6 Things to Know Before Starting a Business in Indonesia as a Foreigner

Deciding on which countries to expand your business to can be a complex and difficult decision.  As an aspiring entrepreneur, you might have heard of the lucrative business environment of Indonesia and might be wondering about the key considerations to take note of starting a business in Indonesia as a foreigner.  In this article, Tetra Consultants will provide 6 key things to take note of before starting a business in Indonesia as foreigner so that you may better understand this business phenomenon and make a more informed decision about whether you should register company in Indonesia.   

These key considerations will be divided into 2 main sections – key business structures operating within Indonesia, as well as the main advantages and opportunities you can capitalise on by choosing to register business in Indonesia.

Key Business Structures

1. Sole Proprietorships

Sole Proprietorships, also known as Usaha Dagang (UD), are the most straightforward type of company structure, with only one person owning and operating the business.  It is important to note that the government views both the business owner and the business as the exact same legal entity, causing one to be personally responsible for the business actions and inactions.  This means that the risks and liability of your business is the same as the liability of the sole person who owns that business.  As such, assets owned by the individual privately are at risk in honouring the liabilities of the business.  

Furthermore, as a sole proprietor, income tax imposed is in accordance with the personal income tax rate, not the corporate tax rate, as profits of the business flow directly to the individual.  In order to set up a sole proprietorship, one must decide on a company name, the Employee identification number, a Domicile letter and register for a business license.

2. Representative Office

A representative office is most commonly utilised by foreign companies hoping to explore the Indonesian domestic market.  As such, the representative office is only permitted to conduct market research, run promotional activities and function as transaction agents for the foreign parent company.  

To set up a representative office, one must register for an office license.  However, this licence will expire once 2 years have elapsed and has to be renewed for their business operations to continue within Indonesia.

Additionally, the branch office is not allowed to earn any profits in Indonesia, with all commercial transactions being approved and run by the foreign parent company.  Yet, in contrast to other types of foreign-owned companies in Indonesia, no minimum capital required to set up the office.  In fact, representative offices provide the option to employ both local and foreign workers.  

In general, there are three types of representative offices in Indonesia, namely foreign representative offices, foreign construction representative offices and foreign trade representative offices.  While all play different types of roles and facilitate the overseas operations of its foreign parent company in various ways, as a whole, branch offices take on a more secondary, supportive role.  

3. Limited Liability Companies

A limited liability company, also known as Perseroan Terbatas (PT) in Indonesia, is a legal entity with its existing capital divided into shares.  Given that a limited liability company is seen as its own separate entity, business owners are not held personally responsible for any liabilities, debt incurred or legal charges against the firm.  Thus, their personal assets are protected from any liabilities on the part of the company.  Additionally, given that shares can be exchanged and sold swiftly and conveniently, key transitions in ownership or changes in shares can be made without having to dissolve the company.

There are two main types of limited liability companies – local companies and foreign owned companies.   When it comes to the issue of ownership, local companies must be fully owned by an Indonesian citizen.  In the instance where foreigners want to establish this company, resident shareholders are required.  These shareholders aid international investors who hope to extend their business to Indonesia in specific industries normally inaccessible by foreigners.  Thus, they serve as a way for foreigners to conduct business in whichever industries they want to engage in.

On the other hand, for foreigner owned limited liability companies, 100% foreign ownership is permitted, with no need for any resident shareholders if the industry they seek to operate in is not restricted to the international community.  However, if their industry is considered part of the negative investment list, in order to continue business operations, your firm must participate in a joint venture with Indonesian citizens or other legal entities.  

4. Subsidiary Companies

In order to set up a subsidiary company and gain access to domestic markets, a foreign parent company registers a new limited liability company in Indonesia, most commonly a foreign-owned one.  However, despite subsidiary companies being an extension of the primary parent company, they are viewed as separate legal entities by the state.  This means that those in charge of managing and operating the subsidiary company have to keep in mind the fact that the government views them as a tax resident, and are thus subject to the corporate tax rate of 25%.

Hence, if you are considering starting a business in indonesia as foreigner, it is critical to keep these business structures and their respective regulations in mind so that you can identify which is most appropriate for your company.  

Pros

1. Attractive consumer market 

As the country with the 4th largest population in the world with an annual GDP growth rate of 6%, the average levels of disposable income and purchasing power of Indonesian consumers has been steadily rising.  In fact, Indonesia has one of the largest and most diverse consumer markets in the Asian region, thus providing an excellent business opportunity for firms to capitalise on.   

2. Business-friendly environment

The next reason for why you should register company in Indonesia is best encapsulated in Batam, Indonesia’s very first Special Economic Zone.  Export oriented manufacturing companies within the Special Economic Zone receive a variety of benefits such as zero VAT rates on imports, zero LST rates, 0 custom duties on physical assets like machines, raw materials and spare parts utilised for manufacturing and even 0 custom duties on exports.  

Furthermore, those conducting business in such zones are also allowed easy access to a variety of different double tax treaties with countries across the world, helping to lower their annual tax rates as well.

Conclusion

Navigating the country of Indonesia’s complex business climate might be a challenging process – a hassle to say the least.  However, with key benefits regarding tax rates and a business friendly environment outlined above, it is easy to see why many businesses would choose to set up in Indonesia.  As such, Tetra Consultants hopes that this article has provided you a much better understanding about the key steps to starting a business in Indonesia as foreigner so that you can truly decide on whether you should register company in Indonesia yourself.

So, what are you waiting for? Contact us to find out more about the process of starting a business in Indonesia, and our dedicated and experienced team will respond within the next 24 hours.  Tetra Consultants will not only empower you by helping to navigate the different regulations of Indonesia, but also aid in facilitating the registration of your company there while providing invaluable, nuanced insights into any potential challenges.