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SETTING UP BRANCH OFFICE

Category: Business Establishment & Licenses
Written by Samuel Sri Kurnia on 28/04/2022
The author’s views are entirely their own and may not always reflect the views of Putranto Alliance.

Expanding the business overseas is important for a company to seek more profit. Indonesia allows a foreign company to seek revenues in the country through the establishment of a branch company. This direct extension of the parent company could gain more attraction from the public, thus making it more sustainable. But a branch company also demands specific documents and requires more time to process. Learning the benefits and understanding the limitations gives foreign companies more confidence in establishing a branch office legally in Indonesia.

With this service, we can help you with the documents needed to set up your branch office in Indonesia as an extension for your company.

What is a Branch Office?

A branch office (BO for short) is one of 3 options for expanding a foreign company business overseas. Different from a subsidiary entity or representative office, BO works the same way as the parent company. A BO is not an independent legal entity but rather depends completely upon the parent company. As a direct extension of its parent company, BO is commonly used for conducting commercial and non-commercial activities, such as market research, purchasing and keeping a number of goods, employing workers, buying or selling goods and services, or engaging in manufacturing, processing, and construction operations.

Indonesia opened its first access to foreign companies in the early 21st century. Mr. Abdurrahman Wahid, the former 4th President of Indonesia, proposed a decree in which foreign companies could open their representative offices all over the province’s capital city. Presidential Decree No. 90 of 2000 records this decree, and further linked to investment (Act No. 25/2007 regarding Investment).

Foreign investment in Indonesia is an investing activity arranged by a foreign investor for running a business inside Indonesia. The legal entity which is a foreign person, company, or government agency that can conduct business in Indonesia (gain revenue streams and profit) is the Limited Liability Companies (Perseroan Terbatas Penanaman Modal Asing / PT PMA). The establishment of a PT PMA is regulated again by Act No. 40/2007 regarding Limited Liability Companies (Company Law). These companies can be either fully or partially foreign-owned.

As stated above, there are 2 other alternatives to creating a company presence overseas. Aside from BO, there is Subsidiary Entity and Representative Office as well. The difference between the three lies within their scope of work. A subsidiary entity works as a separate legal entity from its parent company, while a representative office is a limited yet simplest part of the parent company for the purpose of researching the market.

Branch Office

A BO is an extension of an existing legal entity a.k.a. its parent company, in a foreign country. The establishment of BO was designed to generate profit and operate production facilities in a country. However, a BO shares the similarity as a legal entity with its parent company and does not offer the benefits of parental asset liability protection. BO often are subject to a 20% withholding tax.

Subsidiary Entity

Different from BO, a subsidiary entity (SE) works as a separate legal entity formed in a foreign country. The parent also owns 50% or more of the share within the subsidiary entity itself. In case the ownership is less than 50%, then the parent becomes a minority shareholder and the entity itself is an affiliate of the parent.

SE was established to separate the corporate from its parent. Doing so enables each business to have its own unique identity, as the parent company should not be held liable for the subsidiary liabilities. Hence isolating the risk of exposure to the amount of capital investment the parent has made in the subsidiary.

Another advantage of using an SE is to access the tax laws of the country where it is domiciled. The target country may have tax laws that are advantageous to the planned business activities that may improve overall business profitability.

Representative Office

A representative office (RO) is the simplest but most limited form of business establishment in a country. The local government generally needs to register RO and they can’t generate revenue. However, they usually can have employees in the country.

ROs can be used to evaluate a market before full commercial entry or to support business partners in the jurisdiction. The tax obligations of ROs are typically limited to employee withholding and payroll taxes.

The general usage for RO is to conduct market research studies or testing. It is not possible to gain profit through RO so the actions are usually for negotiating, distributing, or promoting products or services with local companies. It is also not possible to do transactions for delivering products or services as the parent company still need to confirm them.

Branch Office in Indonesia

Regulations Regarding Branch Office in Indonesia

Various sectors in Indonesia can either be fully or partially closed to foreign investment. To find out the sectors which are open to foreign investment a company needs to access the Negative Investment List (Daftar Negatif Investasi), a list compiled by the Indonesia Investment Coordinating Board (BKPM). If a sector is partially closed, then the list states the maximum allowed percentage of foreign ownership. This means the company will need to have a local (Indonesian) partnerships in order to engage in business in that particular sector.

Business Entity in Indonesia

A business entity is an organization created by one or more people to conduct a trade or business, are taxed, and must file a tax return. Some business entities considered for federal tax purposes are not separate from their owners.

