Considerations when investing in Indonesia from Singapore



Things in Indonesia are booming.  When I talk with those unfamiliar with Indonesia, they are often amazed.  I maintain that Indonesia is one of the world’s best kept secrets.  So many people do not even know that Bali is a part of Indonesia.

By some measures, Indonesia is the 16th largest economy in the world.  It gives credibility to ASEAN given its size.  As a young democratic country, Indonesia has maintained political stability since emerging from decades of autocratic rule.  Demand for infrastructure in Indonesia is fueled by both economic growth and urbanisation, while petroleum and minerals continue to make up the majority of exports. To continue reforming its investment climate, the government has rolled out measures to ease red-tape, open up sectors for investment and improve public services.

Often Singapore is used as a base for investing in Indonesia.  This is understandably a sensitive topic.  In July 2017, the Indonesian President was quoted as saying that he aims to persuade companies that have significant operations in Indonesia, but are listed on overseas stock markets to sell shares on Indonesia’s bourse.  President Widodo claimed he has a list of such firms, mostly operating in mining and plantation sectors, and said he would seek to persuade them, without force, to become a public company in Indonesia.

There are many good reasons for Indonesian companies to list in Singapore. For instance, Indonesia-based companies such as Golden Agri-Resources Ltd (SGX: E5H) and Wilmar International Limited (SGX: F34) needed access to a more international investor base to help fund their operations. Given the less mature stock market in Indonesia, a listing in Singapore can often make sense.

IE Singapore writes on its website that the demand for infrastructure creates opportunities for Singapore companies in the maritime, utilities, manufacturing and industrial park development sectors:
• Maritime –
With 17,000 islands, Indonesia is an archipelago nation and President Jokowi envisions it to be a “Global Maritime Axis”. Sea port infrastructure is hence crucial to reduce the high logistics costs Indonesia currently faces. Singapore companies should consider investing in key nodal ports and its supporting infrastructure, through partnerships with state-owned enterprise, Pelindo I-IV or other established Indonesian companies.
• Utilities –
The new administration is committed to improve on the provision of utilities for the country. They target to increase the country’s electricity capacity by 35,000 megawatts and provide the entire population with access to clean water by 2019. For the power sector, Singapore companies can become Independent Power Producers can look beyond Java for additional opportunities. For large water projects, Singapore companies should cultivate relationships with the respective government stakeholders as areas of jurisdictions differ for each project. Besides government or government related projects, Singapore companies should also consider infrastructure projects in the private space, for example, dedicated power plants or industrial water treatment plants servicing industrial parks.
• Manufacturing and Industrial Parks –
Indonesia’s new administration has emphasised the need to revitalise its manufacturing sector by developing integrated industrial estates. Indonesia aims to revive its status as a globally renowned cost-competitive manufacturing hub. Other than competitive production costs, Singapore manufacturers will have access to the country’s population of 250 million when they set up production facilities in Indonesia. Singapore manufacturers that set up factories in industrial parks also enjoy common facilities such as utilities and security. Industrial park developers should explore opportunities out of West Java due to its competitive costs.  

• Although not mentioned by IE Singapore, another growth area in Indonesia is real estate development.  Despite various state incentives, the Indonesian property development sector is still unable to keep pace with the growing population and demand.  Overall, investment opportunities in the property development sector are promising given the backlog and the government’s determination to boost the rate of housing development.


Of course, there are implications to an Indonesian company being listed in Singapore.  Singapore investors either set up a foreign-owned limited-liability Indonesian company (“PT. PMA”) or acquire an existing Indonesian company.  

For investors tax resident in Indonesia considering offering shares in their PT to foreigners, consideration should be given to the steps given below.  From a tax point of view, here are some taxes to be aware of –

·         Land and Building Transfers
o   A 2.5% tax on sales value is levied on companies and individuals for the sale/transfer of land rights and/or buildings. For transfers of simple houses and apartments by tax payers engaged in property development business, the tax rate is 1%.
o   The 2.5% tax on sales value is final.
o   The transfer tax deposit slip (Surat Setoran Pajak) must be presented to the National Land Agency office together with the request for land title transfer.

