Introduction
Indonesia, composed of thousands of volcanic islands stretching from east to west, is known in Japan for its beautiful landscapes in Yogyakarta and the mesmerizing ethnic dance "Kecak." With a population exceeding 260 million, it boasts the largest population in ASEAN and is also home to the world's largest Muslim population.
Its economic potential has attracted attention, with recent years seeing a vibrant influx of investment funds from Western venture capital firms, turning it into a startup powerhouse with unicorn companies like Gojek, Tokopedia, and Traveloka. The government has also championed policies like the "1000 Startup Program" to promote this trend.
In this document, we explain the overall investment environment of Indonesia, covering everything from recent developments to foreign investment regulations.
Basic Information
Capital: Jakarta
Currency: Rupiah (1 Ringgit: approximately 0.0075 yen)
Population: Over 267.03 million (as of 2020)
Average Age: 31 years old (as of 2020)
End of Population Bonus Year: 2044
Political System: Republic
Major Religion: Buddhism (87%)
Jakarta, the headquarters of ASEAN, hosts ambassadors from over 50 countries, including the United States and China. Japan also established the ASEAN-Japan Government Representative Office in Jakarta in 2011, with a resident ambassador. Additionally, Indonesia is the only Southeast Asian country participating in the G20.
With a population exceeding 260 million, Indonesia ranks as the fourth most populous country globally, with an average age of around 30 years, indicating a young population. It significantly surpasses Vietnam, the second most populous ASEAN country with over 98 million people. Embracing the motto of "unity in diversity," Indonesia prides itself on being a multi-ethnic nation.
Macro Information
Gross Domestic Product (GDP) (2018, nominal): Approximately 112 trillion yen
GDP Growth Rate (2018, real): 5.2%
Trade Balance (2019): Approximately -350 billion yen
Current Account Balance (2018): Approximately -3.4 trillion yen
Market Capitalization of the Stock Market (March 2020): Approximately 34.4 trillion yen
2-Year Government Bond Yield (March 2020): 6.24%
10-Year Government Bond Yield (March 2020): 7.91%
Legal Minimum Wage: Approximately 30,000 yen per month
Average Wage for Non-Manufacturing Managers: Approximately 120,000 yen per month
Real Wage Growth Rate (2018): 4.1%
Percentage of College Graduates (2018): 21.2%
Smartphone Penetration Rate (2018): 60%
Number of Japanese Companies Establishing Presence (2018): 1,911
In the International Cooperation Bank's "Foreign Direct Investment Survey" for 2019, Indonesia maintained its fourth position from the previous year, following Vietnam and Thailand. The market, driven by the younger generation, is attracting attention due to its potential in the world's fourth-largest population market.
However, with a wage growth rate of 4%, caution is needed against simplistic considerations of low-cost investments.
In 2018, Indonesia's nominal GDP per capita was $3,971, classifying it as a low-income country (less than $5,000). While Indonesia boasts the largest GDP in ASEAN at approximately 112 trillion yen, double that of Thailand at approximately 54 trillion yen and three times that of Singapore at approximately 40 trillion yen, its GDP per capita is currently about half of Thailand's ($6,992 per capita), highlighting the importance of increasing per capita income for future economic development.
Investment Environment
1. Foreign Investment Regulations
General regulations governing investment activities in Indonesia are stipulated in the "Investment Law," applicable to both domestic and foreign investments. Foreign investment regulations are defined within this law.
Foreign investment in Indonesia is generally allowed, except in prohibited sectors, following a "Negative List" approach that sets the maximum foreign ownership percentage for each sector.
The government publishes the "Investment Negative List," specifying detailed investment conditions (such as foreign ownership percentage), with restrictions varying by sector (typically with a maximum foreign ownership limit of 67% or 49% in many sectors). Therefore, it's necessary to check the list for specific regulations.
In recent years, as part of economic liberalization, the scope of sectors subject to regulatory relaxation has expanded, including tourism, transportation, and cinemas.
The main restrictions by sector are as follows:
Manufacturing: In principle, 100% foreign ownership is allowed (except in certain fields like medical equipment).
Wholesale: Maximum foreign ownership limit is 67%.
Retail: Foreign ownership is only allowed in department stores, supermarkets, and minimarkets (convenience stores), with minimum store size requirements:
Department stores: Foreign ownership is not allowed for stores with a sales area of less than 400 square meters. For stores with sales areas between 400 and 2,000 square meters, foreign ownership is limited to 67%. For stores with sales areas exceeding 2,000 square meters, 100% foreign ownership is permitted.
