Understanding the Basics of Starting a Business in Indonesia
Establishing a business in Indonesia comes with many benefits due to the country’s growing economy and free trade agreements with regional neighbors. It is the fourth most populous country in the world with a burgeoning middle class, providing a large potential market for your products or services.
The official business language in Indonesia is English, making it easy for foreign businesses to set up in the country. As it is located in Southeast Asia, you can easily gain access to other international markets.
Establishing a Legal Entity
- There are three major kinds of legal business entities in Indonesia:
- Foreign-owned limited liability company, also known as a PT PMA (Perseroan Terbatas Penanaman Modal Asing)
- Locally-owned limited liability company, also known as Perseroan Terbatas (PT)
- Branch or Representative Office (RO)
This article will focus on the establishment of a PMA company, as it is the most common type of organization opted for by foreign businesses and investors. The steps involved in setting one up include:
- Decide on a company name containing three words, which must not have obscene or vulgar connotations.
- A Deed of Incorporation consisting of an Article of Association must be drawn up with a notary present.
- Receive approval from the Ministry of Law and Human Rights after submitting the Deed of Incorporation.
- Get your company’s tax ID registered for meeting tax obligations and banking purposes.
- A domicile letter is required to make the location of your business known.
- Acquire a company registration certificate (TDP) for integrated licensing services.
- Acquire a manpower report along with a company welfare report from the Ministry of Manpower.
- Based on your business sector, you may be required to apply for additional licenses such as commercial license or tourism license.
KITAS, which stands for Kartu Izin Tinggal Terbatas, is a limited stay permit for foreign investors in Indonesia. It has to be sponsored by an Indonesian company or citizen.
The validity of an Investor KITAS ranges from 6 months to 2 years. The permit is important for a foreign investor who intends to become a shareholder, director, or commissioner in Indonesia.
As a foreigner, you can choose either a one- or two-year KITAS. Both the options would allow you to enter and exit Indonesia multiple times for as long as the permit is valid.
According to the Investment Coordinating Board in Indonesia (BKPM), the minimum capital needed to establish a PMA company in Indonesia is IDR 10 billion. The figure may vary based on the industry chosen.
This capital amount is simply an estimate. The actual investment is supposed to be made over 3 years according to the investment plan submitted by the company.
For more capital-intensive industries, such as banking services or natural resource extraction, the minimum capital may be higher and must be mentioned in the investment plan. Notable exceptions where a capital higher than IDR 10 billion is required include:
- Wholesale businesses
- Food and beverage businesses
- Construction businesses
Pick a Business Location
You require an official address in order to operate a business in Indonesia. This can either be a physical location or a virtual office. While this process is relatively straightforward, it can delay incorporation if not decided in time.
Your business address mainly exists for administrative and mailing reasons, and you do not have to make it your real working location. Virtual offices have also gained popularity recently. If you plan to have one, you can simply register a commercial building as your company address without operating from there physically.
However, you need to be aware businesses belonging to certain sectors are not permitted to use virtual, offices. If this is applicable to your business in Indonesia, it is best to either opt for a physical office or a dedicated desk in a commercial building.
Spend Time in the Country
In order to establish a business in Indonesia, it is vital to stay in the country for some time. While market entry agencies can helpyou, understand that setting up a company is not a quick procedure. Ensuring that you meet all legal requirements by coordinating with government offices can take a considerable amount of time.
The time it takes to fully establish your business varies depending on the nature of your business and the licenses and permits required to make it operational. If you plan to invest in Indonesia, be prepared to spend at least 2 months in the country to complete the business incorporation process.
Hiring in Indonesia
The labor force in Indonesia is governed by the Indonesian Manpower Law, which safeguards the rights of both employers and employees. Note that there are frequent amendments in the Manpower Law, which is why you must stay up to date with the changes as an employer. If you need to hire employees for your business in Indonesia, here are the key aspects to keep in mind:
Perform A Background Check
Conducting background checks of employees is not mandatory in Indonesia. Nevertheless, it is an important step in order to ensure that the employees suit your requirements.
Employers may skip background checks if they wish to save time or are short on money. However, the cost of hiring the wrong person is considerably higher than taking some time to confirm that you are recruiting the right person, particularly when it comes to senior positions.
Background checks verify important information regarding your prospective employees. This way you can guarantee that the person you are taking on board is not making any false claims and does not have a criminal record.
Make an Offer Letter and a Contract
Once you have decided who to hire, it is good practice to send them an official offer letter. Just like background checks, an offer letter is not a legal requirement in Indonesia.
