Post a comment
Print articleInvestment Law and the New Negative List in Indonesia
November, 2008 -
Since 26 April 2007, Indonesia has had a new Investment Law, namely Law No. 25 of 2007 regarding Investment (“New Investment Law”). The New Investment Law replaces two old laws; ie Law No. 1 of 1967 regarding Foreign Investment, and Law No 6 of 1968 regarding Domestic Investment, both as amended. The New Investment Law accommodates both foreign and domestic investment.
A quick scan of the New Investment Law reveals that many provisions regulate matters already regulated in other legislation, eg. labor and land. Debate as to whether the New Investment Law is a Lex Spesialis or Lex Generalis is still ongoing.
Principal Provisions
One important feature of the New Investment Law is the equal treatement (after initial entry and subject to bilateral treaties) of foreign and domestic investors. There are also provisions (but not in detail) on: good corporate governance and social responsibility, the obligation of mining and resource investors to rehabilitiate their areas, the possibility of tax facilities, new land title renewal procedures, work permit and multiple re-entry periods, the ability of the government to terminate agreements where recovery costs have been inflated and penalties for not implementing good corporate governance or respecting local cultural traditions.
As regards the entity for investment, domestic investment is by a business entity in the form of a legal or a non-legal entity or by sole proprietorship. Foreign investment should be by way of a limited liability company established under Indonesian law.
As expected, the New Investment Law contains provisions on nationalization/expropriation of investors’ property rights and the ability to repatriate assets, capital, profit, interest, dividends, etc. provided repatriation is undertaken in accordance with laws, including of course any tax impositions and reporting requirements. The situation regarding divestment is somewhat unclear.
Although some facilities and incentives have been have been mentioned above there is also mention of the easing of licensing processes (see below). The tax incentives are not referred to in as much detail as in the previous law. In addition, and for new foreign investment companies it appears that the 30 year term for the investment license has been abolished. Import facilties are also referred to.
One Stop Service
The New Investment Law is intended to provide a 'one-stop' service for investors at the Investment Coordinating Board (BKPM) in an attempt to reduce the lengthy start-up time for direct capital investment. BKPM will now bear responsibility of intensifying coordination among departments and regional governments to disentangle the current bureaucratic maze. This will no doubt will be a difficult task for BKPM, as until now the Indonesian Government still lacks tight coordination.
Nominee Companies
Article 33 of the New Investment Law tries to prevent nominee arrangements. Although the Article specifically refers to limited liability companies and share ownership in these companies, the intent is much more broad reaching than just companies. The impact of Article 33 is that where investors invest under the names of others, any contract that they may enter into is void at law. The way that Article 33 outmanoeuvres nominee arrangements by deeming all contracts which violate Article 33 to be null and void is an approach that will not have direct impat but it may have an affect after disputes arises between the parties involved in the nominee arrangements.
Negative List
Following the enactment of the New Investment Law, the Government issued (i) Presidential Regulation No. 76 of 2007 regarding the Criteria and Requirements for Determining Which Business Fields are Closed or Open with Certain Conditions for Investment ("PR 76") and (ii) Presidential Regulation No. 77 of 2007 regarding the List of Business Fields which are Closed or Open with Certain Conditions for Investment ("PR 77"). PR 77 revokes Presidential Decision No. 96 of 2000 (as amended) which contained the previous list.
Under Article 12 (1) of the New Investment Law in conjunction with Article 2(1) of PR 76, basically all business fields are open for investment, except those listed as closed or open with certain conditions. The list of business fields which are closed or open with certain conditions (the "Negative List") is determined by PR 77 containing the Negative List. This list will be reviewed every 3 years and implemented by BKPM.
The allowable shareholding composition in many business sectors has changed in the new Negative List and some of the restrictions have caused considerable concern if not consternation on the part of foreign investors. Many more business areas now appear to have foreign shareholding restrictions although there are a couple of areas which have been newly opened to foreign investment.
The new shareholding limits do not apply to existing foreign investments whose approvals were obtained prior to enactment of PR 77. Nevertheless, PR 77 will apply to amendments to existing investment approvals. So, although existing PMA companies do not need of adjust their shareholding composition right now, the restrictions will apply when their shareholdings change, subject to BKPM implementing regulations and policies.
