Investment Incentives

Indonesia seeks to facilitate investment through fiscal incentives, non-fiscal incentives, and other benefits.  Fiscal incentives are in the form of tax holidays, tax allowances, and exemptions of import duties for capital goods and raw materials for investment.  Presidential Regulation No. 10/2021 on investment establishes 245 priority fields that are eligible for tax and other incentives, such as facilitated licensing and land use, to encourage investment in those sectors. The Omnibus Law on Job Creation offers a variety of tax incentives, including eliminating income tax on dividends earned in Indonesia and on certain income, including dividends earned abroad, as long as they are invested in Indonesia.  The Law also exempts dozens of goods and services from value added tax (VAT).  The provisions in the Omnibus Law on Job Creation complement several regulations in Law No. 2/2020, which was issued earlier in 2020.  Law No. 2 cut the corporate income tax rate, lowering it to 22 percent for 2020 and 2021, and to 20 percent for 2022.  In addition, a company can claim a further 3 percent reduction if it is publicly listed, with a total number of shares traded on an Indonesian stock exchange of at least 40 percent. Investment incentives are outlined at https://www.investindonesia.go.id/cn/invest-with-us/faq.

To cope with soaring demand and to improve domestic production of medical devices and supplies amid the COVID-19 pandemic, the government through BKPM Regulation No. 86/2020 streamlined licensing requirements for manufacturers of pharmaceuticals and medical devices.  The Ministry of Health also accelerated product registration and certification for medical devices and household health supplies.  Moreover, the Ministry of Trade issued Regulation 28/2020 to relax import requirements for certain medical-related products.

Foreign Trade Zones/Free Trade/ Trade Facilitation

Indonesia offers numerous incentives to foreign and domestic companies that operate in special economic and trade zones throughout Indonesia.  The largest zone is the free trade zone (FTZ) island of Batam, Bintan, and Karimun, located just south of Singapore.  The Omnibus Law on Job Creation and its implementing regulation, Government Regulation No. 41/2021 strengthened and unified the three islands (Batam, Bintan, and Karimun) into one integrated Free Trade Zone for the next 25 years to create an international logistics hub to support the industrial, trade, maritime, and tourism sectors.  Investors in FTZs are exempted from import duty, income tax, VAT, and sales tax on imported capital goods, equipment, and raw materials.  Fees are assessed on the portion of production destined for the domestic market which is “exported” to Indonesia, in which case fees are owed only on that portion.  Foreign companies are allowed up to 100 percent ownership of companies in FTZs.  Companies operating in FTZs may lend machinery and equipment to subcontractors located outside the zone for two years.

Indonesia also has numerous Special Economic Zones (SEZs), regulated under Law No. 39/2009, Government Regulation No. 1/2020 on SEZ management, and Government Regulation No. 12/2020 on SEZ facilities.  These benefits include reduction of corporate income taxes (depending on the size of the investment), luxury tax, customs duty and excise, and expedited or simplified administrative processes for import/export, expatriate employment, immigration, and licensing.  Under the Omnibus Law on Job Creation, foreign technology start-up investments located within SEZs are exempt from the minimum investment threshold of IDR 10 billion (USD 700,000), excluding land and buildings.  There are minimal export processing requirements within the SEZs.  New business activities in the education and health sectors (for which licensing services remain under the central government’s authority) will be allocated by zones and determined by the administrator of the SEZ.  The Law lifted limits of imported goods into SEZs but maintained restrictions on specific banned goods in accompanying laws and regulations.  It also introduced new tax facilities and incentives for taxpayers in SEZs.  As of February 2021, Indonesia has identified fifteen SEZs in manufacturing and tourism centers that are operational or under construction, and two more have been approved.

Indonesian law also provides for several other types of zones that enjoy special tax and administrative benefits.  Among these are Industrial Zones/Industrial Estates (Kawasan  Industri), bonded stockpiling areas (Tempat Penimbunan Berikat), and Integrated Economic Development Zones (Kawasan Pengembangan Ekonomi Terpadu).  Indonesia is home to 115 industrial estates that host thousands of industrial and manufacturing companies.  Ministry of Finance Regulation No. 105/2016 provides several different tax and customs accommodations available to companies operating out of an industrial estate, including corporate income tax reductions, tax allowances, VAT exemptions, and import duty exemptions depending on the type of industrial estate.  Bonded stockpile areas include bonded warehouses, bonded zones, bonded exhibition spaces, duty free shops, bonded auction places, bonded recycling areas, and bonded logistics centers.  Companies operating in these areas enjoy concessions in the form of exemption from certain import taxes, luxury goods taxes, and value-added taxes, based on a variety of criteria for each type of location.  Most recently, bonded logistics centers (BLCs) were introduced to allow for larger stockpiles, longer temporary storage (up to three years), and a greater number of activities in a single area.  The Ministry of Finance issued Regulation No. 28/2018, providing additional guidance on the types of BLCs and shortening approval for BLC applications.  By October 2019, Indonesia had designated 106 BLCs in 159 locations, with plans to approve more in eastern Indonesia.  In 2018, the Ministry of Finance and the Directorate General for Customs and Excise (DGCE) issued regulations (MOF Regulation No. 131/2018 and DGCE Regulation No. 19/2018) to streamline the licensing process for bonded zones.  Together the two regulations are intended to reduce processing times and the number of licenses required to open a bonded zone.