An offer letter sets down clear expectations for both the employer and the employee, and forms the foundation for an employment contract. Vital elements of an offer letter include job description, designation, starting date, performance metrics, type of contract, and salary and other benefits.
When it comes to salary, make sure it is mentioned whether the amount includes taxes or excludes them. It is recommended to always mention the gross salary in offer letters and contracts so that it is easier to calculate.
Types of Employment Contracts
As per the labor law, employees in Indonesia can be hired on one of the two kinds of contracts. The details are as follows:
Temporary or Fixed-Term Contract
Fixed term contracts are valid up to a certain amount of time. The requirements include:
- A five-year duration at the most
- No probationary period
- Contracts are to be signed in the Indonesian language. It is common for foreign employees to have bilingual contracts. However, if a contract is in English, it would be automatically considered an indefinite contract.
- As an employer, you must register the contract with the Indonesian Ministry for Manpower within 3 days of signing.
In case you decide to terminate an employee, there are some rules and regulations you need to keep in mind. Firstly, the reason a probationary period is not allowed is to discourage employers from terminating the contracts during the initial months after hiring.
Indonesian employees have a right to acquire compensation in case of contract termination. The compensation must amount to a month’s salary. If the employment duration was less than a year, the compensation is prorated. On the contrary, foreign employees are not eligible for similar compensation.
Permanent or Definite Term Contract
These contracts are more common than the temporary ones. Typically, a three-month probationary period is included in a definite term contract. After the end of the probationary period, it is important to issue a letter to your worker to inform them of their permanent status.
The employment contract is supposed to clearly state the conditions of the probationary period. The contract typically lets both parties terminate the contract with a 1-4 week notice, without employee entitlement to severance pay.
Make sure you always track the last date of the probationary period. It is imperative to establish internal rules where direct supervisors are mandated to make a decision about whether to retain the employee after the end of the probationary period.
Employee Working Hours, Salary, and Leave Policies
Before hiring employees in Indonesia, it is crucial to gain an understanding of the regular working hours in the country, the minimum wage, and the leaves employees are entitled to.
Full time work in Indonesia is 7 hours a day, 40 hours a week, and 6 days a week. Some employees are also allowed to work 8 hours per day for 5 days after agreement with the employer.
According to Indonesian law, part-time work is not recognized. If there are any part-time employees in your company, note that they are entitled to similar benefits as full-time employees.
In Indonesia, three sectors decide the minimum wage, namely the province, the regency (that exists within the province), and the business sector. The minimum wage in the country varies from one province to another.
If an employee is working additional hours, your company must provide them with adequate compensation. Overtime hours must be agreed with the workers in writing.
You will find that several employees will choose to work overtime, especially during holidays or busy seasons. Moreover, organizations are not permitted to replace incentives or bonuses with overtime pay.
As an employer in Indonesia, it is important to learn about the leave entitlements for workers. Here is a brief explanation:
The minimum annual leave for employees in Indonesia is 12 days per year. However, this does not come into effect until after 12 months of service. Employees can only carry over annual leaves for 6 months from the point it is accrued.
Paid sick leaves must be supported by a medical certificate. The standard sick or medical leave for workers in Indonesia is 14 days a year.
Special leave entitlements exist for female employees. Pregnant women are typically given 3 months of maternity leave, 1.5 pre-natal and 1.5 post-natal. During this period, they are paid their wages in full.
Benefits of Starting a Business in Indonesia
Indonesia is located at a strategic position in Southeast Asia and has the benefit of being the world’s third largest democracy. Here are key reasons why establishing a business in Indonesia is a smart choice:
Indonesia is the largest economy in Southeast Asia and is also a member of the G20 major economies of the world. The United States, China, Singapore, and Japan are the leading export destinations of Indonesia.
Indonesia is the fourth most populated country in the world and houses a growing middle class. There is a large demand for various products and services in the country, providing a massive potential market for your business.
Free Trade Agreements
Indonesia is a member of the Association of Southeast Asian Nations (ASEAN), which is an economic union comprising of 10 countries in the region. The member states are free to trade with each other with minimum or no tax. This can help you easily gain access to neighboring markets.
English as the Official Business Language
While Bahasa Indonesia is the official language of Indonesia, the official business language is English. This is a major advantage for foreign business owners as it would help your business in Indonesia to penetrate the market smoothly.
Before you plan to expand your business to a foreign country, it is imperative to learn about the various rules and regulations. Make sure you properly register your business in Indonesia and keep business operations aligned with the requirements of the relevant government bodies. Moreover, if you need to hire employees, it is best to form offer letters and draft legal contracts so that expectations between the company and the workers are clear.
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