It should be noted that a draft amendment to PR 77 has already been drafted and it is expected that certain parts of the Negative List will change shortly.
A quick scan of the New Investment Law reveals that many provisions regulate matters already regulated in other legislation, eg. labor and land. Debate as to whether the New Investment Law is a Lex Spesialis or Lex Generalis is still ongoing.
Principal Provisions
One important feature of the New Investment Law is the equal treatement (after initial entry and subject to bilateral treaties) of foreign and domestic investors. There are also provisions (but not in detail) on: good corporate governance and social responsibility, the obligation of mining and resource investors to rehabilitiate their areas, the possibility of tax facilities, new land title renewal procedures, work permit and multiple re-entry periods, the ability of the government to terminate agreements where recovery costs have been inflated and penalties for not implementing good corporate governance or respecting local cultural traditions.
As regards the entity for investment, domestic investment is by a business entity in the form of a legal or a non-legal entity or by sole proprietorship. Foreign investment should be by way of a limited liability company established under Indonesian law.
As expected, the New Investment Law contains provisions on nationalization/expropriation of investors’ property rights and the ability to repatriate assets, capital, profit, interest, dividends, etc. provided repatriation is undertaken in accordance with laws, including of course any tax impositions and reporting requirements. The situation regarding divestment is somewhat unclear.
Although some facilities and incentives have been have been mentioned above there is also mention of the easing of licensing processes (see below). The tax incentives are not referred to in as much detail as in the previous law. In addition, and for new foreign investment companies it appears that the 30 year term for the investment license has been abolished. Import facilties are also referred to.
One Stop Service
The New Investment Law is intended to provide a 'one-stop' service for investors at the Investment Coordinating Board (BKPM) in an attempt to reduce the lengthy start-up time for direct capital investment. BKPM will now bear responsibility of intensifying coordination among departments and regional governments to disentangle the current bureaucratic maze. This will no doubt will be a difficult task for BKPM, as until now the Indonesian Government still lacks tight coordination.
Nominee Companies
Article 33 of the New Investment Law tries to prevent nominee arrangements. Although the Article specifically refers to limited liability companies and share ownership in these companies, the intent is much more broad reaching than just companies. The impact of Article 33 is that where investors invest under the names of others, any contract that they may enter into is void at law. The way that Article 33 outmanoeuvres nominee arrangements by deeming all contracts which violate Article 33 to be null and void is an approach that will not have direct impat but it may have an affect after disputes arises between the parties involved in the nominee arrangements.
Negative List
Following the enactment of the New Investment Law, the Government issued (i) Presidential Regulation No. 76 of 2007 regarding the Criteria and Requirements for Determining Which Business Fields are Closed or Open with Certain Conditions for Investment ("PR 76") and (ii) Presidential Regulation No. 77 of 2007 regarding the List of Business Fields which are Closed or Open with Certain Conditions for Investment ("PR 77"). PR 77 revokes Presidential Decision No. 96 of 2000 (as amended) which contained the previous list.
Under Article 12 (1) of the New Investment Law in conjunction with Article 2(1) of PR 76, basically all business fields are open for investment, except those listed as closed or open with certain conditions. The list of business fields which are closed or open with certain conditions (the "Negative List") is determined by PR 77 containing the Negative List. This list will be reviewed every 3 years and implemented by BKPM.
The allowable shareholding composition in many business sectors has changed in the new Negative List and some of the restrictions have caused considerable concern if not consternation on the part of foreign investors. Many more business areas now appear to have foreign shareholding restrictions although there are a couple of areas which have been newly opened to foreign investment.
The new shareholding limits do not apply to existing foreign investments whose approvals were obtained prior to enactment of PR 77. Nevertheless, PR 77 will apply to amendments to existing investment approvals. So, although existing PMA companies do not need of adjust their shareholding composition right now, the restrictions will apply when their shareholdings change, subject to BKPM implementing regulations and policies.
It should be noted that a draft amendment to PR 77 has already been drafted and it is expected that certain parts of the Negative List will change shortly.
