Indonesia has several types of companies which are generally quite confusing for foreign investors when they want to choose the right legal entity for their business activities. Each form of company has its advantages and disadvantages, and we have selected the three most common types in Indonesia and presented a comparison between them in this article.
Here is an explanation of the differences between PT, PMA, and KPPA:
1. PT PMDN or Domestic Investment
One of the legal entities available in Indonesia is the Domestic Investment or so-called Limited Liability Company (PT PMDN), which is the most popular and most widely used form of business entity to carry out business activities in Indonesia in various fields.
Apart from having a clear legal basis as contained in Law No. 40 of 2007 concerning Limited Liability Companies, PT is considered as an option for foreign investors who want to develop a business that is closed to foreign ownership. PT is a company founded by at least 2 local people as responsible shareholders and free from corporate debt.
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The advantages of a Limited Liability Company in Indonesia, if you compare it with other companies, include:
· Shareholders’ liability is limited to the company’s debts
· Can easily obtain additional funds or capital, for example by issuing new shares
· The continuity of the company is safer
· Leadership efficiency, because the company leadership can be replaced at any time through the General Meeting of Shareholders (GMS)
· Company management has clear responsibilities to owners or shareholders
· It is clearly regulated by laws and other regulations, that a Limited Liability Company binds and protects the company’s activities
· Applications for company registration are classified based on the minimum value of capital investment, which is specifically based on company size: small < IDR 600,000,000; medium IDR 600,000,000 – 10,000,000,000; and large > IDR 10,000,000,000
· Companies can have at least three business activities that are related to one another
· In general there are no restrictions set, and can participate in all open tenders from the government
Also read: Exploring the Various Types of Business for Success
Apart from its advantages, PT in Indonesia also has disadvantages, including:
· PT is subject to separate taxes and dividends received by shareholders will be taxed.
· The company’s trade secrets are less secure, because all activities must be reported to shareholders.
· The incorporation process requires more time and funds than other entities.
· The process of dissolution, amendment to the articles of association, mergers and takeovers requires time and funds, as well as approval from the General Meeting of Shareholders (GMS).
· The company is 100% owned by local shareholders.
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2. PT PMA or Foreign Investment
Foreign investors who wish to set up a business in Indonesia tend to choose PT PMA (Foreign Investment) which is the formation of capital for business purposes in the Republic of Indonesia by foreign investors. Investments made can come from foreign investors wholly or partly with domestic investors.
Before deciding to register a PMA in Indonesia, investors must ensure that their business activities comply with the Positive Investment List, which contains limits on foreign ownership of certain business classifications. The list is issued by the Investment Coordinating Board (BKPM).
The total investment plan is a minimum of IDR 10 billion, which is allocated in Indonesia for land, buildings, working capital, and others. The minimum amount of capital that must be deposited is IDR 10 billion, which must be deposited after the company is established and has a bank account.
After incorporation, the company needs to submit an Investment Activity Report and a monthly tax report, even if the company does not have any tax activity and liabilities yet.
Comparing companies, the advantages of PT PMA in Indonesia include:
· PMA has the same rights and obligations as other local companies.
· The minimum number of shareholders is two (can be individuals or legal entities).
· The minimum organizational structure consists of 1 (one) Director and 1 (one) Commissioner.
· Easy and fast licensing permission.
· Provision of special customs facilities for PMA.
· Local taxes or lower import duties.
· Foreign investors own 100% or less of the company.
· Can sponsor many foreign employees.
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However, PT PMA also has its drawbacks, including:
· Companies must make monthly tax reports.
· Companies are required to provide business activity reports to BKPM every 3 months so that BKPM can monitor company developments.
· The minimum investment plan is 10 billion.
Also read: Limited Liability Company (LLC): Definition and Characteristics
3. KPPA or Foreign Company Representative Office
Another business entity known as a Foreign Company Representative Office (KPPA).
What is KPPA in Indonesia? It is an office established by a foreign company to manage its business activities in Indonesia. This includes preparing for the establishment of a PT PMA
Activities that can be carried out by KPPA are limited, including:
· Activities in the role of supervisor, liaison, coordinator, and management of the interests of the company or its branches in Indonesia and/or outside Indonesia. KPPA in Indonesia cannot seek or earn income or pursue transactional activities of the sale and purchase of goods and services.
· Carry out market research for materials and products based on company needs.
· Monitor sales in Indonesia for the company’s marketing activities.
· KPPA must be located in the provincial capital and in an office building.
· KPPA must have a permit to carry out its activities. Petition requests to establish
KPPA in Indonesia and foreign nationals who wish to work for companies (expatriates) must be addressed to the Investment Coordinating Board (BKPM).
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The following are the requirements for establishing a KPPA:
· Articles of Association of the foreign company to be represented.
· Letter of Appointment from the foreign company to be represented.
· Photocopy of passport (for foreigners) or KTP (for Indonesian citizens) who will be the executive representative.
· Statement of willingness to stay and work only as an executive representative, and not to do other business.
· Power of Attorney, if the application letter is not submitted by a foreign company.
Also read: What is Company Incorporation: Definition and Advantages
However, the weakness of the KPPA is that no income is generated, and it is only valid for a maximum of 5 years. KPPA works best for foreign investors or companies who do not wish to dive directly into the Indonesian market prior to conducting research and evaluation. KPPA in Indonesia is generally the first step for foreign companies in building their business in Indonesia. KPPA is usually used to test feasibility before establishing a PT/PMA. After the KPPA shows that the designation of its products proves that its products are marketable and suitable for the Indonesian market, foreign companies can establish PT. FDI.
Also read: The Types of Companies in Indonesia: 2023 Complete Guide
Both PT, PT PMA and KPPA have their respective roles. PT plays a role in absorbing a large number of workers and has a positive impact on the progress of domestic industry and reducing dependence on foreign products. Then, one of the important roles of PT PMA is to increase the country’s foreign exchange reserves with taxes provided by investors. For the KPPA, its role is as a supervisor, liaison, coordinator, and manager of the interests of the company or its branches in Indonesia and/or outside Indonesia.
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