Reformation Policy on Investment,
Jakarta, May 29, 1998

In the efforts to recover the investors' confidence due to the sharp depreciation of Indonesia's rupiah, the Government of the Republic of Indonesia introduced a new package policy on private investment, which is now recognized as New Reformation Policies as follows: 

1. The delegation of authority from the President of the Republic of Indonesia to the Minister of Investment/Chairman of the Investment Coordinating Board (BKPM) to issue foreign investment approval up to US$. 100,0 million. Previously, foreign investment approval in Indonesia, at any amount, was issued by the President of the Republic of Indonesia. Foreign Investment approval of more than US$. 100,0 million should still issued by the President.
   
   

2. The delegation of authority from the Minister of Investment to the Provincial Governor/ Chairman of the Regional Investment Coordinating Board (BKPMD) to issue the domestic investment approvals. If the mechanism will run very smoothly at the regional level, the value of investment of Rp. 10,0 billion will be increased.
   
   

3. Re-instating of "one roof services" in the office of Ministry of Investment/ Investment Coordinating Board (BKPM). In the last few years, the evaluation and approval of Master List for project expansion and restructurization was issued by the office of Director General of Custom. With the new reformation policy, investor should not go to various Government insitutions in order to get such approval or licensing either at the preparation or implementation stage. It will be issued bY the office of the Ministry of Investment/Investment Coordinating Board  (BKPM). For further clarification, under "one roof services", does not mean that the Director General of Customs will delegate the authority to the Ministry of Investment/Investment Coordination Board (BKPM) for the above Master List's evaluation and approval. However, the Customs Office may assign their officials to the office of Ministry of Investment/Investment Coordinating Board (BKPM) and provide such services to the investors. The time frame of the such services would be under the coordination of the Minister of Investment/Chairman of BKPM.
   
   

4. Re- instating of "one roof services" at the Second Level Region/Regency to issue local permits such as building, nuisance and location permits. The service is provided under the coordination of Bupati (Head of Second Level Region Government) where each of Technical Department/Institution is stationed in the building. In this regard, there would be no delegation of authority between the government offices at the second level region in order to avoid confusion. 
   
   

5. The deletion of the Principal Approval which is normally issued by the Governor of Provinces before the investor could begin implementation or construction of the project. The reason for the deletion is that, each investor has received an official government approval from the office of Ministry of Investment/Investment Coordinating Board (BKPM).
   
   

6. The deletion of all kind of recommendation letters from the Technical Department/Directorate General Offices to the Investment Coordinating Board before the project application can be processed. With the new reformation policy, the Investment Coordinating Board will use the "Negative List" as guidance, and any further technical guidance Technical Department/Directorate Generals will be put at the "Negative List Directory".
   
   

7. The transferring of Environmental Impact of analysis's appraisal (AMDAL) from AMDAL Commission in Jakarta (Central Goverment) to the Regional AMDAL Commission. The transferring of appraisal authority to the region will cut a substantial amount of time for the investors therefore reduce cost.
   
   

8. In order to make tax incentives policy, based on the Goverment Regulation No. 45/1996, clear and traparent to the public, the domestic and foreign investors, the criterias for such tax incentives will be established under a President Decree. The criterias will include investment priority sectors, strategic role in economic development, market orientation (e.q. high export content), location, applied technology, investment risks, etc.
   
   

9. On the choice of the project location, foreign investors may now choose whether to locate their project in industrial estate or in industrial zone. The previous policy required the foreign investors to locate only in industrial estate, and the foreign investors had no other choices although the price of land per m2 was relatively high. In order to locate the project in industrial zone, the foreign investor must use the regional spatial planning as guidance, therefore to avoid the use of residental, agricultural or productive land.
   
   

10. In order to widen opportunities to foreign investors and improve competitiveness among ASEAN countries, Indonesia has opened retail & wholesaler trading and palm oil sectors to foreign investment. On top of this new policy , import-export trading has also been opened earlier for foreign investment. In the meantime, foreign investment in retail and wholesaler trading should be conducted in the form of joint venture with the Indonesian nationals/Indonesian companies.
    
    

11. The investment licensing/approval services in the Office of Investment Coordinating Board are also being streamlined. The time-frame to issue a foreign investment approvals has been reduced from 42 days to only 10 working days. The other implementation permits (such as Master List's approval, expatriate approvals) will be finalized between 4 to 10 working days. With this new and streamlined services, investors would not spend too much time on getting the necessary permits.
    
