Indonesia offers a dynamic array of incentives designed to attract foreign investments and support businesses looking to establish or expand their operations in the country. This article provides an overview of Indonesia’s key investment incentives, covering tax allowances, tax holidays, super deduction tax, import duty exemptions, and Indonesia’s pro-business government policies.
Pro-Business Policies that Support Foreign Direct Investment (FDI)
Indonesia’s government has adopted a pro-business stance, introducing policies to create a more favorable environment for foreign direct investment (FDI). Some highlights include:
- 100% Foreign Ownership: Presidential Regulation No. 49 of 2021 allows foreign investors to fully own businesses across most sectors, except for 37 industries with specific requirements.
- Simplified Licensing: The Job Creation Law (Omnibus Law) enacted in 2020 simplifies investment and licensing processes by consolidating 77 laws. This groundbreaking regulation streamlines both central and regional policies, making Indonesia’s regulatory landscape more transparent and predictable.
Also read: Indonesia’s Positive Investment List: Opportunities for Investors
Tax Allowances
Under Government Regulation No. 78 of 2019 and Ministry of Finance Regulation No. 11/PMK.010/2020 (amended by No. 96/PMK.010/2020), Indonesia offers tax allowances to encourage businesses in specific sectors.
These allowances apply to both new capital investments and expansions within select industries. Eligible businesses are granted a 30% reduction of corporate income tax (CIT) based on capital investment over six years (5% per year).
Criteria for Tax Allowance Eligibility
Businesses must meet specific criteria to qualify for tax allowances, such as:
- High Investment Value: Investments contributing significantly to the local economy.
- Job Creation: Substantial employment generation, especially in labor-intensive industries.
- Local Content: Usage of locally-sourced materials and resources.
Additional benefits include accelerated depreciation, reduced withholding tax rates on dividends, and extended tax loss carryforward for up to 10 years. These tax allowances are available to 183 business fields, offering flexibility and support for various sectors.
Also read: PMA (Foreign Company) Taxation in Indonesia: Complete Guide
Tax Holiday
Indonesia’s tax holiday scheme is one of its most attractive incentives for foreign investors, particularly for companies in “pioneer” sectors, such as manufacturing and infrastructure.
Governed by Ministry of Finance Regulation No. 130/PMK.010/2020, eligible businesses can receive full exemptions from corporate income tax (CIT) for 5 to 20 years, depending on the scale of the investment. For investments in Special Economic Zones (SEZs), tax holidays may extend up to 25 years.
For smaller-scale investments, Indonesia also offers a “mini” tax holiday, which provides a 50% reduction in CIT for up to five years. Both the tax holiday and mini tax holiday can be extended with an additional two-year CIT reduction.
This flexible scheme aims to provide substantial financial relief and boost the profitability of capital-intensive sectors.
Super Deduction Tax
Indonesia’s super deduction tax incentives are aimed at encouraging businesses to invest in research and development (R&D) and vocational training programs. Under Government Regulation No. 45 of 2019, companies can receive tax deductions of up to 300% of the expenses incurred in R&D and up to 200% for vocational training-related costs.
Super Deduction Breakdown:
- Vocational Programs: Provides a maximum deduction of 200% of total expenses for training programs focused on developing a highly skilled workforce.
- R&D Activities: Allows a maximum deduction of 300% of total expenses on R&D to foster innovation and technological advancement in Indonesia.
This initiative aligns with Indonesia’s goal of becoming a hub for technological innovation, while simultaneously enhancing workforce skills and industry competitiveness.
Also read: Withholding Tax in Indonesia: Complete Guide for Foreigners
Import Duty Exemptions
Indonesia provides significant import duty exemptions to businesses in designated industries, including manufacturing and power generation, as outlined in Ministry of Finance Regulation No. 176/PMK.011/2009 (updated by No. 188/PMK.010/2015).
These incentives grant a three-year exemption from import duties on machinery, goods, and materials required for production.
Businesses operating in Free Trade Zones (FTZs) and bonded zones are also eligible for VAT exemptions, further lowering the costs associated with imported materials.
Additionally, Indonesia’s inclusion in the US Generalized System of Preferences (GSP) allows qualifying companies to benefit from reduced tariffs when exporting over 3,500 products to the US.
Also read:
- Indonesia’s Biggest Imports: A Detailed Overview
- Indonesia’s Biggest Export: Top Products and Commodities
End-to-End Services and Tailored Facilities
To further ease the investment process, Indonesia’s Ministry of Investment/BKPM has introduced end-to-end services, providing tailored support for each investor. Backed by state-owned enterprises, Indonesia is also developing new integrated industrial zones, such as the Batang Industrial Estate in Central Java, which offers highly competitive land lease rates and even free lease options for certain projects.
This approach aims to simplify the entry and expansion processes, especially during challenging times.
Indonesia’s comprehensive range of investment incentives highlights the country’s commitment to fostering a supportive, pro-business environment for foreign investors. From tax holidays and allowances to duty exemptions and streamlined regulations, Indonesia provides ample resources for businesses to succeed.
These incentives, combined with Indonesia’s strategic location, abundant natural resources, and growing domestic market, make it an ideal destination for foreign businesses.
Also read; 7 Reasons and Advantages for Starting a Business in Indonesia
For foreign investors considering Indonesia as a destination for their next venture, these incentives create significant cost savings, enhance profitability, and ensure a smooth business setup experience.
One thing that must also be considered by potential foreign investors is the issue of legality. You must comply with applicable regulations to ensure your investment runs smoothly.
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