Business law in Indonesia
Business Law in Indonesia
Indonesia has a dynamic and growing business environment, with a well-established legal system that regulates business operations, foreign investments, contracts, taxes, labor relations, and dispute resolution. The legal framework governing business law in Indonesia is influenced by its civil law tradition, with substantial regulation from national legislation, including various statutes, regulations, and presidential decrees.
1. Legal System
Indonesia follows a civil law legal system, which is based on written laws and statutes. The key sources of business law in Indonesia are:
- The Constitution of Indonesia (1945) – the fundamental law of the nation.
- Laws and regulations passed by the People's Representative Council (DPR) and enacted by the president.
- Judicial decisions that may serve as precedents for interpreting laws.
- Government Regulations and Decrees – issued by the president or relevant ministries.
2. Types of Business Entities
Indonesia provides various legal structures for businesses, each with its own characteristics regarding ownership, liability, and taxation.
a. Sole Proprietorship
- This is the simplest form of business, where an individual operates the business on their own.
- Liability: The owner has unlimited liability, meaning personal assets may be used to settle business debts.
- Registration: While the registration process is relatively simple, it may require a business license from the local authorities.
b. Partnership (Firma or CV)
- A partnership is a business run by two or more individuals who share ownership and liabilities.
- Firma (Fa): Similar to a general partnership where all partners have unlimited liability.
- Commanditaire Vennootschap (CV): A limited partnership where general partners have unlimited liability, but limited partners have liability restricted to their contribution.
c. Limited Liability Company (PT)
- The most common form of business entity for small to medium-sized enterprises (SMEs).
- PT (Perseroan Terbatas): A limited liability company that provides liability protection for shareholders, meaning their liability is limited to the amount of their capital contribution.
Types of PT:
PT PMA (Penanaman Modal Asing): A foreign investment company in which foreign investors can have an ownership stake, regulated by Indonesia’s Foreign Investment Law.
PT Non-PMA: A local limited liability company that is fully owned by Indonesian citizens.
Requirements for PT PMA:
- Must have a minimum of two shareholders (local or foreign).
- Must appoint a minimum of one director and one commissioner.
- The minimum capital requirement for PMA is IDR 10 billion for businesses in most sectors, but this can vary based on the industry.
d. Cooperative
- A cooperative is a business entity created by a group of individuals who voluntarily come together to fulfill common economic needs.
- It is regulated by the Cooperatives Law and often operates in sectors like agriculture, credit, or retail.
3. Company Registration and Compliance
To establish a company in Indonesia, several legal steps must be followed:
- Incorporation: The company must be registered with the Ministry of Law and Human Rights and obtain a legal entity status.
- Articles of Association (Anggaran Dasar): The company must draft and submit the Articles of Association, which outline the company's purpose, structure, and governance.
- Taxpayer Identification Number (NPWP): The company must apply for a tax number with the Tax Office.
- Business License: Depending on the nature of the business, various business licenses may be required. This may include a business identification number (NIB) from the Online Single Submission (OSS) system.
4. Foreign Investment
Indonesia encourages foreign direct investment (FDI) but regulates it through the Foreign Investment Law and Negative Investment List. The PT PMA (Foreign Investment Company) is the legal structure typically used for foreign investors.
Key Regulations for Foreign Investment:
- Foreign Ownership Restrictions: Certain sectors may limit foreign ownership to a specific percentage, with restrictions varying based on the industry. Some sectors allow 100% foreign ownership, while others may limit it to 49% or 66%.
- Investment Coordinating Board (BKPM): The BKPM is the main regulatory body responsible for foreign investment and provides approvals for foreign investment applications.
5. Taxation in Indonesia
Indonesia has a complex tax system that involves both direct and indirect taxes. The primary tax authority is the Directorate General of Taxes.
a. Corporate Income Tax
- The corporate income tax rate is generally 22% for both domestic and foreign companies. For small and medium-sized businesses (SMEs) with annual revenue below IDR 4.8 billion, the tax rate may be lower.
b. Value Added Tax (VAT)
- The VAT rate in Indonesia is 10%, applied on most goods and services, with some exemptions (e.g., basic food items and healthcare).
c. Withholding Tax
- Withholding tax applies to payments of dividends, interest, royalties, and income from services rendered. The general withholding tax rate is 20%, but it can be reduced under double taxation agreements (DTAs) signed between Indonesia and other countries.
d. Personal Income Tax
- Personal income tax is levied on the income of individuals, with rates ranging from 5% to 30% depending on the income level.
e. Other Taxes
- Land and Building Tax (PBB) is applicable for land and property.
- Stamp Duty is applied on certain transactions, like contracts and agreements.
6. Labor Laws
Indonesia has several labor laws that protect workers’ rights and regulate employment conditions. The Labor Law is governed by the Manpower Law (Law No. 13/2003) and has been amended by Law No. 11/2020 in the Omnibus Law.
Key aspects of Indonesian labor law include:
- Employment Contracts: The law distinguishes between permanent employees (indefinite-term contracts) and temporary employees (fixed-term contracts).
- Working Hours: The standard working hours are 40 hours per week, with overtime pay required for any additional hours worked.
- Minimum Wage: The minimum wage is set annually by the provincial or city government and varies by region.
- Severance Pay: Employees who are terminated after a certain period of employment are entitled to severance pay, which is calculated based on the length of service and the reason for termination.
- Social Security: Employers are required to contribute to Indonesia's Social Security System (BPJS), which covers health insurance, employment insurance, and pension plans for employees.
7. Intellectual Property
Indonesia offers protection for intellectual property (IP) through laws governing patents, trademarks, copyrights, and industrial designs.
a. Patents
- The Patent Law protects inventions for a period of 20 years, provided they are novel, inventive, and industrially applicable.
b. Trademarks
- Trademarks are protected under the Trademark Law, and registration is handled by the Directorate General of Intellectual Property. Registered trademarks are protected for 10 years, with the possibility of renewal.
c. Copyrights
- The Copyright Law protects literary, artistic, and musical works. It grants the creator of the work exclusive rights for 50 years from the date of creation.
d. Industrial Designs
- The protection of industrial designs is governed by the Industrial Design Law. Designs are registered with the Directorate General of Intellectual Property for protection.
8. Dispute Resolution and Arbitration
Indonesia has a well-established legal system for resolving disputes, with both judicial and alternative dispute resolution (ADR) mechanisms.
a. Litigation
- Commercial disputes in Indonesia are generally resolved through civil courts, with proceedings governed by the Civil Procedure Code.
b. Arbitration
- Indonesia is a member of the International Chamber of Commerce (ICC) and the United Nations Convention on International Settlement Agreements. The Indonesian National Board of Arbitration (BANI) is the primary organization for arbitration in Indonesia.
c. Mediation
- Mediation is an alternative dispute resolution method supported by the Supreme Court and often used before litigation.
Conclusion
Indonesia offers a robust legal framework for businesses, with clear rules for company formation, taxation, foreign investment, intellectual property, and labor relations. Foreign investors can enter the market by establishing a PT PMA, subject to certain ownership restrictions. However, businesses must ensure compliance with a wide range of legal requirements and regulations, and it is advisable to seek legal counsel when starting or operating a business in Indonesia. The country's legal system and business environment continue to evolve, presenting opportunities and challenges for both domestic and international companies.
RELATED Blog
0 comments