Understanding the Omnibus Law in Indonesia: Effect on foreign investors.

On 2 November 2020, the Indonesian government passed the Omnibus law to boost Indonesia’s economy. We have put together a guide on the Omnibus Law in Indonesia and its effect on foreign investment.

Continue reading to find out more.

What is the omnibus law in Indonesia?

The purpose of the Omnibus Law to attract foreign investment, strengthen Indonesia’s economy, increase the ease of doing business and create new jobs.

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What effects does the omnibus law have on foreign investment?

Foreign direct investment opportunities

The positive investment list is one of the regulations set out by the Omnibus Law. This list opens opportunities for foreign investment in fields that were previously closed.

Some business sectors that were previously restricted to foreign ownership but are now open to foreign investors include:

• Constriction services
• Distribution
• Energy
• Telecommunications
• Transportation

The positive investment list divides business fields that are open to foreign investment into four categories:

1. Priority business fields (245 business fields)

Priority business fields are deemed as business that meets the following conditions:

• Capital intensive
• Export-oriented
• Labour intensive
• Oriented in research, development and innovation activities
• Pioneering industry
• Strategic national program or project
• Use high technology

2. Business fields that require partnerships with cooperatives of small- and medium-sized enterprises (SMEs) (89 business fields)

Businesses that meet the following conditions are for cooperatives and SMEs:

• Do not use high technology
• Have special cultural heritage significance and labour intensive
• Activities with a maximum capital of IDR 10 billion
• Originally occupied by cooperatives or SMEs
• Have an opportunity to enter the large-scale supply chain

3. Business fields that are open but have specific requirements (46 business fields)

Business fields under this category are open to all investors but must meet one or more of the following conditions:

• Investment requirements for domestic investors
• Investment requirements with limited foreign ownership
• Investment requirements with special licenses and/or approval from relevant authorities

4. Businesses fields that can be carried out by any investor, including foreign investors or local investors

Business fields under this list are open to all investors without any restrictions.

These include:

• Cable telecommunication activities
• Crude palm oil
• General distributorship activities
• Internet service provider
• Online retailer
• Palm plantation
• Satellite telecommunication activities
• Wholesale trade of laboratory, pharmacy and medical equipment

Even though a majority of sectors are open to investment, there are also business fields that are closed to both foreign and domestic investment:

• Class one drugs and drug cultivation
• All gambling and casino activities
• Fishing endangered species
• Collecting corals in nature for jewellery, building materials and souvenirs
• Industrial chemical weapon production
• Industrial o-zone depleting substances

Minimum capital requirements

Certain business sectors in Indonesia previously had a requirement of injecting IDR 100 billion as the company’s capital, such as e-commerce businesses.

However, under the Omnibus Law, these business sectors can now be 100% foreign-owned without the IDR 100 billion capital requirement. Instead, it requires a minimum of IDR 10 billion and 100% to be paid upon incorporation.

Start-ups located in special economic zones also entitled to a reduced minimum capital requirement.

The reduction of minimum capital requirements will possibly attract foreign investors to invest in previously restricted sectors due to capital requirements.

Simplified process of obtaining business licenses

Businesses in Indonesia require business licenses to be able to operate legally and must be extended frequently.

Many government institutions and authorities were involved in issuing different types of business licenses, which may be difficult for foreign investors to know which licenses and permits they should get for their business.

The process of obtaining business licenses is more simplified under the Omnibus Law.

Foreign investors can obtain a business license through the Online Single Submission (OSS) system, and business licenses can be obtained in one place.

The Omnibus Law also introduced a risk-based business concept that divides business activities into low, medium and high risks businesses.

Business licenses or permits will be issued based on the risk level of the business. The risk level will be determined by the following factors:

• Business activity
• Business location
• Resource scarcity
• Volatility risk

Low-risk businesses will only require the Business Identification Number (NIB), which will act as proof of the business registration and be able to carry out business activities.

Medium risk businesses require the NIB and a standard certification issued by the central or regional government.

High-risk businesses require a NIB and a business license from the central or regional government.

Corporate income tax reduction

The corporate income tax rate is 22% for the 2020 and 2021 fiscal year and 20% for the 2022 fiscal year onwards.

Public companies with at least 40% shares traded in the stock market which fulfil certain requirements will be subject to an additional 3% reduction to 19% in 2020 and 2021 and 17% in 2022.

The requirements are:

1. The 40% shares traded in the stock market are owned by at least 300 parties outside the issuer and controlling/major shareholder
2. The total shares ownership of each party does not exceed 5% of the total issued and fully paid shares
3. The above conditions must be fulfilled within a minimum of 183 days in a period of one year

Limited period of territorial basis taxation can be applied to foreigners

A foreign citizen who has stayed in Indonesia for more than 183 days within 12 months will be considered as a domestic taxpayer (Subjek Pajak Dalam Negeri (SPDN)).

Certain foreign citizens can apply to be taxed only on Indonesian-sourced income for the first four years since he/she registered for Indonesia tax ID.

However, the foreign citizen must meet certain skills, which are:

• Occupy certain positions and for foreign researchers who are determined by the Minister in charge of government affairs in the manpower and research sectors
• Expertise in science and technology and/or math proved through one of the following:
  • Certificate issued by an authorised institution
  • Educational certificate
  • A minimum of five years’ work experience
• Has an obligation to transfer knowledge

This rule, however, does not apply to foreigners who benefit from the double taxation agreement.

Conclusion

Through the Omnibus Law, many restrictions on foreign investors have been lifted and made easier for foreign investment in Indonesia. If you are interested in establishing a company in Indonesia, feel free to contact Acclime for a consultation.