·         Asset Revaluations
o   The net gains from asset revaluations (approved by the tax authority) are subject to a 10% final tax. An additional final income tax of 15% is imposed if the revalued assets are sold or transferred within a certain period after revaluation (for example, for land/building assets, the period is less than ten years). This additional tax does not apply to assets transferred to the government or transferred in the course of a tax-free business merger, however such mergers must be for business purposes and not tax driven.

·         Shares
o   Foreign companies and individuals are subject to a 20% withholding tax on dividends from property companies (subject to tax treaty provisions, where relevant).
o   A final tax of 0.1% applies to income from the sale of shares at the Indonesian Stock Exchange (collected "automatically" by the Stock Exchange). The rate is 0.6% if the seller is a founding shareholder.
o   A 5% tax is applicable to the sale of shares by a foreign shareholder, unless it is exempted under a tax treaty.

·         Tax on Dividends
o   If there’s a DTA, such as the Singapore – Indonesia DTA, dividends paid by a resident company of a Contracting State to a resident of the other Contracting State may be taxed in that other State.  However it may be subjected to tax in the Contracting State of which the company paying the dividends is a resident. But where the recipient of the dividend is the beneficial owner and resident of the other contracting state the tax so charged shall not exceed
§  10% of the gross amount of the dividends if the recipient is a company which owns directly at least 25% of the capital of the company paying the dividends;
§  15% of the gross amount of the dividends in all other cases.
o   This provision shall not apply if the recipient has a PE in the contracting state of which the company paying the dividends is a resident and such dividend received is effectively connected to that PE. Such income from dividends connected to a PE will be treated as a Business Profit and subjected to tax treatment accordingly.

·         Tax on Interest in the case of the Singapore – Indonesia DTA
o   Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, such interest may also be taxed in the Contracting State in which it arises; if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10% of the gross amount. The Government of a Contracting State shall be exempt from tax in the other Contracting State in respect of interest derived from that other State. Interest arising in one contracting state shall be taxable only in the other contracting state in the following circumstances:
§  If the interest is paid in respect of a bond, debenture or other similar obligation of the government, political subdivision, local authority of contracting country, or
§  If the interest is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Monetary Authority of Singapore, or the “Bank Indonesia” (The Central Bank of Indonesia), or any other lending institution, as may be specified and agreed in letters exchanged between the competent authorities of the Contracting States.
o   The above provisions shall not be applicable if the beneficial owner of the interest, has a PE or fixed base in the contracting state in which the payer is resident and the interest paid is effectively connected with such PE or fixed base. If, due to the special relationship existing between the payer and the recipient, the interest paid is in excess of the amount that would have otherwise been paid, then the provision of the treaty shall apply only to that amount and any excess amount of interest paid will be taxable according to the laws of each Contracting State.

·         Tax on Royalties in the case of the Singapore – Indonesia DTA
o   Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. Royalties shall be deemed to arise in a Contracting State when the payer is a resident of that State. However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 15% of the gross amount of the royalties. Royalties encompass payments of any kind received as a consideration for the use of, or the right to use, any copyright patent, trademark, design or model, plan etc. If, due to the special relationship existing between the payer and the recipient, the royalties paid is in excess of the amount that would have otherwise been paid, then the provision of the treaty shall apply only to that amount and any excess amount of royalty will be taxable according to the laws of each Contracting State.

·         Treatment of Business Profits in the case of the Singapore – Indonesia DTA
o   The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a PE situated therein. But only that portion of the profit that can be effectively attributable to the PE can be taxed in the other Contracting State. For the purpose of determining the profits of the PE it shall be allowed all expenses and deductions that could be reasonably attributable to the PE and deductible if the PE were an independent enterprise and profits of the PE shall be determined as if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE. A PE’s mere purchase of goods or merchandise for the enterprise shall not render profits attributable to that PE. Profit attribution to the PE must be made by the same method every year unless there is a valid reason for the contrary. Where information available to the competent authority is inadequate the provisions of the agreement shall not impede the laws of the contracting state or the discretion of the competent authority.

