A Guide to Establishing a Joint Venture in Indonesia

PART ONE: DETERMINING THE BUSINESS SECTOR OF THE JOINT VENTURE, NEGATIVE INVESTMENT LIST, AND NOMINEE ARRANGEMENTS

This is the first part of a consecutive series on how to establish a joint venture in Indonesia, which will discuss the first step: determining the business sector of the joint venture and ensuring that it is open or at least conditionally open for foreign investment.

The next parts of the guide will elaborate the following:

  1. Setting up a joint venture agreement with an Indonesian partner;

  2. Establishment of the joint venture;

  3. Introduction to Indonesian corporate law for joint ventures; and

  4. How to prepare the joint venture for commercial operation.

This guide only specifically addresses incorporated joint ventures in the form of a foreign investment limited liability company and does not discuss unincorporated joint ventures, such as construction joint operations and oil and gas. Reference to joint venture in this article means an incorporated joint venture in the form of a foreign investment limited liability company.

Determining the Business Sector

Before deciding on establishing a joint venture with your business partner in Indonesia, it is pivotal to firstly determine the business sector that the joint venture will be engaged in as not all business sectors are open to foreign investment and certain business sectors are subject to certain requirements for foreign investment.

Business sectors in Indonesia are classified in Head of Statistics Indonesia Regulation No. 95 of 2015 on the Indonesia Standard Classification of Business Sectors, as amended by Head of Statistics Indonesia Regulation No. 19 of 2017 (usually referred to by its abbreviation KBLI).[1]

All businesses are classified into business sectors listed in the KBLI and joint ventures are not an exception. Make note of the 5-digit KBLI codes that are potentially relevant business sectors to the joint venture as this will be important for:

  1. Making sure that the business sector of the joint venture is open to foreign investment or at least conditionally open to foreign investment (meaning that it is open to foreign investments but with certain conditions, such as foreign capital ownership cap or requiring specific licenses);

  2. Determining which business activities are allowed for the joint venture to carry out; and

  3. This 5-digit KBLI code will be mentioned in most licenses of the joint venture.

In going through the KBLI, what is meant by the most relevant business sectors in the KBLI is based on the description of the activity or the type of goods or services produced, of which both may not be set out in the same 5-digit KBLI code so take note of all 5-digit KBLI codes that matches the activity of the joint venture and the type of goods or services that the joint venture intends to produce.

Negative Investment List

After obtaining the 5-digit KBLI code of all relevant business sectors to the joint venture in the KBLI, match those 5-digit KBLI codes to the ones listed in the Negative Investment List stipulated under President Regulation No. 44 of 2016 on List of Business Sectors that are Closed to Investment and Business Fields that are Conditionally Open to Investment (Negative Investment List).[2]

If there is a match between the 5-digit KBLI code obtained from when looking for the business sectors relevant to the joint venture in the KBLI and the 5-digit KBLI code listed in the Negative Investment List, this means that the joint venture will most likely be subject to the conditions stated in the Negative Investment List. To make sure, it may be prudent to check the information stated in the Negative Investment List to understand exactly what type of business is subject to the conditions.

Alternatively, most foreign investors are advised to consult with the Indonesia Investment Coordinating Board to discuss whether the joint venture that they intend to establish is listed in the Negative Investment List.

If the 5-digit KBLI code and business sector is not mentioned in the Negative Investment List, the joint venture may be fully owned by a foreign investor, even though it will be required for the joint venture to have 2 shareholders at all times as this is required for all limited liability companies under Law No. 40 of 2007 on Limited Liability Companies (so both shareholders can be foreign in this case).

Note that determining the 5-digit KBLI codes will also dictate which business activities are to be carried out by the joint venture as these 5-digit KBLI codes will be inserted into the most general license of the joint venture. It is not advisable to not disclose any relevant 5-digit KBLI code or business activity that the joint venture will conduct as the joint venture may be considered as operating business activities without a license if such 5-digit KBLI code or business activity are not mentioned in the joint venture’s license.

There are certain conditions for investment in the business sectors stated in the Negative Investment List. These conditions vary between different business sectors:[3]

Being reserved for or in partnership with micro, small, and medium business, and cooperatives

If the business sector is reserved for micro, small, and medium business, and cooperatives, the joint venture cannot be established as joint ventures are not considered as a micro, small, or medium business, and is not in the form of a cooperative.

