For some reasons, setting up a representative office in Indonesia is more of a plausible solution to provide foreign companies with a support system in Indonesia. This way, the company can conduct a market research, identify the potential local partners, offer post-sale service, and become acquainted with Indonesia’s business climate without having to actually engage in the business. That means a representative office offers a low-risk and more secure method with a low-cost local presence to take advantage of the country’s massive economic potential.
A lot of companies prefer to oversee the commercial agreement with local partners at the first place before committing to a substantial investment capital. The predicament is likely because most foreign investors are still unfamiliar with how business works in Indonesia, more often than not, is also caused by limited financial resources and propensity to test the project first. This presence comes with a notion that the company has limited activity and cannot generate revenue whatsoever, locally.
Related Article: Establishment of Foreign Foundation in Indonesia
According to the Chief of BKPM Regulation No. 15 Year 2015 Article 1 paragraph 28, a foreign company or joint foreign company can appoint one or more foreigners or Indonesian citizen to lead the representative office. Managing the business’ interests in Indonesia is possible after submitting the application to the Indonesia Investment Coordination Board (BKPM).
Indonesia representative office procedure must be fulfilled in order to obtain a license from BKPM and conduct business interest. According to the regulation, a representative office can only be situated in the capital city of a province and must be set up in an office building.
In order to obtain a license, a foreign company must submit the following documents to BKPM:
The Indonesian Investment Coordination Board (BKPM) will process the application approximately 10-14 working days before the license issued. However, for the representative office to fully operate, the documents required for the establishment also include:
A complete application will lead to faster and more convenient submission, in which the licensing will be issued in 5 working days. The license of Indonesia representative office procedure is valid for 3 years and is extendable for two times each for a year.
One type of representative office that is allowed to operate in Indonesia id the foreign trade rep office, which, despite its name, is still cannot engage in a direct commercial business activity. Kantor Perwakilan Perusahaan Perdagangan Asing (KP3A) or as we refer as the foreign trade representative office Indonesia may act as selling or buying agent, but all the financial transaction must be under the parent company’s name.
According to the Regulation of Head of Investment Coordinating Board Article 1 paragraph 29, a KP3A Indonesia is “an office which is led by an Indonesian citizen or foreigner who is designated by a foreign company or joint foreign company overseas, as its representative in Indonesia”. A KP3A is more suitable for conducting promotional activities and managerial duties.
A foreign trade representative office Indonesia also has 2 legal bases that should be followed by the investors; (i) be established as a form of buying agent, and (ii) be opened in the capital of province and regency/city of Indonesia.
The procedure of obtaining a license for KP3A Indonesia is governed under the Ministry of Public Works Regulation No. 10 (2014) with requirements as follows:
The foreign company is obliged to appoint someone with at least three years of experience to manage the rep office with relevance educational background. According to the Article 24 Paragraph (3), BKPM Regulation No. 15 Year 2015, the KP3A Indonesia must employ at least 3 (three) Indonesian workers when hiring a foreign manpower as the Chief of the Representative of the KP3A.
Once the company submitted the application, the BKPM will issue Surat Izin Usaha Perusahaan Perwakilan Perdagangan Asing (SIUP3A). Please note there are three types of KP3A validation license according to the Article 25 BKPM Regulation No. 15 Year 2015:
We can say that both are allowed to establish in Indonesia, but the two have quite significant differences. For a brief understanding, here are the differences between a representative office in the form of KPPA and KP3A, and the local limited liability company (PT).
A representative office in the form of KPPA can only act as a local representation or market research purposes. A foreign company can opt to establish KPPA in order to study the business climate, market position, or investment policy in Indonesia before setting up a PT PMA. There is neither a capital requirement nor foreign ownership restriction when establishing a KPPA.
In short, here is the scoop on activities of foreign representative office:
A KPPA also has other compliances such as monthly withholding tax report and annual activity report submitted to BKPM. The rep office must also be situated in an office building and is not allowed on using the virtual office as a company address.
A foreign trade representative office Indonesia (KP3A) also has a limited role and mostly acts as a local representation of the head office abroad. However, KP3A is permitted to conduct more business activities compared to the KPPA, despite the fact that it cannot generate any revenue from any business transaction. Setting up a KP3A is quite easy, with no capital requirement or foreign ownership restriction, and extendable license for every 3-year period.
