Indonesia’s booming economy has seen huge numbers of foreign firms enter the market. More often than not, they are looking for a low-cost manufacturing base to make their goods or a rapidly emerging consumer market in which to sell their good.

Starting a business in Indonesia, however, can be tricky. There can be a lot of red tape and requirements and working with certain authorities can be challenging. That said, firms and entrepreneurs can ease the stress and tension that comes with establishing a business in Indonesia by understanding the process and its nuances ahead of time.

Foreign ownership rules in Indonesia

Foreign investors looking to establish a business in Indonesia must comply with foreign ownership regulations, which determine which industries are open to full or partial foreign investment. These rules are outlined in the Positive Investment List, which replaced the previous Negative Investment List (DNI) under the Omnibus Law on Job Creation.

The Positive Investment List categorizes industries into three main groups:

Industries that allow 100 percent foreign ownership – This includes sectors such as manufacturing, e-commerce, IT services, wholesale trading, and tourism-related businesses.
Industries requiring a local partner or joint venture – Certain sectors, such as retail, logistics, transportation, energy, and construction, may have foreign ownership caps, requiring a local Indonesian partner to hold a portion of the shares.
Industries reserved for domestic investment – Some sectors, including media, small-scale retail, and traditional agriculture, are fully restricted to foreign investment.

Foreign investors must check the specific industry regulations under the Investment List to determine their eligibility and required ownership structure.

The Indonesia Investment Coordinating Board (BKPM) is the government agency responsible for approving foreign investments, issuing business licences, and ensuring compliance with ownership regulations. Foreign-owned companies (PT PMA) must register with BKPM before starting operations in Indonesia.

Understanding and adhering to these foreign ownership rules is essential for foreign firms to successfully establish and operate a business in Indonesia. Consulting with local legal advisors or investment consultants is recommended to ensure compliance with the latest regulations.

Choosing the Right Business Structure

Foreign firms looking to establish a presence in Indonesia must choose a business structure that aligns with their investment goals, industry requirements, and foreign ownership regulations. The country offers several business entity options, each with different levels of control, capital requirements, and regulatory obligations.

PT PMA (Foreign-Owned Company)

A PT PMA (Perseroan Terbatas Penanaman Modal Asing) is a limited liability company designed for foreign investors, allowing full or partial foreign ownership depending on the industry.
The minimum capital investment required is IDR 10 billion (approx. US$700,000), with at least 25 percent (IDR 2.5 billion) paid up before registration.
The company must register with the Indonesia Investment Coordinating Board (BKPM) and obtain a Business Identification Number (NIB) through the Online Single Submission (OSS) system.
Suitable for manufacturing, trading, services, and export-oriented businesses that want full operational control.

Representative Office (KPPA)

A Representative Office (Kantor Perwakilan Perusahaan Asing – KPPA) is a non-commercial entity used by foreign companies to conduct market research, brand promotion, and liaison activities.
It cannot engage in direct revenue-generating activities, issue invoices, or sign contracts.
Requires approval from BKPM and has fewer compliance requirements than a PT PMA.
Suitable for multinational corporations (MNCs) and businesses exploring the Indonesian market before committing to full investment.

Branch Office

Branch offices are restricted in Indonesia and are only allowed in specific sectors, such as banking, oil & gas, and finance, where special government permits apply.
Unlike a PT PMA, branch offices do not have separate legal status from their parent company, meaning the foreign entity is directly liable for any debts or obligations.
Approval from sector-specific regulatory bodies is required before establishing a branch.

Joint Ventures

In industries where foreign ownership is restricted, a joint venture (JV) with a local Indonesian partner is required.
The percentage of foreign ownership depends on the Positive Investment List, which defines which industries require partial or majority Indonesian ownership.
Common in sectors such as mining, logistics, telecommunications, and construction, where a local partner must hold a certain percentage of shares.
Provides foreign investors with local market expertise, regulatory compliance advantages, and established distribution networks, but requires a well-structured agreement to protect interests.

Business Registration and Licensing

Setting up a foreign-owned business (PT PMA) in Indonesia requires completing several registration steps with different government agencies. The process has been streamlined through the Online Single Submission (OSS) system, but compliance with licensing and taxation regulations remains essential.

Reserve a Company Name

The company name must be unique, in Indonesian, and comply with the naming rules set by the Ministry of Law and Human Rights (Kemenkumham).
The name reservation process is conducted through the AHU Online System, and approval typically takes a few days.

Register the PT PMA with BKPM and Obtain a Business Identification Number (NIB)

Foreign investors must register their business with the Indonesia Investment Coordinating Board (BKPM).
After BKPM approval, businesses must apply for a Business Identification Number (NIB) through the Online Single Submission (OSS) system, which serves as:
- The company’s official business registration number
- Import-export licence (if applicable)
- Tax and social security registration

Obtain a Taxpayer Identification Number (NPWP)

All companies must register with the Directorate General of Taxes (DGT) to obtain a Taxpayer Identification Number (NPWP).
The NPWP is required for tax compliance, banking transactions, and hiring employees.
Companies must also register for Value-Added Tax (VAT) if annual revenue exceeds IDR 4.8 billion (approx. US$320,000).

