PE in Indonesia: major updates on laws and regulations

July 2021 | SPOTLIGHT | FINANCE & INVESTMENT

Financier Worldwide Magazine

July 2021 Issue

Indonesia made major changes to its investment regime at the end of 2020. The process began with the issuance of Law Number 11 of 2020 on Job Creation (Omnibus Law) which amends and revokes approximately 76 previously existing laws and regulations. Following the introduction of the Omnibus Law, approximately 47 government-level regulations, five president-level regulations, and four ministry-level regulations have also been issued as implementing regulations to the Omnibus Law.

This article will focus on the key changes that may affect private equity firms investing in Indonesia in the post-Omnibus Law era.

Positive List

Previously, foreign investment in Indonesia was subject to certain government conditions or restrictions, under Presidential Regulation number 44 of 2016 (Negative List). The Negative List contained approximately 345 lines of business that are either closed or conditionally open for foreign investment.

In line with the spirit of the Omnibus Law, which is to create a friendly investment environment for investors, the government issued Presidential Regulation Number 10 of 2021 on Investment Business Field (Positive List) to replace the Negative List. As opposed to the Negative List, which was considered an ‘Achilles’ heel’ for investors, the Positive List contains considerably fewer lines of business that are either declared closed and reserved for government, or allocated only to cooperatives and micro, small and medium-sized enterprises.

Some popular lines of business that previously contained restrictions for foreign investment are now open 100 percent for foreign investment, according to the Positive List, such as: (i) distribution (wholesale trading) – previously limited to a maximum of 67 percent of foreign investment; (ii) hospital (healthcare) – previously limited to a maximum of 67 percent of foreign investment, 70 percent if the investors are from ASEAN countries; and (iii) marketplace (portal web) – previously open to a maximum of 100 percent of foreign investment only if the issued and paid-up capital of the company is equal to approximately US$7.14m, otherwise only open to a maximum of 49 percent of foreign investment.

The Positive List also regulates certain prioritised lines of business which will be given fiscal incentives, such as tax holidays, tax allowance, investment allowance, customs incentives, as well as non-fiscal incentives, such as easement of licensing procedures, support on procurement of infrastructures, immigration matters, manpower matters and so on.

New licensing regime

Aiming to boost investment in Indonesia, the government issued Government Regulation Number 5 of 2021 on Implementation of Risk-Based Business Licensing (PP 5) as an implementing regulation of the Omnibus Law. This PP 5, effective on 2 June 2021, brought a major overhaul to the licensing regime in Indonesia as it changes licensing to being based on risk assessments.

Previously, a limited liability company needed to obtain a business identification number (NIB), an effective business licence and an operational licence specific for certain lines of business only, before it could commercially operate its business. Now, after the effective date of PP 5, the required licences will be based on a risk assessment of the business. The lower the risk inherent in a business activity, the fewer licences it will require. If a business is categorised as low risk, it need only apply for an NIB to operate. On the other hand, if a business is high risk, it will require a business licence in addition to an NIB.

To effectively implement the new licensing regime brought by PP 5, the Investment Coordinating Board (BKPM) recently issued BKPM Regulation No. 4 of 2021 (BKPM Reg), effective on 2 June 2021. Interestingly, there is one new requirement for a foreign investment company in the BKPM Reg that may contradict the stated aim of boosting investment in Indonesia. Under the regulation, a foreign investment company will be categorised as a large-scale business and would therefore have to invest minimum issued and paid-up capital of IDR 10bn approximately US$701,000, whereas previously it was IDR 2.5bn, or approximately US$175,200, unless exempted by other regulations. As the BKPM Reg is relatively new, it is unclear whether the requirement will apply retroactively to existing companies and if the exemptions will be provided by other regulations.

Tax updates

The government has updated some of the tax regulations in Indonesia in response to the COVID-19 situation, by, for example, issuing Law Number 2 of 2020 on Stipulation of Government Regulation In Lieu of Law Number 1 of 2020 on State Financial and the Stability of the Financial System Policies for the Mitigation of Coronavirus Disease 2019 (Covid-19) Pandemic and/or to Deal with Threats that are Potentially Harmful to the National Economy and/or the Stability of the Financial System (Law 2). In addition to Law 2, the government has further amended some other tax provisions to provide more leniency to entrepreneurs through the Omnibus Law and its implementing regulations.