Limited Liability Company (Perseroan Terbatas / PT)

A limited liability company, known as PT in Indonesia, is a legal entity that runs a business consisting of shared capital, which is part of the owner of the shares owned. This type of business is allowed to conduct all business activities as mentioned in the business field it got approval for. A PT is most suitable for local investors, and cannot involve any foreign shareholders. However, the company also has a limited amount of work permits for foreigners, which depends on the size of the capital. Each company’s capital consists of shares that can be traded in the market and changes in the company can be made without the need to disband the company.

The scope of activities of a PT is not limited to RO in Indonesia. It is unconfined to perform any business activities in the field as stated in the permit/business license. The company also has a compliance of annual tax report, monthly withholding tax report, and annual tax report.

When you decide to open up a business in Indonesia, the first step is to understand the types of business entities available to choose from. There are 2 types of PT in Indonesia, which are Local PT and PT PMA (Penanaman Modal Asing). PT PMA is the most popular choice for foreign businesses in Indonesia, mainly because of its ideal legal methodology to operate and gain profit in Indonesia. These benefits balance with its limitations, in which establishing a PT PMA needs 700,000 USD with a processing time of around 10 weeks, although it may vary per case.

Business Opportunity in Indonesia

Indonesia is currently undergoing a new project to move the capital city from Jakarta, Java, to East Kalimantan. Mr. Joko Widodo, the 6^th President of Indonesia, initiated the project to solve the concentrated overpopulation problem in Jakarta city. Many stakeholders have welcomed this project to ensure a profitable outcome in the future.

From the issue alone, several sectors would benefit from the development revolving around the new capital. These promising sectors are notably:

Manufacturing

Since the 1970s, manufacturing has become one of the major pillars of Indonesia's economy. Although the industrial sector once lost its momentum after the Asian Crisis in the late 1990s, BKPM still considers manufacturing sector as one of the most popular and promising business opportunities in Indonesia. Moreover, the Indonesian government has stated that they will provide support in terms of the permits, licenses, and even incentive provisions.

Infrastructure

Since President Jokowi led in 2014, he has stated infrastructure development has become one of the things he prioritized the most. In 2018, the Indonesian government is said to spend IDR 404 million on various infrastructure projects, including bridges, roads, airports, and power plants throughout Indonesia.

Physical infrastructures open a huge opportunity for investors to take part in the development. They can help deliver the product or services faster, hence can lead to better Indonesia's economic development acceleration. Contributing to the development of infrastructures serves as a strong reason why this sector becomes an emerging business opportunity in Indonesia.

Travelling Industry

As a nation with more than 17,000 islands across 34 provinces, Indonesia offers many options for traveling experiences. In 2015, there were up to 10 million foreign tourists traveling to Indonesia, and the number keeps growing over the years.

In support of this, the Indonesian government has also issued a visa-free regulation for foreign tourists from 169 countries. This has opened wide opportunities for travel industries to grow. In conjunction with the infrastructure sector, the development of the tourism industry has become a lucrative business area, especially for foreign investors.

E-Commerce Business

With the rapid advance of digitalization in the country, Indonesia's E-Commerce scene is quite exciting to follow. In 2017, sales volumes reached US$2.7 billion, resulting in the country's online market transactions being the highest in Southeast Asia. In 2020, it's projected that the Indonesian E-Commerce market will be rallied close behind China with the estimation of US$1130 billion. Hence e-Commerce has become one of the promising business opportunities in Indonesia. Not to mention that more and more e-Commerce start-ups in Indonesia begin to gain their fortune.

What are the Benefits of Setting Up Branch Office?

Aside from the main full access for business activities, setting up a BO also has other benefits, such as:

Guarantee of the company's survival. Business activities ensure the company's longevity through a capital attraction from the public. Possibility to directly enter contracts to amend or supplement contracts;
Register and issue VAT invoices independently. Independently or dependently keep accounting records;
Possibility to limit stock ownership to a particular group;
Easily trade shares.

Registering for PT PMA could also use these merits:

Utilize foreign employees;
Register owned products;
Obtain a license.

Limitations of Branch Office

In contrast to the benefits stated, having a BO in Indonesia also has its limitations to consider, as follows:

Requires complicated establishment procedure. Several special permits are required, such as Principle License & Business License, Tax Identification Number, Company Registration Certificate, and Company Welfare Report;
Need high establishment cost, around 700,000 USD or 10,000,000,000 IDR;
Requires separate accounting system and tax declaration to report monthly, quarterly, and annual compliance to the government;
Requires clearing all tax obligations during the shutdown.

How to Set Up a Branch Office?