    

Jakarta, 29 May 1998

Office of the Ministry of Investment/

Investment Coordinating Board (BKPM)

This section provides you with everything about investment policies in Indonesia, including domestic and foreign investment, competitive advantages, guarantee & protection, and incentives provided.  

This is to ensure the economic developments proceed in a balanced manner as dictated by the General Session of the MPR (Majelis Permusyawaratan Rakyat - People’s Consultative Assembly).

The most recent DNI was adopted by the issuance of the Presidential Decree No. 96/1998, dated 29 May 1998, concerning the List of Sectors Closed for Investment.

A Domestic Investment, further referred to as PMDN (Penanaman Modal Dalam Negeri), is the investment implemented within the territory of the Republic of Indonesia by an Indonesian enterprise. The enterprise can either be one of the "National Economic Actors," namely:

• Fully private company, which usually takes the form of a Limited Liability Company and is subject to the Indonesian Corporate Laws, denoted as PT (Perseroan Terbatas);

• Cooperative or Koperasi; or 

• State-Owned Enterprise or BUMN (Badan Usaha Milik Negara).

The PMDN is governed by Law No. 6/1968 on Domestic Capital Investment Law as amended by Law No. 12/1971. In addition to the Domestic Capital Investment Law No. 1/1967, the PMDN enterprises are still subject to sectoral policies applied by the corresponding ministry, such as those stipulated in Law No. 5/1984 on Industry, Law No. 5/1967 on Forestry, and Law No. 12/1992 on Agricultural System, etc.

The delegation of authority from the Minister of Investment to the Provincial Governor/ Chairman of the Regional Investment Coordinating Board (BKPMD) to issue the domestic investment approvals. If the mechanism will run very smoothly at the regional level, the value of investment of Rp. 10,0 billion will be increased.

A domestic enterprise running a PMDN project, which is already commercially operational, is allowed to sell its shares to foreign companies, PMA companies, and/or foreign individuals through direct placement or through domestic stock exchange. The purchased company in this case retains its corporate status.     

Total purchase of the domestic company’s shares by the foreign parties is allowed only for those company whose line of business is open for the Foreign Direct Investment (FDI), that is not included in the DNI.

Joint Venture Investment

Foreign investment, further referred to as PMA (Penanaman Modal Asing), means the direct investment of foreign capital in Indonesia to establish an enterprise here. The fundamental law primarily governing the foreign investment is Law No. 1/1967on Foreign Capital Investment, as amended by Law No. 11/1970, which referred to generally as the Foreign Investment Law.

The law provides a broad statutory framework for the encouragement, protection, and regulation of foreign investment. Until today, this law is still considered compatible with Indonesia’s current needs. As a legal basis, the law is fairly accommodative to various deregulatory policies and measures that have been and will be adopted by the government.

Under the Foreign Investment Law No. 1/1967, a PMA company is established as a joint venture scheme between foreign and Indonesian partners. The company established is then referred to as a Joint Venture Foreign Investment company. The joint venture entity shall take the form of a Limited Liability Company subject to the Indonesian Corporate Laws, denoted as PT (Perseroan Terbatas).

The delegation of authority from the President of the Republic of Indonesia to the Minister of Investment/Chairman of the Investment Coordinating Board (BKPM) to issue foreign investment approval up to US$. 100,0 million. Previously, foreign investment approval in Indonesia, at any amount, was issued by the President of the Republic of Indonesia. Foreign Investment approval of more than US$. 100,0 million should still issued by the President.

The foreign partners may be foreign nationals/individuals and/or foreign legal bodies (companies); whereas the Indonesia partners may be Indonesian nationals/individuals, existing joint venture PMA companies, existing PMDN companies, non-PMA/PMDN private companies, state-owned enterprises (BUMN - Badan Usaha Milik Negara), regional-owned companies (BUMD - Badan Usaha Milik Daerah), and Cooperatives.

Numerous implementing regulations and decrees have been adopted and revised from time to time to flesh out important details of the investment regime. Foreign capital is broadly defined to include:

• all foreign exchange that is not part of Indonesia’s reserves;

• imported goods and services that are not financed by such reserves; and

• reinvested earnings.