- Supermarkets: Foreign ownership is not allowed for stores with a sales area of less than 1,200 square meters. For stores with sales areas of 1,200 square meters or more, 100% foreign ownership is allowed.
- Minimarkets: Foreign ownership is not allowed for stores with a sales area of less than 400 square meters. For stores with sales areas of 400 square meters or more, 100% foreign ownership is allowed.
Distribution: Land transportation has a maximum foreign ownership limit of 49%, sea transportation 49%, and warehousing 67% (except for cold storage, which allows 100% foreign ownership).
The minimum capital requirement for foreign investment is 25 billion rupiahs for both manufacturing and non-manufacturing sectors, with a total investment (including capital) of over 10 billion rupiahs excluding land and buildings.
Regarding land ownership, according to the "Basic Agrarian Law," land ownership rights are only granted to Indonesian citizens. Therefore, foreign investors can establish local entities to enjoy land use rights, construction rights, etc., for a specified period in Indonesia.
2. Corporate Law
The equivalent of Japan's Company Law in Indonesia is the "Company Law," enacted in 2007. It differs significantly from Japan's corporation law in several aspects, such as requiring authorization for establishment, setting minimum capital requirements, mandating nominal shares for all shares (or equivalent certificates) issuance (for private companies), and having a board of commissioners (Komisaris).
Shareholders' Meeting
Ordinary resolutions are passed by a majority of the total voting rights of attending shareholders.
Special resolutions on certain important matters (such as capital reduction, issuance exceeding authorized capital, amendments to articles of association, etc.) require approval by "2/3 or more" of the total voting rights of attending shareholders. For certain matters (equivalent to special resolutions in Japan's company law, such as mergers, transfers or provision of security of more than 50% of company assets, etc.), "3/4 or more" approval is required.
It's worth noting that these requirements differ from Japan's company law, where ordinary resolutions require a simple majority, and special resolutions require 2/3 majority (or in some cases, "special" resolutions require 3/4 majority).
A minimum of two shareholders is required.
Board of Directors and Board of Commissioners
The board of directors consists of one or more members.
Decisions are generally made by a majority vote, and there are no specific requirements regarding the composition, convening, or decision-making of the board of directors. Each director has the authority to represent the company individually, so it's essential to note that even if one director executes business without the board's decision, the legal effect belongs to the company.
However, the articles of association allow for autonomy, so specifying certain positions such as representative directors in the articles of association and granting authority to represent the company only to directors holding such positions does not prevent this and is widely practiced in practice.
Commissioner and Commissioner Board
As a similar institution to auditors and audit committees in Japanese law, it supervises the company's management by the board of directors and provides advice on management matters. In certain cases, it may have more direct involvement in company management or exercise stronger supervisory powers over the board of directors, differing from Japanese law.
If the board of commissioners consists of multiple commissioners, each commissioner is obliged to act based on resolutions of the board of commissioners, differing from individual directors who have individual representative powers. There are no specific provisions regarding resolutions, convening requirements, or decision-making requirements.
3. Accounting Standards
Indonesia's accounting system is governed by the Financial Services Authority of Indonesia (OJK) and the Financial Accounting Standards Board (DSAK), which prescribe the Indonesian Financial Accounting Standards (PSAK).
There is active convergence with IFRS, with full adherence to IFRS principles. However, due to potential time lags in reflecting IFRS, caution is needed.
4. Taxation
Corporate Income Tax (nominal rate): 25%
- Listed companies that have more than 40% of their shares publicly traded receive a 5% reduction.
- Companies with annual sales of up to 50 billion rupiahs are taxed at half the corporate tax rate on taxable income up to 4.8 billion rupiahs.
- For companies with annual sales of 4.8 billion rupiahs or less, a final tax of 0.5% is imposed on monthly sales.
Tax on Dividend Payments to Japan (maximum rate): 10% for ownership ratio of 25% or more, 15% for ownership ratio below 25%.
Tax on Interest Payments to Japan (maximum rate): 10%
Tax on Royalty Payments to Japan (maximum rate): 10%
Value Added Tax (standard rate): 10%
Thank you for reading until the end. Have you gained a better understanding of Indonesia's investment environment? Please feel free to contact us for individual consultations.
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