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Ease of Establishing a Local Company in Indonesia: The Comprehensive Guide to Establishing a Company in Indonesia

Indonesia is one of the fastest-growing economies in Southeast Asia, presenting tremendous opportunities for local and international businesses alike. Establishing a local company, known as a Perseroan Terbatas (PT), is one of the most common ways for entrepreneurs and investors to tap into Indonesia’s vibrant market. With a supportive regulatory environment, access to government incentives, and a growing consumer base, Indonesia is an attractive destination for businesses aiming to expand their operations.

In this detailed guide, we explore the key requirements, potential opportunities, and benefits of establishing a local PT in Indonesia, along with insights into how local companies can partner with foreign entities through joint ventures, capital regulations, and the numerous advantages local companies enjoy.

Overview: What is a Local Company in Indonesia?

A Perseroan Terbatas (PT) is a limited liability company, and it is the most commonly used legal entity for local businesses in Indonesia. This business structure provides significant flexibility for small and medium enterprises (SMEs) as well as larger corporations. It offers legal protection to its shareholders, who are only liable up to the amount of their shareholding. In general, local PTs must be 100% Indonesian-owned. However, under certain circumstances, they can engage in joint ventures with foreign companies.

The key legislation governing the formation and operation of local PTs includes Law No. 40 of 2007 concerning Limited Liability Companies and the Indonesian Investment Law (Law No. 25 of 2007) for joint ventures involving foreign ownership.

Local Company

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Requirements for Establishing a Local Company in Indonesia

Setting up a local PT involves several steps, each designed to ensure compliance with Indonesia’s business laws and regulations. Here is a breakdown of the main requirements:

  1. Minimum Number of Shareholders:
    A local PT must have at least two shareholders. These shareholders must be Indonesian citizens or Indonesian legal entities. The company’s shares can be owned by individual shareholders or by corporate entities registered in Indonesia.

  2. Board of Directors and Commissioners:
    A local PT must appoint at least one Director and one Commissioner. Both roles must be held by Indonesian nationals. The Director is responsible for the day-to-day operations of the company, while the Commissioner serves in an oversight role, ensuring that the management adheres to the company’s objectives and regulations.

  3. Registered Business Address:
    Every local company in Indonesia must have a legal, physical business address. Virtual offices are permissible in some regions and industries for the purpose of registering a business, but it is essential to have a legitimate location for tax purposes and correspondence with the authorities.

  4. Articles of Association:
    The Articles of Association is a foundational document that outlines the company’s objectives, governance structure, and share distribution. This document must be notarized and approved by the Ministry of Law and Human Rights.

  5. Obtaining a Business License (NIB):
    A local PT must apply for a Business Identification Number (NIB) through the Online Single Submission (OSS) system. The NIB serves as the main license required to operate legally in Indonesia and includes automatic registration with the Tax Identification Number (NPWP), import-export licensing, and labor force registration.

  6. Industry-Specific Licenses:
    Depending on the type of business, a company may require additional sector-specific licenses, such as construction permits, food and beverage certifications, or manufacturing licenses, which are issued by respective regulatory bodies in Indonesia.

Can Local Companies Engage in Joint Ventures with Foreign Entities?

While local PTs must be fully owned by Indonesian nationals or entities, there is the possibility of forming joint ventures with foreign partners. In these cases, the company can transition into a Penanaman Modal Asing (PMA), which is a foreign investment company. This involves foreign shareholders acquiring a stake in the business.

Under the Foreign Investment Law, foreign ownership in Indonesian companies is subject to certain restrictions, depending on the business sector. The Positive Investment List, introduced in 2021, outlines the maximum allowable foreign ownership in various industries, ranging from 100% foreign ownership in sectors like technology and renewable energy to capped ownership in industries like agriculture and hospitality.

Local companies benefit from forming joint ventures with foreign partners through access to capital, technology transfer, and new markets, while still benefiting from local market knowledge and connections. Foreign investors, on the other hand, gain access to Indonesia’s vast consumer base and growing economy.

Local Company

Read More: What is a PMA?

Capital Requirements for Local Companies

The capital requirements for a local PT are more flexible than for foreign-owned PMA companies, making it easier for small businesses to start up. Here are the main categories of capital requirements:

  1. Small Enterprises:
    A small PT typically requires a minimum paid-up capital of between IDR 50 million and IDR 500 million. This lower threshold allows small businesses to start with limited capital and scale up as they grow.

  2. Medium Enterprises:
    Medium-sized companies generally require IDR 500 million to IDR 10 billion in capital. These companies benefit from a larger scale of operations and can access additional government incentives for business expansion.

  3. Large Enterprises:
    Large enterprises need to have a minimum paid-up capital exceeding IDR 10 billion. These companies usually operate in capital-intensive sectors like manufacturing, infrastructure, or large-scale retail.

Key Advantages of Establishing a Local Company in Indonesia

  1. Simplified Registration and Licensing Process:
    Indonesia has taken significant steps to streamline the company registration process through the OSS (Online Single Submission) system, making it easier and faster for local companies to be established and obtain necessary licenses.

  2. Lower Capital Requirements:
    Compared to foreign-owned companies, local PTs benefit from more relaxed capital requirements, allowing Indonesian entrepreneurs and SMEs to start with less initial investment.

  3. Access to Local Government Incentives:
    Local PTs are eligible for a wide range of government support programs, including tax incentives, grants, and subsidies aimed at promoting the development of Indonesian businesses in sectors such as manufacturing, agriculture, and digital technology.

  4. Complete Control Over Business Operations:
    Since local PTs are fully owned by Indonesian citizens, they have full control over their business operations and decision-making, without needing approval from foreign shareholders. This autonomy allows for quicker decision-making and flexibility in managing the company’s direction.

  5. Potential for Future Growth and Joint Ventures:
    Once a local PT is well-established, it has the opportunity to seek international partnerships, engage in joint ventures, and expand its business beyond Indonesia’s borders.

  6. Strategic Location in ASEAN:
    Indonesia’s position within the Association of Southeast Asian Nations (ASEAN) provides local companies with strategic access to regional markets, trade agreements, and partnerships that enhance business opportunities.

Local Company

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Conclusion

Setting up a local company in Indonesia offers a wealth of opportunities for both entrepreneurs and established businesses. With its flexible regulations, growing economy, and government support, Indonesia is an ideal location for businesses looking to capitalize on the region’s growth. Whether you are a small business owner or a larger corporation looking to expand, forming a local PT offers advantages such as lower capital requirements, easier access to government incentives, and potential joint venture opportunities with foreign partners.

At ET Consultant, we are dedicated to helping businesses navigate the complexities of company formation in Indonesia. Our team of experts will guide you through every step of the process, ensuring compliance with local laws and providing strategic advice for future growth. Contact us today to learn more about how we can assist you in establishing your local company in Indonesia and unlock the full potential of your business in this dynamic market.

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ET Consultant is a Business Consultant and Legal Consultant Expert that provides support for local and multinational clients to start and manage their business operations in Indonesia. ET Consultant specializes in Business Incorporation, Licensing & Legal, Accounting & Taxes, Immigration, and Advisory Services.

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We are established as an Indonesian Advisory Group – Consulting Firm that provides local and multinational clients support for start-up and managing business operations in Indonesia.

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