The new company formed from such investment must be domiciled in and operated wholly or for the greater part in Indonesia and must be a legal entity established under Indonesian Laws.

In addition to the Foreign Investment Law No. 1/1967, the PMA companies as well as other companies are still subject to sectoral policies applied by the corresponding ministry, such as those are stipulated in Law No. 5/1984 on Industry, Law No. 5/1967 on Forestry, and Law No. 12/1992 on Agricultural System, etc.     

The PMA company is granted a period of 30 years to operate after its legal formation. If within this period it commits an additional investment or expansion of its project, another 30 years of time is granted for the expansion project. Thus, a PMA company can, in effect, continuously exist if it keeps expanding or reinvesting.     

There is no requirement on the minimum amount of investment (equity plus loan). The amount is for the parties concerned to determine, based on their economic of scale and business considerations.     

A PMA company under joint venture scheme, which has been commercially operational, is allowed to set up new PMA companies under the same ownership. It is allowed to buy - through direct placement or through domestic stock exchange - the shares of an existing domestic company already commercially operational, as long as the line of business concerned is open for the foreign investment, that is not included in the DNI (Daftar Negatif Investasi - Negative List of Investment) as stipulated in the Presidential Decree No. 96/1998 on List of Sectors Closed for Investment. The purchased company in this case retains its corporate status.     

In the framework of financial rescue and export drive, foreign enterprises and foreign citizens may buy the shares of existing PMA or fully domestic companies through direct placement or through domestic stock exchange, as long as the line of business concerned is open for the FDI, that is not included in the DNI. In this case, the original corporate status of the purchased company may be retained.      

PMA companies in infrastructure projects such as seaports; generation and transmission as well as distribution of electricity for public use; telecommunications; shipping; airlines; potable water; public railways; atomic energy reactors; and mass media should be established by way of joint ventures between foreign and Indonesian partners provided that the Indonesian share is maintained at least 5%.
     

The 100% Foreign Shareholding

As of the issuance of the Government Regulation No. 20/1994, a PMA company may be established as a straight investment or Foreign Direct Investment (FDI), namely with 100%-Foreign Shareholding, either by foreign nationals/individuals and/or foreign legal bodies (companies).

Not later than 15 years of commercial operation, a 100% Foreign Shareholding company starts to be divested by selling some of its shares to Indonesian individuals and/or business entities, through direct placement and/or indirectly through domestic stock exchange.     

All of the clauses stipulated in the Foreign Investment Law No. 1/1967 as amended by Law No. 11/1970 and the DNI (Presidential Decree No. 96/1998 on List of Sectors Closed for Investment) are still applicable to the 100% Foreign Shareholding investment. 
    

Indonesia offers natural and regulatory comparative advantage to investors with an attractive range and combination, such as:   

• A vast, fertile country endowed with rich, highly diversified natural resources, which is evident in all sectors, namely: mining, agriculture, forestry, fishery, outdoor scenery, etc.

• A large population of more than 200 million living in harmony and dynamically adaptive to progress, constituting a huge potential, sizable domestic market.

• A competitive and productive labor force as offered by a large population and government’s concern to the development of human resources.

• A stronger economic base as being undergoing a transformation from an agrarian economy to an industrial economy towards a balanced economic structure.

By virtue of the Foreign Investment Law, foreign investors are given a certain number of investment guarantees and protections. The law guarantees that after-tax profits, depreciation of capital assets and proceeds from the sale of share to Indonesian persons may be repatriated in the original investment currency at the rate of exchange prevailing at the time of repatriation.     

No restriction is imposed on the personnel composition of a joint venture company board of management. The employment of expatriates at the technical level is now less and less restricted.     

There is no control or restriction whatsoever imposed on the movement of foreign currencies. Indonesia adopts free foreign currencies exchange system, which is not common particularly among developing countries.

The law also guarantees the availability and transferability of foreign exchange, such as repatriation of capital and profits; costs related to expenses for foreigners/expatriates employed by the foreign capital enterprise, expenses for training Indonesian personnel abroad, royalty and technical assistance fees, as well as to serve and re-pay foreign loans that are part of the approved capital investment; and the right to repatriate invested capital upon liquidation of the company. These have paved the way for a smoother investment inflow.     