Apply for Industry-Specific Permits

Depending on the type of business, additional sector-specific permits may be required:

Import-Export Businesses – Need a Customs Identification Number (NIK) and import/export licences from the Ministry of Trade.
Food, Pharmaceuticals, and Cosmetics – Require approval from the Food and Drug Authority (BPOM).
Construction and Engineering – Must obtain licences from the Ministry of Public Works and Housing.
Financial Services – Require permits from the Financial Services Authority (OJK).

Opening a Corporate Bank Account

Once a business is legally registered in Indonesia, foreign firms must open a corporate bank account to conduct financial transactions, pay employees, and manage business operations. The banking system in Indonesia offers a range of financial services, including multi-currency accounts, trade financing, and online banking solutions for foreign businesses.

Required Documents for Opening a Corporate Bank Account

Banks in Indonesia require specific documentation to open a business account. The key documents include:

Company Registration Certificates – Proof of incorporation from the Ministry of Law and Human Rights.
Taxpayer Identification Number (NPWP) – Issued by the Directorate General of Taxes.
Business Identification Number (NIB) – Obtained from the Online Single Submission (OSS) system.
Deed of Establishment and Articles of Association – Outlining the company’s structure and ownership.
Shareholder and Director Details – Including copies of passports or KTP (for Indonesian nationals).
Domicile Letter (if required) – Proof of the company’s registered business address.
Minimum Initial Deposit – The required amount varies by bank and account type.

Some banks may request additional compliance documents, such as board resolutions authorizing account opening, depending on the nature of the business.

Leading Banks for Foreign Businesses

Indonesia has several local and international banks that cater to foreign businesses. The most recommended banks include:

Bank Mandiri – One of Indonesia’s largest state-owned banks, offering corporate accounts and trade financing services.
BCA (Bank Central Asia) – Known for strong digital banking solutions and corporate banking services.
BNI (Bank Negara Indonesia) – Offers business banking, credit facilities, and trade financing.
HSBC Indonesia – Preferred by multinational businesses for its global banking network and foreign exchange services.
Standard Chartered Indonesia – Provides multi-currency business accounts and international transaction capabilities.

Foreign Currency and Multi-Currency Accounts

Businesses engaging in international trade or foreign transactions may need a foreign currency account to receive and send payments in USD, EUR, SGD, and other major currencies.
Some banks offer multi-currency accounts, allowing businesses to hold funds in multiple currencies to reduce exchange rate risks.

Hiring Employees and Work Permits

Foreign businesses operating in Indonesia must comply with labour laws and immigration regulations when hiring both local and foreign employees. Employers are required to provide mandatory benefits, adhere to minimum wage regulations, and ensure foreign employees obtain the necessary work permits and visas.

Compliance with Indonesian Labour Laws

Indonesian labour laws are designed to protect workers’ rights and ensure fair employment conditions. Key employer obligations include:

Minimum Wage – Set by local governments and varies by region (e.g., higher in Jakarta than in smaller cities).
Mandatory Employee Benefits – Employers must provide social security and health insurance, which includes:
- BPJS Kesehatan (National Health Insurance) – Covers medical and healthcare benefits for employees.
- BPJS Ketenagakerjaan (Social Security) – Includes work accident protection, pension, and death benefits.
Employment Contracts – Businesses must provide written contracts that specify job roles, wages, and benefits.
Termination and Severance Pay – Employers must follow strict labour laws regarding termination, ensuring employees receive appropriate severance payments.

Work Permits and Visas for Foreign Employees

Foreign employees must obtain specific permits and visas to work legally in Indonesia. The process involves multiple approvals from government agencies.

KITAS (Limited Stay Permit Card) – A temporary stay permit issued to foreign workers for employment purposes. It is valid for 6–12 months and renewable.
IMTA (Work Permit) – Employers must secure a work permit from the Ministry of Manpower, proving that the foreign worker is needed for a specific job role.
RPTKA (Expatriate Placement Plan) – Companies must submit an Expatriate Manpower Utilization Plan (RPTKA) to justify hiring foreign workers before obtaining an IMTA.
DKP-TKA (Foreign Worker Compensation Fund Payment) – Employers must pay a fee of US$100 per month per foreign employee as a government levy.

Restrictions on Foreign Hires

Some industries have hiring restrictions for foreign workers, particularly in human resources, legal, and supply chain roles.
Companies hiring foreign employees must prove that no local talent is available for the job, and priority is given to Indonesian workers in many sectors.
Sectors such as education, financial services, and retail may have specific requirements for hiring expatriates.

Taxation and Compliance

Foreign businesses operating in Indonesia must comply with the country’s tax regulations, which cover corporate taxes, VAT, and withholding taxes. The Directorate General of Taxes (DGT) under the Ministry of Finance oversees tax administration and enforcement. Businesses must ensure timely filing of tax returns and financial reports to avoid penalties.

