Investment in Indonesia is categorized as either domestic (PMDN) or foreign (PMA). An investment with any degree of direct foreign ownership is defined as PMA. A foreign investor may be an individual or a corporate entity. A PMA must have a minimum of two managers/shareholders, and at least one director and chairman. There are no minimum or maximum total investment (debt plus equity) requirements, however investors in the manufacturing sector typically are expected to have a debt to equity ratio of 3:1 or less, while those in the agricultural or mining sectors may have ratios of 6:1 or greater.
Private entities may establish, acquire, and dispose of interests in business enterprises. Current regulations permit foreign firms to acquire domestic firms in sectors open for foreign investment after receiving approval from BKPM. When reviewing applications from foreign firms seeking to acquire locally established firms, BKPM frequently requires the buyer to reserve a small stake for a local buyer or the original owner. In cases where a foreign buyer is buying out a troubled Indonesian firm, BKPM frequently requires the investor to inject capital, not just provide management expertise, technology or assume outstanding loans. The approval process to take over a troubled firm may take as long as two months.
BKPM claims to require only ten days to process the initial investment approval (IIA) (or investment license) once the applicant has furnished all requested information and documentation. In practice, however, this process can easily be delayed for two to four weeks depending on the availability of officials and complete submission of documents. The IIA serves as a temporary operating license for a period up to three years (the IIA can be extended), and it enables the PMA company to start its commercial activities.
The IIA allows the parties to form a limited liability company (Perseroan Terbatas, or P.T.) by executing through an Indonesian notary a Deed of Establishment. The Articles of Association of the PMA company are included in the Deed of Establishment and must comply with Law No. 1/1995 on Limited Liability Companies. With the Deed of Establishment executed, the company may obtain a taxpayer registration number from the Directorate General of Taxation of Foreign Companies. This requires about one week. The PMA company must open a special foreign investment account at an approved foreign exchange bank in Indonesia. Should the PMA company's IIA indicate plans to hire expatriates, it will need to file an application for approval of its manpower plan with BKPM.
A PMA company becomes a limited liability company after the Ministry of Justice and Human Rights (MOJHR) grants approval. The process takes a maximum of two months after the MOJHR receives the Deed of Establishment, tax ID number, PMA bank account information from the notary who initially prepared the Deed of Establishment. After obtaining approval from the MOJHR, the PMA should submit its Deed of Establishment to the Ministry of Industry and Trade (MOIT) within thirty days. Following registration at the MOIT, the Deed of Establishment should be published in the Supplement to the State Gazette (Tambahan Berita Negara), a process normally handled by the notary. During the time between receiving approval from the MOJHR and Deed of Establishment's publication in the Gazette the founding shareholders are personally liable for all obligations undertaken in the company name. If importing, BKPM may require the firm to seek an additional license, and the PMA company may need to enroll employees in Indonesia's mandatory employee social insurance program run by JAMSOSTEK. If the PMA employs more than 25 people, the Manpower Department must also approve.
The IIA can be used until the PMA company reaches the state of commercial operation or commercial production. At that point, the PMA company must submit an application for a Permanent Business License (Ijin Usaha Tetap, or IUT) with a recommendation letter from BKPMD to BKPM. Each IUT is valid for 30 years and subject to renewal. The investor must submit semi-annual reports to BKPM and BKPMD.
Especially for oil and gas sector, aAs required under Oil and Gas Law 22/2001 of October 2001, the Indonesian government created two new bodies to take over Pertamina's upstream and downstream regulatory functions. In July 2002, the government formed the Implementing Body for Oil and Gas Upstream Activities (BPMIGAS). This nominally independent body reports directly to the President and is principally responsible for managing the Production Sharing Contracts (PSCs). The government established the downstream regulatory authority, BPHMIGAS, in December 2002. Like its upstream counterpart, BPHMIGAS is also an independent body responsible for regulating the supply and distribution of oil fuel and natural gas, as well as setting tariffs for natural gas pipelines.
According to the law, both authorities are termed "state legal entities" and therefore not government bodies. Full details on the functions and responsibilities of both organizations bodies will be contained in government implementing regulations that have not yet been issued.
In June 2003, the government passed a presidential decree changing state oil and gas company Pertamina into a limited liability company. This is the first step towards the complete privatization of Pertamina by 2006. The decree requires the Ministry of Finance and the Ministry of Energy and Mineral Resources to jointly decide which assets the new Pertamina will retain. This important issue includes whether or not Pertamina will retain non-core (i.e., non petroleum-related) assets, as well as core assets such as oil refineries and Liquefied Natural Gas (LNG) plants. The decree also requires Pertamina to transfer all geothermal sector activities to a subsidiary within two years.
Services: trade barriers continue to exist in many sectors, in particular professional services. Foreign accounting firms must operate through technical assistance arrangements with local firms, and only citizens of Indonesia can be licensed as accountants. Foreign agents and auditors may act only as consultants and cannot sign audit reports. Foreign law firms cannot establish a legal practice in Indonesia, so many foreign law firms enter into a cooperative work agreement with local firms. Indonesian law allows only Indonesian nationals who have graduated from an Indonesian legal facility or other recognized institution to join the local bar and practice law. Foreign engineering consultants can operate only by forming a joint venture with local partners in Indonesia.