The law prohibits nationalization or revocation of ownership rights except by statute in the national interest, and against payment of compensation in accordance with the principles of International Law.     

To provide security for foreign investment, the Government of the Republic of Indonesia have concluded Investment Guarantee Agreement (IGA) with 39 foreign governments, some of which are Republic of Argentina, Australia, the Netherlands, Belgium, People’s Republic of China, Denmark, Finland, Hungary, United Kingdom, Italy, Federal Republic of Germany, Republic of Korea, Kyrgyztan, Laos People’s Democratic Republic, Malaysia, Egypt, Norway, Pakistan, France, Poland, Singapore, Slovak, Spain, Sri Lanka, Suriname, Sweden, Switzerland, Tunisia, Turkmenistan, Ukraine, Vietnam, Canada, the United State of America, Vietnam, and the Islamic Conference Nations. The agreements generally provide for compensation in case of nationalization or expropriation, losses due to war, revolution or insurrection, and losses resulting from the inconvertibility of the Rupiah (the Indonesian currency).     

To deal with foreign investment disputes, the Government of Indonesia has participated in and signed the Convention of the Settlement of Investment Disputes between states and nationals of other states. Consequently, disputes that may arise from foreign investment ventures in the country can be referred to the International Center for the Settlement of Investment Disputes (ICSID) in Washington, DC. Whilst, in dealing with non-commercial investment risk, Indonesia joint the Multilateral Investment Guarantee Agency (MIGA).     

The legal aspects concerning intellectual property rights are also being improved. Recently, laws on copyright and trademarks have been modified to become more compatible with internationally accepted standards. On 1 August 1991 and 28 August 1992, the newly established Patent Law and Trademark Law became effective.
     

Import Duties
     

All investment projects approved by BKPM - PMA as well as PMDN projects, including existing PMA and PMDN companies expanding their projects to produce similar product(s) with an excess of 30% installed capabilities or diversifying their products - will be granted the following facilities:
   

• Exemption/relief from import duty and levies:

• On the importation of capital goods namely machinery, equipment spare parts, and auxiliary components.

• On the importation of raw materials for the purpose of two years full production accumulated production time).

• Exemption from Transfer of Ownership Fee for ship registration deed/certificate made for the first time in Indonesia.

Outlying Province and Priority Sectors      

For certain industry and/or location of projects which is considered as a national priority in term of export and the development of potential remote areas, the government will provide tax incentive. The kind of industry and the project sites will be determined further in the Presidential Decree of the Republic of Indonesia. 

The tax incentives are as follows:   

• Accelerated Depreciation and Amortization:

• Loss carried forward up to 10 (ten) consecutive years, however for plantation and mining which are not located in the priority area, loss carried forward facility is given up to 8 (eight) consecutive years.

• Reduction on income tax of net income after tax as mentioned in Article 26 of Law No. 7/1983 and Law No. 10/1994.

  Export Oriented Manufacturing   
   
The government provides many incentives for exporting manufacture products.      Some of the incentives are listed below:   

• Restitution (drawback) of import duty and import surcharge on the importation of goods and materials needed to manufacture exported finished products.

• Exemption from Value Added Tax and Sale Tax on luxury goods and materials purchased domestically, to be used in the manufacturing of the exported products.

• The company can import raw materials required regardless of the availability of comparable domestic products.

  Bonded Zones:      The industrial companies located in the bonded zones are                  provided with various incentives as listed below:

• Exemption from import duty, import surcharge, excise, Income Tax of Article 22, Value Added Tax, and Sale Tax on luxury goods on the importation of capital goods and equipment as well as raw materials for the production process.

• Allowed diverting their products up to ¼ of their export (in terms of volume) to the Indonesian custom area through normal import procedure, including payment of custom duties.

• Allowed to sell scraps or wastes to Indonesian custom area as long as it contains at the highest tolerance of 5% of the amount of the material used in the production process.

• Allowed to lend their own machinery and equipment to their subcontractors located outside the bonded zones for not longer than 2 (two) years in order to further process their own products.

• The exemption of Value Added Tax and Sale Tax on luxury goods on the delivery of products for further processing from the bonded zones to their subcontractors outside the bonded zones or the other way around as well as among companies in these areas.

Script & Scenario First Written: 02 June 1996 Last Updated: 01 August 1999 

Copyright © 1996, BKPM