If the business sector requires partnership with micro, small, and medium business, and cooperatives, the joint venture must do so and be asked to submit a copy of the partnership agreement. The types of partnerships available are: plasma-core,[4] subcontract,[5] agency,[6] and franchising[7] pursuant to Government Regulation No. 44 of 1997 on Partnerships (Partnership Regulation).

Foreign capital ownership cap

Most business sectors listed in the Negative Investment List is subject to a foreign capital ownership cap, which means that there is a maximum percentage for the foreign investor’s capital ownership in the joint venture.

Limited to certain locations

For certain business sectors, joint ventures are not allowed to operate in certain regions or may only operate in certain regions.

Specific licenses

Certain business sectors are governed by a specific Indonesian authority. For example, financial services are under the authority of the Financial Services Authority and will require specific licenses from the Financial Services Authority.

100% domestic investment

There are certain business sectors in the Negative Investment List that are reserved for domestic investment only. As such, joint ventures cannot be established for such business sectors.

Foreign capital ownership cap for investors from ASEAN countries

The same as foreign capital ownership cap as elaborated in number 2 but specifically applicable only to foreign investors from ASEAN countries. These are usually more favourable, allowing a higher ceiling compared to general foreign capital ownership cap.

Nominee Arrangements

With many business sectors subject to a foreign capital ownership cap in the Negative Investment List, most foreign investors will consider nominee arrangements, including a nominee shareholder to the joint venture that has no control over the joint venture and is there only for the purpose of complying with the foreign capital ownership cap in the Negative Investment List.

This is prohibited under Indonesian law. Although many provide services in setting up such nominee arrangement and most are not discovered when the nominee arrangement is established, any form of agreement made to set up such nominee arrangement will be deemed null and void, meaning that it will be unenforceable under Indonesian law.[8] Should any conflict occur in the nominee arrangement, the agreements of the nominee arrangement have no standing, including any rights that the foreign investor may have in the nominee arrangement.

Typically, a nominee arrangement is structured through deferred equity arrangement, such as convertible bonds or exchangeable bonds, or through encumbrance of shares by virtue of loan arrangement, such as pledge of shares or shares as fiduciary guaranty.

Part Two

The second part of this guide to establishing a joint venture in Indonesia will discuss on drafting a joint venture agreement if there is a local partner or there is a foreign capital ownership cap for the business sector of the joint venture pursuant to the Negative Investment List (therefore, requiring a local partner).


FOOTNOTES

[1] There is no English version of the KBLI that is publicly available online. However, Makarim & Taira S., Counsellors at Law, has an excellent summary of the recent change to the Negative Investment List, which lists all the relevant business sectors in English. See: Makarim & Taira S., Counsellors at Law, “2016 Negative List Revision Released,” 25 May 2016.

[2] English version: https://www.indonesia-investments.com/upload/documents/Negative-Investment-List-May-2016-Indonesia-Investments.pdf and http://www.bkpm-jpn.com/assets/up/2017/04/160630-english-dni-rev.pdf.

[3] Negative Investment List, Article 2 paragraph (2).

[4] Based Article 3 of the Partnership Regulation, in the plasma-core partnership, the joint venture will act as the core that will guide and develop the micro, small, or medium business, or cooperative, as the plasma in: (i) providing and preparing land for business, (ii) providing production facilities, (iii) providing technical guidance in business management and production, (iv) helping in obtaining and developing necessary technological improvements, (v) financing, (vi) providing other assistance needed to increase efficiency and productivity of the business.

[5] Based Article 4 of the Partnership Regulation, in the subcontract partnership, the joint venture in producing goods and services will subcontract to the micro, small, or medium business, or cooperative to: (i) carry out a part of the production or component, (ii) acquiring raw materials from the joint venture with reasonable pricing, (iii) guidance on technical production or management skills, (iv) acquiring and improving the necessary technology, and (v) financing.

[6] Based Article 5 paragraph (1) of the Partnership Regulation, a partnership between the joint venture and the micro, small, or medium business, or cooperative can be in the form of marketing cooperation, business location provision, or the provision of supplies.

[7] Based on Article 7 paragraph (1) of the Partnership Regulation, a franchise partnership made by a joint venture may be made with micro, small, or medium businesses, or cooperatives, which fulfil the criteria to carry out the franchise partnership.

[8] Law No. 25 of 2007 on Investment, Article 33 paragraph (1) and paragraph (2); Indonesia Investment Coordinating Board Regulation No. 6 of 2018 on Guidelines and Procedures for Investment Licenses and Facilities, Article 6 paragraph (6).


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