Here is the scoop on activities allowed for foreign trade representative office in Indonesia:
In other words, a foreign trade representative office in Indonesia can act as a selling agent, manufactures agent, or buying agent. However, all transactions must still be under the parent company’s name, and the rep office must not generate any revenue from any resources in Indonesia.
A local limited liability company is also known as PT in Indonesia. 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 in any foreign shareholders. However, the company also has a limited amount of work permits for foreigners, which depends on the size of the capital.
The scoop of activities of a PT is not limited as KPPA or KP3A Indonesia. It is unconfined to perform any business activities in the field as stated in the permit/business license. The company also has compliance of annual tax report, monthly withholding tax report, and annual tax report.
In Indonesia, foreigners can only invest in two forms of business activities, namely the representative office or Penanaman Modal Asing (PMA). Just because the representative office act and play its role as the representative of its head office, doesn’t mean that it has the same function as a branch or even subsidiary company. The definition of the three may get some people mixed up, but there are clear, distinctive features and functions of a branch office, a subsidiary company, and a representative office.
A branch office has the same legal entity as the parent company, and act as an extension of it. The liabilities of a branch office in Indonesia also extend to the parent company, and it should have the same name.
The office is allowed to conduct commercial and non-commercial activities including market research, purchase and keep a quantity of goods, employ workers, and buy or sell goods and services or engage in manufacturing, processing, and construction process; same as the parent company.
However, there is limited sector allowed to develop a branch office in Indonesia, such as banking sector. From the authority perspective, the government through OJK set out general requirements for a foreign bank to expand a branch in Indonesia, as follows:
In general, a subsidiary company has separate legal entity distinct from its parent company, and its liabilities are limited to the subsidiary as well. The entity name of a subsidiary company may be similar or different from the parent company, and the type of business activities conducted may also be similar or different.
In Indonesia, opening a subsidiary company has the similar procedure of setting up a PT PMA (Penanaman Modal Asing), with an option of full foreign ownership or joint ventures with a local company. A paid-up capital of 20% from the total of at least IDR 10 billion must be fulfilled and the foreign investors are allowed to conduct business in any sectors except for the ones listed in the Negative Investment List by BKPM.
However, the requirements are different when proposing to open a subsidiary company for a foreign bank in Indonesia. The investors must fulfill the following conditions:
A representative office can only act as the representative of a foreign company. Setting up a representative office in Indonesia doesn’t need any paid-up capital or shareholder compliance, so it’s suitable for the investor with limited financial ability. With such convenience, a rep office cannot generate any profit or conduct any financial activities during their presence in Indonesia.
However, a foreign trade representative office Indonesia can actually act as the foreign company’s agent, be it as the buying/selling, or manufacturing agent. The difference from a branch office or subsidiary company, any financial transaction conducted by a rep office must be under its parent company. They cannot issue an invoice, and only parent company can charge clients.
Among submitted compliance of a representative office is monthly withholding tax report, which is, easy to calculate when you have something to buy or sell. According to the regulation, the established rep office in Indonesia has special treatment from the authorities.
The Indonesia representative office taxation extends to two majors; tax on employee’s salary, and company’s income.
The obligation to pay the employee’s income tax is under the representative office, which is mostly done by subtracting the worker’s monthly income to pay to the government. According to the Income Tax Article 21, below are the tax rates for employees in representative office:
A certain regulation of tax for Indonesia representative office taxation, Article 25 states that a rep office is eligible for 0.44% of corporate income from Gross Export Values. The amount of gross value of export is determined by the revenue of the company abroad that has a rep office in Indonesia. Investors from a country with Tax Treaty with Indonesia must pay the company’s income tax based on the rate of the branch profit tax as mentioned in the Tax Treaty.
The regulation state that deadline of tax reporting is on the 20th date of each month, while the deadline for tax payment is on the 15th date of each month. An Indonesia representative office that fails to meet the deadline will be employed a tax penalty.
To ensure a smooth investment and business operation from the legal perspective, but also still focus on maintaining your business in Indonesia and reach your revenue target, it is advised for you to find capable and trusted lawyers or legal consultants for advice and assistance in ensuring your legal compliance with prevailing laws and regulations.
SMART Consulting is an Indonesian Corporate Legal Services firm. SMART has assisted Clients in dealing with matters related to Investment Law, such as assist Client to establish Foreign Direct Company and Representative Office. We also assist Clients regarding the Compliance and Corporate Legal Services.
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