New investment rules in Indonesia

published on 12 March 2021 | reading time approx. 2 minutes

On 2 February 2021, Indonesia’s President Joko Widodo has enacted Presidential Regulation No. 10 of 2021 concerning Investment Business Fields (“Regulation No. 10/2021”), which entered into effect 30 days later on 4 March 2021. These implementing regulations refer to the Job Creation Law, which is commonly known as "Omnibus Law" entered into effect on 2 November 2020 as Law No. 11 of 2020, issued in the State Gazette of the Republic of Indonesia No. 245 of 2020. This legal instrument aims at attracting investment and stimulating the economy by i.a. simplifying the licensing process and harmonizing various business related laws and regulations that are deemed to be obstructive towards foreign investments.

  
   
The Omnibus Law supersedes earlier provisions on the same regulated subject matter. Regulation No. 10/2021 refers to domestic and foreign investment and has three annexes which include (i) prioritized business fields with fiscal and non-fiscal facilities, (ii) business fields which are allocated for or open in cooperation with cooperative, and/or micro, small and medium business (UMKM) and (iii) business fields which are open to investment with certain requirements.
 
Differently from the previous approach of listing businesses that are closed to foreign investments, Regulation No. 10/2021 provides a positive list approach, stipulating that all business activities are now open for foreign investment unless (i) regulated otherwise or (ii) they may only be carried out by the Indonesian Government. 
   

Closed sectors

Business activities/sectors that are closed for investment include, among others, narcotics cultivation, all forms of gambling and/or casino activities or the chemical weapons manufacturing industry. Business fields that can only be carried out by the Government include activities which are in essence public services or in relation to strategic defense and safety, and cannot be carried out in cooperation with other parties. It should further be noted that large-scale businesses including foreign investment companies are not allowed to participate in certain business lines allocated for cooperatives and UMKM. 
   

Prioritized business fields

Business fields which are open for investment are listed in the aforementioned three annexes. Annex I lists prioritized business fields with the following criteria:
 
a) national strategic programs/projects;
b) capital intensive;
c) labor intensive;
d) high technology;
e) pioneer industry;
f) export oriented; and/or
g) research, development and innovation oriented activities.
 
The prioritized business fields may receive fiscal and non-fiscal incentives from the Government. Fiscal incentives could be in form of tax allowance, tax holiday, investment allowance and exemption of custom duties related to investment activities. Non-fiscal incentives may include the ease of licensing process, supporting infrastructure, immigration service, manpower assistance and other benefits under the prevailing laws and regulations.
 

Open sectors with requirements

Business fields which are open with certain requirements are divided into investment (i) only for domestic investors, (ii) with limitation of foreign capital ownership and (iii) with special license.

Further, several fields that are open for large scale business must be done jointly with cooperatives or UMKM, such as the industry of two and three wheeled vehicles, consultation service in electricity installation, building construction or certain rental services. These business fields are listed in Annex II of Regulation No. 10/2021. 
 

Distribution activities

Interesting changes in Regulation No. 10/2021 appear in the fields of distribution services which previously were only permitted to foreign investment to a narrow extent. Now, wholesale distribution without affiliation to production is fully open for foreign investment (previously it was open for up to 100 percent foreign investment if affiliated with the manufacturer and only open up to 67 percent foreign investment if not affiliated with the manufacturer), except for distribution/wholesale and export of fisheries products which requires local cooperation.

 
Also commission agency service is now fully open for foreign investment. This business field was previously allocated only to domestic investors. Retail service (i.e. sales to end customers, which was previously vastly restricted to foreigners) has now been opened more for foreign investment, except for (i) pharmaceutical goods and drugs for consumption of humans in and out of pharmacy, (ii) minimarkets, (iii) retail sales outside department stores, (iv) footwear, (v) non-alcoholic beverages, (vi) rice, (vii) bread, pastry, cake and its kind, (viii) coffee, sugar and brown sugar, (ix) tofu, tempe, and its derivatives, (x) meat and processed fish, (xi) other types of food which are allocated for UMKM, and (xii) retail sales of alcoholic beverages which require a distribution network and special location. 
  

Capital requirements

Regulation No. 10/2021 provides that limitations of foreign capital ownership will not affect existing business which already obtained investment approval/license before the Regulation had been enacted, unless the new provisions are more favorable to investors or if the investor is privileged under a bilateral agreement between the Government and the investor’s state government. It also reiterates that in general foreign investors may only participate in large scale business with investment value of more than IDR 10 billion, excluding land and building. This requirement was previously only governed in regulations of the Capital Investment Coordinating Board (BKPM); the inclusion on a Presidential Regulation level shall clarify this capitalization requirement to foreign investors and grant certain protection to UMKM. Exemptions may apply for investments made in special economic zones. Further, as under previous regulations, foreign investment must be done in form of limited liability company under Indonesian laws and domiciled on Indonesian territory, unless determined otherwise by prevailing laws.
  
Regulation No. 10/2021 effectively revokes Presidential Regulation No. 76 of 2007 on Criteria and Requirements of Preparation of Business Fields that are Closed for Investment and Business Fields that are Conditionally Open for Investment, as well as Presidential Regulation No. 44 of 2016 with the List of Business Fields that are Closed to Investment and Business Fields that are Conditionally Open for Investment.