After considering the benefits and limitations above, a company can decide whether to establish a foreign company in Indonesia or not. To open a BO, one needs to turn to the BKPM, which is the investment service agency of the Indonesian government and deals with foreign investment.

Foreign companies do not necessarily need to establish a PT PMA from scratch. They can also decide to acquire an existing PT PMA or an existing PT. Regarding the latter, as the PT is a local limited liability company, it needs to be converted into a PT PMA after acquisition.

In general, establishing a PT PMA requires the following licenses/documents:

Copies of the incorporation documents of the foreign company setting up the local entity;
Power of attorney to the person carrying out the company registration process in Indonesia;
Information about the representative appointed for the Indonesian company; a foreign national can, but is not constrained to immigrate to Indonesia for this purpose;
Information about the activities which will be undertaken by the Indonesian company.

Furthermore, setting up a BO also requires at least these following people:

Two local or foreign shareholders;
One local or foreign director;
One local or foreign commissioner.

In case the appointed foreign director does not yet have the tax ID and does not plan to reside in Indonesia, it’s better to have a local director to represent the company during the registration process. The director can technically be a foreigner.

For the procedure itself, the steps required to establish a BO are:

Company name (Must be composed of 3 words);
Principle License & Business License from BKPM;
Deed of Establishment (containing the Articles of Association) legalized by a Public Notary;
Legalization of the legal entity status of the PT PMA by the Ministry of Law and Human Rights;
Domicile Letter from the local district authority;
Tax Identification Number (NPWP) and taxable entrepreneur confirmation (PKP) from the tax office;
Company Registration Certificate (TDP) from the agency for integrated licensing services (BPPT);
Manpower and Company Welfare Report from the sub-department of the Ministry of Manpower.

In accordance with Indonesian regulations, both local and foreign companies fall under the PT category. The 2 have roughly the same rights and responsibilities, with notable differences such as:

Foreign shareholders

Unlike a local company, foreign investors can fully or partly own a foreign company depending on the business sector. However, any amount of foreign shareholders means the company needs to be registered as a PT PMA.
Minimum investment value

While local companies can be more flexible, a foreign company needs to have an investment plan valued at a minimum of IDR 10 billion or about USD 700.000. A paid-up capital needs to be paid upfront for exactly 25% of this (IDR 2,5 billion or about USD 175.000). For this, foreign companies have to be categorized as large companies.
Restricted business fields

For foreign companies in Indonesia, some business fields are available for 100% foreign ownership, while others are capped at lower percentages. With the introduction of the omnibus law, there has been an increase in business fields open to 100% foreign ownership. However, that is with the exception of a few business fields, which can be found in our Summary of Negative & Positive Investment List 2021.
Business location

Unlike local companies, foreign companies can only use virtual offices offered by vendors with specific qualifications. For a simpler and faster way to set up, a PT PMA needs to register its location with a physical space in an office building.

How We Can Help

Once a business has gained a reputation and established growth, it may consider expanding to different parts of Indonesia to serve a wider client base. One issue that may arise is that the local authority will request your company to have the local licenses and permits as a certain aspect of the operations is subject to local regulations. Upon establishment of branch offices, there might also be local taxes due.

Once your company has determined your business location, Putranto Alliance allied notary partners can assist the company with the deed of branch opening, tax registration for the branch office, and the registration from the Online Single Submission (OSS) system. If required, we can also assist in finding office space for your branch establishment and provide business advisory on the compliance requirements.

References

Badan Koordinasi Penanaman Modal Republik Indonesia. Frequently Asked Questions on Investment ❯

Peraturan Badan Koordinasi Penanaman Modal Republik Indonesia Nomor 13 Tahun 2017 tentang Pedoman dan Tata Cara Perizinan dan Fasilitas Penanaman Modal ❯

4 Business Opportunities Emerging in Indonesia ❯

FAQs

What type of legal entity do I need? A company (PT PMA) or a representative office (KPPA)?

Depends on the company goal. Should the company plans to generate revenues, profit or engage in sales directly in Indonesia, then it needs a PT PMA. But if the company wants to explore business opportunities in Indonesia (through market research, networking, etc.) without engaging in commercial transactions, then it is better to establish a representative office (if such research shows positive results then the company can decide whether to establish a PT PMA or not later on).

Is the sector I want to invest in open to foreign investment? If yes, what is the percentage of ownership allowed to foreign investors?

Company might need to take a closer look at the Negative Investment List (According to the latest revision done through Presidential Regulation No. 44/2016). If the sector requires partial domestic ownership, then the company needs a local partner. If the company does not have a suitable local partner, our services can help to try finding one.

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