·         Treatment of Income from Property in the case of the Singapore – Indonesia DTA
o   Income derived by a resident of a Contracting State from immovable property situated in the other Contracting State may be taxed in that other State. Income from immovable property of an enterprise and income from immovable property used for the performance of independent personal services shall also be covered by this provision. Income from direct use, letting or use in any other form of immovable property shall be covered by the agreement. The term “immovable property” shall comprise of properties as defined by the law of the contracting state in which the property is located. It shall include accessories, equipment, livestock, rights and usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources. However, ships and aircraft shall not be regarded as immovable property.

·         Treatment of Income from Shipping & Air Transport in the case of the Singapore – Indonesia DTA
o   Income derived by an enterprise of a Contracting State from the operation of aircraft in international traffic shall be taxable only in that Contracting State. In which case, where such income is subjected to tax in the other Contracting State, the tax imposed in that other Contracting State shall be reduced by an amount equal to 50%. The provisions applies to the share of the income from the operation of ships or aircraft derived by an enterprise of a Contracting State through participation in a pool, a joint business or an international operating agency.

·         Treatment of Associated Enterprises in the case of the Singapore – Indonesia DTA
o   If an enterprise or persons involved in an enterprise of a Contracting State participate directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, the enterprises involved are said to be associated enterprises. The terms and conditions of operations and transactions between the associated enterprises will differ from those made between independent enterprises, thus affecting the profitability and income of the enterprises. In the case of associate enterprises the DTA provides that the contracting states may deem a taxable income that would have otherwise accrued if the parties were independent and tax the enterprises accordingly.

·         Treatment of Individual Income in the case of the Singapore – Indonesia DTA
o   Independent Personal service
§  Income derived by a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that State unless he is present in the other Contracting State for a period or periods exceeding in the aggregate 90 days in any twelve-month period. Only that portion of the income attributable to his stay and activities performed in the other state may be taxed. The term “professional services” includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.
o   Dependent Personal Service
§  Salaries, wages and other similar remuneration derived by a resident of a State for employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration may be taxed in that other State. However even if the employment is exercised in the other Contracting State the recipient shall only be subjected to tax in the first mentioned state in the following circumstances:
·         the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned; and
·         the remuneration is paid by, or on behalf of, an employer who is a resident of the first-mentioned State; and
·         the remuneration is not borne by a PE which the employer has in the other State.
o   Director’s Fees
§  Directors’ fees and similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.
o   Entertainers, Artists & Athletes
§  Income derived by a resident of a State as an entertainer, such as a theatre, motion picture, radio or television artiste, a musician, or an athlete, from his personal activities as such exercised in the other State, may be taxed in that other State. However, such incomes shall be exempt from tax if they are accrued for such activities exercised in one of the contracting state under some mutually agreed exchange programs or substantially supported by public funds of the Government, a political subdivision, a local authority or a statutory body of the other Contracting State.
o   Pensions
§  Pensions and other similar remuneration arising in a Contracting State and paid to a resident of the other Contracting State in consideration of past employment may be taxed in the first-mentioned State.
o   Persons on Government Service
§  Salaries, wages and other similar remuneration, other than a pension, paid by a Contracting State or a political subdivision or a local authority or a statutory body thereof to an individual in respect of services rendered to that State, subdivision, authority or body would be taxed by that State. However, such remunerations will be taxable only in the other contracting state if the services are rendered in that state and the resident recipient is a national of the state and his residency is not solely for the purpose of rendering the service.
o   Students and Trainees
§  Students and trainees who were a resident of a contracting state immediately before visiting the other contracting state, where he receives training or education and is temporarily present in the other contracting state solely for the purpose of education or training, shall be exempt from tax in the other state. Taxation in the other state shall be exempted on all remittances and grants received from abroad and any remuneration not exceeding US$2,200 per annum in respect of services in that other State provided the services are performed in connection with his study, research or training or are necessary for the purposes of his maintenance.