Corporate Income Tax

The corporate income tax (CIT) rate is 22 percent, applicable to most companies.
Small and medium enterprises (SMEs) with annual revenue below IDR 50 billion (approx. US$3.2 million) may qualify for a 50 percent tax reduction on taxable income up to IDR 4.8 billion.
Companies listed on the Indonesia Stock Exchange (IDX) may receive a 3 percent tax reduction under certain conditions.
Branch profits tax of 20 percent applies to profits remitted by a branch office to its foreign parent company.

Value-Added Tax (VAT)

The standard VAT rate is 11 percent, applicable to most goods and services.
Certain transactions, such as exports of goods and services, are zero-rated (0 percent VAT).
Businesses with annual turnover exceeding IDR 4.8 billion (approx. US$320,000) must register for VAT with the DGT.
VAT returns must be filed monthly, and failure to comply may result in penalties.

Withholding Taxes

Withholding tax applies to payments made to foreign entities, including:
- Dividends – 20 percent withholding tax, unless reduced under a double taxation agreement (DTA).
- Interest payments – 20 percent withholding tax, subject to DTA benefits.
- Royalties and technical service fees – 20 percent withholding tax, unless reduced under a tax treaty.
Indonesia has DTA agreements with various countries, allowing for lower withholding tax rates on cross-border transactions.

Tax Filing and Compliance Requirements

Companies must file annual corporate tax returns by April 30 of the following year.
Monthly tax filings are required for withholding tax, VAT, and employee payroll taxes.
Businesses must submit audited financial statements to the Ministry of Finance if they meet certain thresholds.
Companies that fail to comply with tax regulations may face penalties, fines, or legal actions from the Indonesian tax authorities.

Challenges and Considerations

While Indonesia offers significant business opportunities, foreign firms must navigate bureaucratic, logistical, financial, and cultural challenges to operate successfully. Understanding these hurdles and planning accordingly can help businesses establish a strong foundation in the market.

Bureaucratic Processes and Regulatory Complexity

Government processes can be slow and require multiple approvals from various agencies, such as the Indonesia Investment Coordinating Board (BKPM), Ministry of Finance, and Directorate General of Taxes.
Frequent regulatory changes can create uncertainties for foreign businesses, requiring continuous monitoring of tax, investment, and labour laws.
Foreign firms often require local legal and accounting consultants to ensure compliance with licensing, tax filings, and employment laws.
Corruption and administrative inefficiencies in some sectors may slow down business registrations and approvals.

Infrastructure and Logistics Challenges

Indonesia’s geographic structure (over 17,000 islands) creates transportation and supply chain challenges, particularly for businesses operating outside Jakarta, Surabaya, or major urban centres.
Port congestion, inadequate road networks, and high shipping costs can increase lead times and operating expenses.
Government investments in infrastructure projects are improving roads, airports, and logistics hubs, but challenges remain in rural and remote areas.

Foreign Exchange Regulations and Financial Transactions

Indonesia has strict foreign exchange controls requiring businesses to report international transactions and remittances to the Bank of Indonesia.
Foreign currency transfers exceeding certain thresholds may require additional documentation and regulatory approvals.
Businesses must carefully manage currency risks, as fluctuations in the Indonesian rupiah (IDR) can impact import/export costs and profit margins.

Cultural and Language Barriers

Bahasa Indonesia is the primary language of business, and while English is spoken in corporate settings, many business negotiations still require local language fluency.
Understanding Indonesian business culture is crucial, as relationships, hierarchy, and informal networks (“guanxi”) play a significant role in decision-making.
Foreign companies that fail to adapt to local business etiquette and negotiation styles may struggle to build strong partnerships and gain market trust.

Expanding into Southeast Asia

Firms looking at doing business in Indonesia could also consider expanding in Southeast Asia more broadly.

Vietnam

Starting a business in Vietnam can prove very lucrative and Vietnam’s booming economy in recent years has seen huge numbers of foreign firms enter the market. More often than not, they have come looking for a low-cost manufacturing base to make their goods or to make the most of a rapidly emerging consumer market in which to sell their goods, for both of which Vietnam ranks highly.

See: How to Start a Business in Vietnam

The Philippines

The Philippines is a rapidly growing economy in Southeast Asia, offering opportunities for foreign investors across various industries. With a large consumer base, a skilled workforce, and increasing government support for businesses, the country presents an attractive destination for investment. However, businesses must navigate regulatory requirements, foreign ownership limitations, and infrastructure challenges to succeed.

See: How to Start a Business in the Philippines

What’s next?

There are a wide variety of professional services firms that cater to entrepreneurs and investors looking at starting a business in Indonesia.

That said, as an emerging market, the business environment in Indonesia can turn on a dime. With this in mind, firms doing business in Indonesia should make sure to keep up with the latest changes by subscribing to the-shiv.

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