (Izin Prinsip) issued before the effectiveness of Regulation 13 are still valid until the expiry of such In-Principle Licences in accordance with their terms.
In-Principle Licence applications that have been received and deemed complete by BKPM before the effectiveness of Regulation 13 and are still in settlement phase, will be processed in accordance with the provisions of Regulation 13.
PMA companies that have already obtained a Business Licence, but which have not met the minimum requirements of a large scale business as mentioned above, are required to have complied with such requirements in the event they wish to apply for any new Investment Registration with BKPM (eg, for business expansion purposes).
1 (1) Regulation of Chairman of BKPM No. 8 of 2015 on Procedures on Income Tax Facility Application for Investment at Specific Lines of Business and/or Specific Regions as amended by Regulation of Chairman of BKPM No. 18 of 2015; (2) Regulation of Chairman of BKPM No. 13 of 2015 on Guidelines and Procedures on Corporate Income Tax Reduction Facility Application as amended by Regulation of Chairman of BKPM No. 19 of 2015; (3) Regulation of Chairman of BKPM No. 14 of 2015 on Guidelines and Procedures on Investment Principle Licence as lastly amended by Regulation of Chairman of BKPM No. 8 of 2016; (4) Regulation of Chairman of BKPM No. 15 of 2015 on Guidelines and Procedures on Investment Licensing and Non-licensing; and (5) Regulation of Chairman of BKPM No. 16 of 2015 on Guidelines and Procedures on Investment Facility Services.
2 Penanaman Modal Asing or Foreign Capital Investment
3 Penanaman Modal Dalam Negeri or Domestic Capital Investment
4 Certain exceptions apply in respect of PMA companies engaging in property development activities and PMA companies engaging in the manufacturing/industry activities.
5 Unless stipulated otherwise under the relevant laws for a particular sector, a Business Licence shall be valid as long as the company undertakes its business activities.
6 Law No. 25 of 2007 on Capital Investment
7 Presidential Regulation No. 44 of 2016 on Lists of Business Line that is totally restricted and Business Line that is Open Subject to Requirements in Capital Investment Sector