Shipments from FTZs and SEZs to other places in the Indonesia customs area are treated similarly to exports and are subject to taxes and duties.  Under MOF Regulation No. 120/2013, bonded zones have a domestic sales quota of 50 percent of the initial realization amount on export, sales to other bonded zones, sales to free trade zones, and sales to other economic areas (unless otherwise authorized by the Indonesian government).  Sales to other special economic regions are only allowed for further processing to become capital goods, and to companies with a license from the economic area organizer for the goods relevant to their business.

Performance and Data Localization Requirements

Indonesia expects foreign investors to contribute to the training and development of Indonesian nationals, allowing the transfer of skills and technology required for their effective participation in the foreign companies’ management.  Generally, a company can hire foreigners only for positions that the government has deemed open to non-Indonesians.  Employers must have training programs aimed at replacing foreign workers with Indonesians.  If a direct investment enterprise wants to employ foreigners, the enterprise should submit an Expatriate Placement Plan (RPTKA) to the Ministry of Manpower.

Indonesia recently made significant changes to its foreign worker regulations.  Government Regulation No. 34/2021, an implementing regulation of the Omnibus Law on Job Creation, on the utilization of foreign workers stipulates specific documents required for the RPTKA and introduces different types of RPTKA for temporary works (e.g. film production, audits, quality control, inspection and installation of machinery), employment for work under six months, employment that does not require payment to the Foreign Worker Utilization Compensation Fund (DKPTKA), and employment in SEZs.  Under the regulation, an RPTKA is not required for commissioners or executives.  Foreigners working in technology-based startups are also exempted from the RPTKA requirement in the first three months.  Expatriates can use an endorsed RPTKA to apply with the immigration office in their place of domicile for a Limited Stay Visa or Semi-Permanent Residence Visa (VITAS/VBS).  Expatriates receive a Limited Stay Permit (KITAS) and a blue book, valid for up to two years and renewable for up to two extensions without leaving the country.  While a technical recommendation from a relevant ministry is no longer required, ministries may still establish technical competencies or qualifications for certain jobs, or prohibit the use of foreign workers for specific positions, by informing and obtaining approval from the Ministry of Manpower.  Foreign workers who plan to work longer than six months in Indonesia must apply for employee social security and/or insurance.

Government Regulation No. 34/2021 outlines the types of businesses that can employ foreign workers, sets requirements to obtain health insurance for expatriate employees, requires companies to appoint local “companion” employees for the transfer of technology and skill development, and requires employers to facilitate Indonesian language training for foreign workers.  Any expatriate who holds a work and residence permit must contribute USD 1,200 per year to the DKPTKA for local manpower training at regional manpower offices.  Ministry of Manpower Decree No. 228/2019 details the number of jobs open for foreign workers across 18 sectors, ranging from construction, transportation, education, telecommunications, and professionals.  Foreign workers must obtain approval from the Manpower Minister or designated officials to apply for positions not listed in the decree.  Some U.S. firms report difficulty in renewing KITASs for their foreign executives.

Indonesia notified the WTO of its compliance with Trade-Related Investment Measures (TRIMS) on August 26, 1998.  The 2007 Investment Law states that Indonesia shall provide the same treatment to both domestic and foreign investors originating from any country. Nevertheless, the government pursues policies to promote local manufacturing that could be inconsistent with TRIMS requirements, such as linking import approvals to investment pledges or requiring local content targets in some sectors.

In 2019, Indonesia issued Government Regulation No. 71/2019 to replace Regulation No. 82/2012, further detailed in Ministry of Communication and Information Technology (MCIT) Regulation No. 5/2020, which classifies electronic system operators (ESO) into two categories:  public and private.  Public ESOs are either a state institution or an institution assigned by a state institution but not a financial sector regulator or supervisory authority.  Private ESOs are individuals, businesses and communities that operate electronic systems.  Public ESOs must manage, process, and store their data in Indonesia, unless the storage technology is not available locally.  Private ESOs have the option to choose where they will manage, process, and store their data.  However, if private ESOs decide to process data outside of Indonesia, they must provide access to their systems and data for government supervision and law enforcement purposes.  For private financial sector ESOs, Government Regulation 71/2019 provides that such firms are “further regulated” by Indonesia’s financial sector supervisory authorities regarding the private sector’s ESO systems, data processing, and data storage.

Additionally, to implement Government Regulation 71/2019, the Financial Services Authority (OJK) issued Regulation No. 13/2020, an amendment to Regulation No. 38/2016, which allows banks to operate their electronic data processing systems and disaster recovery centers outside of Indonesia, provided that the system receives approval from OJK.  Certain core banking data must also be stored within Indonesia.  OJK will evaluate whether offshore data arrangements could diminish its supervisory efficiency or negatively affect the bank’s performance, and if the data center complies with Indonesia’s laws and regulations.  The regulation became effective March 31, 2020.