First, Law 2 has lowered the corporate income tax rate, which was previously set at 25 percent, to 22 percent for financial year 2020-21 and 20 percent for financial year 2022. In addition, a qualified public company may obtain a further 3 percent lower rate than the previously mentioned rate.

Second, the Omnibus Law uses the concept of territory to impose income taxes, thus redefining individual tax subjects. Foreign individuals can be categorised as domestic taxpayers if they reside in Indonesia. Based on PMK 18, a person will be deemed as residing in Indonesia if he or she: (i) stays in a place in Indonesia that can be possessed or used at all times, is owned, leased or available for use, and is not used only for a stopover; (ii) has their main centre activities (private, social, economic and financial) in Indonesia; or (iii) conducts their usual activities in Indonesia, or are present in Indonesia for more than 183 days in 12 months (either continuous or discontinuous).

Equally, an individual can be considered a domestic taxpayer if they are present in Indonesia in a fiscal year and have an intention to reside in Indonesia, which must be proven by the existence of: (i) permanent residence or KITAP (a permanent stay permit card); (ii) a limited stay visa (VITAS or ITAS) with a validity of more than 183 days, accompanied by an employment agreement, business agreement or business activities in Indonesia for more than 183 days; and (iii) other documents, such as a lease agreement for more than 183 days or a transfer document of family members.

Third, the Omnibus Law also regulates the way in which the government may reduce the interest tax tariff for domestic interest received by foreign taxpayers, which was previously set at 20 percent under the old regime. Following the Omnibus Law, Government Regulation Number 9 of 2021 on Tax Treatments to Support Ease of Doing Business (PP 9) reduces the interest rate to 10 percent, or in line with the tax treaty’s rate for bond interest received by non-permanent establishment foreign tax subjects. Bond interest includes interest on bonds with coupons that are equal to the gross amount of the interest under the bond’s term of ownership, a discount on bonds with coupons that are equal to the difference between the selling price or nominal value above the cost of the bonds, excluding the current interest, and a discount of the interest-free bonds that is equal to the difference between the selling price or the nominal value above the bond acquisition price. The reduced tariff will be effective from 3 August 2021.

PP 9 also regulates that the withholding of interest tax should be conducted by bond issuers or custodians as the appointed payment agent, and securities companies, dealers or banks as the intermediary sellers or buyers.

Fourth, the Omnibus Law regulates that the transfer of goods for capital participation is no longer considered as delivery of taxable goods subject to VAT if both the transferor and transferee are Indonesian taxable entrepreneurs.

Competition law updates

As part of the implementation of the Omnibus Law regarding competition law, the government issued Government Regulation No. 44 of 2021 on Implementation of Prohibition of Monopolistic Practices and Unfair Business Competition (PP 44), which became effective on 2 February 2021. This PP 44 introduces a new mechanism to determine the maximum amount of fines for violations of the Indonesian Competition Law (ICL), i.e., the profit and revenue-based calculation method.

Before the issuance of the Omnibus Law, the ICL adopted a fixed scale of administrative fines ranging from IDR 1bn, or approximately US$70,000, to IDR 25bn, or approximately US$1.75m, for violations of ICL provisions. After the issuance of the Omnibus Law and PP 44, the upper limit was removed and the maximum amount of the administrative fines will be calculated based on either of the following formulas, at the sole discretion of the Indonesia Competition Commission: (i) a maximum of 50 percent of net profit earned by an undertaking in the relevant market during the period of the violation; or (ii) a maximum of 10 percent of total revenues earned from the relevant market during the period of the violation.

Freddy Karyadi is a partner and Anastasia Irawati is a senior associate Ali Budiardjo Nugroho Reksodiputro (ABNR). Mr Karyadi can be contacted on +62 81 910 103 949 or by email: fkaryadi@abnrlaw.com. Ms Irawati can be contacted on +62 21 250 5125 or by email: airawati@abnrlaw.com.

Freddy Karyadi and Anastasia Irawati

Ali Budiardjo Nugroho Reksodiputro (ABNR)