A New Business Landscape in Indonesia

SSEK Legal Consultants' Rusmaini Lenggogeni and Winnie Y. Rolindrawan provide an overview of the rules and regulations affecting investment in Indonesia and look at the main legal developments in the country over the last year and how they impact companies operating or investing here.

1. What were the most important legal developments in Indonesia in the last 12 months and how might they affect businesses?

The Indonesian Government has issued several significant laws and regulations in the past 12 months. The Trade Law (Law No. 7 of 2014 regarding Trade) was issued to create a comprehensive legal umbrella for both domestic and international trade-related activities. It coordinates international trade policies, standardization, licensing, consumer protection and trade promotion, and replaces the Dutch colonial era trade law of 1934.

The new law introduces stricter requirements on Indonesian-language labelling, the use of domestic products, standardization to meet the Indonesian National Standard (SNI), import-export licensing and other measures, price enforcement, the imposition of trade restrictions or bans, e-commerce, the imposition of antidumping and countervailing duties and safeguards, border trade, and consultations with the House of Representatives (DPR) in reviewing foreign trade agreements.

Also issued was the new Industry Law (Law No. 3 of 2014 regarding Industry), which provides a master plan for national industry development and aims to strengthen industry in Indonesia and encourage industrial development across the country. It revokes the 1984 Industry Law. Similar to the Trade Law, the Industry Law is nationalistic in tone, particularly in its stipulations regarding the use of domestic products.

Turning to the mining industry, for the past five years the Indonesian Government has endeavored to protect the domestic market by pushing a ban on the export of certain raw mineral ores, including gold, silver, bauxite, nickel, tin and chromium. The Government intends to push miners to process and refine their mining products domestically.

To implement this policy the Minister of Finance issued Regulation No. 153/PMK.011/2014 regarding the Third Amendment to Minister of Finance Regulation No. 75/PMK.011/2012 regarding the Stipulation of Exported Goods Subject to Export Duty and Export Duty Tariff, dated January 11, 2014. The regulation incentivizes miners to build refineries and smelters in Indonesia by aligning the export tariff on mineral ores with progress on construction of refineries or smelters. It sets the export tariff at 7.5% if construction progress reaches 7.5%. The export tariff will be reduced to 5% for construction progress of 7.5% to 30% and it will fall to 0% if construction progress is more than 30% by January 12, 2017.

Another important development was the update of Indonesia's Negative Investment List. It was updated through Presidential Regulation No. 39 of 2014 regarding List of Business Fields that are Closed and Conditionally Open for Investment (New Negative List), which governs business fields that are open, fully or partially with conditions, to investment, including foreign investment. The New Negative List reduces foreign investment restrictions for some business fields, such as advertising, which is now 51% open to foreign investment (previously entirely closed) for ASEAN member countries, and pharmaceutical manufacturing, now open for a maximum 85% foreign investment (previously 75%).

Restrictions were also eased in certain business fields for public-private partnerships (PPP), including power transmission, which is now open to 100% foreign investment in the context of a PPP project during the concession period.

2. What are the main restrictions on foreign investment?

Under the New Negative List, several sectors remain closed to foreign investment. These include gambling/casinos and the manufacturing of alcoholic beverages and certain chemical materials. The New Negative List also increases foreign ownership restrictions for certain business fields, such as distribution, which was previously 100% open to foreign investment and is now limited to 33% foreign investment. This restriction applies only to companies engaging solely in the distribution business and does not apply to import activities and manufacturing companies that distribute their own products. The reasoning behind the restriction is to protect local distributors.

3. What key structuring and other considerations should be highlighted to potential investors/businesses looking to enter this market?

Investors should first analyze the type of business presence that can be established in Indonesia and which meets their business purposes and requirements. If investors wish to test the market, they can do that by establishing a Representative Office. Establishing a limited liability company with foreign investment or acquiring an Indonesian company are the most common ways to enter the Indonesian market.

Investors will have to take into account the various aspects of foreign investment restrictions, employment-related matters (an acquisition may trigger employment and severance pay obligations, for example), tax structure (Indonesia has tax treaties with 65 countries) and licensing requirements.

Alternatively, investors can choose to do business in Indonesia through various contractual arrangements, such as franchise, consortium and licensing agreements, depending on the needs of their business.

4. What are the most important laws relating to labor and employment?

The principal provisions of labor and employment matters in Indonesia are regulated under the Manpower Law (Law No. 13 of 2003 regarding Manpower), as amended. The Manpower Law contains general principles and requirements on labor and employment matters, including types of employment, salary and allowances, employment of expatriate workers, social security, termination of employment and termination payments. Employment dispute settlements, including termination of employment, are also governed under the Labor Court Law (Law No. 2 of 2004 regarding Settlement of Industrial Disputes).

Minister of Manpower Regulation No. 12 of 2013 regarding Procedures for the Utilization of Foreign Employees prohibits foreign workers to hold more than one position in a company or to be employed by more than one company. These provisions do not apply to foreign nationals employed as directors or commissioners.

The Indonesian Government also stipulates limitations on the employment of expatriate workers under Minister of Manpower Decision No. 40 of 2012 regarding Certain Positions which Are Prohibited to Be Held by Expatriate Workers.

5. Is there a competition law in place and how strictly does it control M&A or other activity?

The Anti-Monopoly Law (Law No. 5 of 1999 regarding Monopolistic Practices and Unfair Business Competition) and its implementing regulation, Government Regulation No. 57 of 2010, were put in place to prevent anti-competition practices. In general, the Anti-Monopoly Law requires a post-completion notification for mergers or consolidations of business entities and acquisitions of shares that meet a minimum threshold in terms of local assets and/or sales value. Such notifications must be filed to the Business Competition Supervisory Commission (KPPU) within 30 business days as of the effective date of the merger. With share acquisitions, the notification requirement only applies when there is a change of control of the company. The KPPU has never cancelled a transaction on the basis of a violation of the Anti-Monopoly Law.

This article originally appeared in Asialaw Profiles 2015.

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