Finally, here are the steps to foreign investment in Indonesia:

(a)    Initial stage: a foreign investor is expected to submit their investment proposal with business description to the Indonesia Investment Coordinating Board (“BKPM”).  The proposal will be screened by BKPM where it will be classified under the appropriate business field as stipulated in KBLI (Indonesian Classification of Business Field) and evaluated to determine whether it is closed or open with stipulations for foreign investment. If the business sector is open or open with stipulations, the foreign investor will be able to apply for an Investment Principal License, to begin the investment process, subject to the stipulations stated in the DNI (Indonesia Negative Investment List).

(b)    Preparation stage: Once the investment proposal is evaluated and deemed to be allowed under the DNI, the foreign investor will be able to apply for an Investment Principal License from BKPM, and start the process of setting up a legal business entity in Indonesia. Once the Investment Principal License is approved by BKPM, the foreign investor will be able to set up its business entity by engaging any public notary office to draft the deed of establishment of PT. PMA. The deed of establishment will need to be ratified by Indonesian Ministry of Law and Human Rights to be legalized and officially posted in the State gazette. In parallel to establishing PT.PMA’s deed of establishment, the foreign investor will also be able to apply for the necessary provincial government licenses, which mainly refer to the regional regulation and certification for operating business entity.  PT. PMA will also need to apply for a tax registration number, from the Directorate of Tax, and an immigration license – to enable it to employ foreign workers – from the Directorate of Immigration.

(c)     Setting-up stage: In the setting-up stage, the foreign investor will be able to start (i) setting up its business infrastructure and (ii) processing all the required licenses from Technical Ministries.  With the establishment of BKPM One-Stop Services Centre (“OSS-C”), high officials from 22 Technical Ministries and government agencies will be positioned in the OSS-C to attend to all investment inquiries and also application of the technical licenses pertaining to their business sector. Investors will be able to apply for the technical licenses with the OSS-C to simplify and expedite the setting-up process, and start the business operations as soon as possible.

(d)    Final stage: Once the company is ready for the commercial stage, PT. PMA will be able to apply for its business license from BKPM to start its business operations.

If a foreign investor decides to acquire a stake in an existing Indonesian company, the above framework and considerations (in relation to foreign-ownership restriction) still applies.  According to Indonesian Law, any company with any percentage of foreign shareholding is considered a PT. PMA.  However, the investor may be able to save significant time in the getting the required licenses from Technical Ministries during the Setting-Up Stage (provided that those licenses do not have any condition which restrict the change of ownership in the Indonesian company from local-owned to foreign-owned) by acquiring an existing Indonesian company.

A Singapore investor should also note that Indonesia adopts a civil law system which was inherited from the Dutch.  Although, Indonesia has enacted law reforms in the recent years to make it easier for foreign investors to make an investment in Indonesia, a Singapore investor may be perplexed that certain corporate actions that can be easily done in Singapore, such as acquisition of shares or transfer of shares in a private company, would require significantly different formality or significantly more time to execute in Indonesia.

The following are examples of peculiar features of Indonesian law for foreign investors:
(
       a)    Law no. 24 year 2009, Article 31 paragraph (1) requires the transaction documents to be in Bahasa Indonesia if a transaction involves Indonesian individuals or business entities. Parties may execute a legally binding agreement using bi-lingual documents, or parties may execute the agreement in English and proceed with the translation of the agreement shortly thereafter.
(   
      b)    If a corporate action, such as merger and acquisition, results in change of control of a company, the corporate action must be advertised in at least one Indonesian national newspaper and the company must announce the merger in writing to its employees. The corporate action may not close within 30 days of the newspaper advertisement.
(
       c)     If such corporate action takes place and the employees of the company being acquired are not willing to continue with their employment, such employees shall be entitled to severance pay.
(
       d)    There is no concept of “trusts” in Indonesia.
(   
       e)    Another peculiar feature of the Indonesian legal system is the role of a public notary. An Indonesian public notary is the only public officer who has the authority to issue or make authentic deeds concerning all kind of acts, agreements and arrangements as provided by the law or wished by the parties concerned.
(   
      f)      A notarial deed is the most important legal document in Indonesia because it has absolute authenticity by law, and is the best guarantee for foreign investors to safeguard their business and financial interests.


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