JAKARTA, GESAHKITA COM–When a foreigner wants to engage in market surveillance, networking, explore business opportunities or provide other managerial support in Indonesia to the parent company abroad, he needs to establish a (general) foreign representative office (in Indonesian: Kantor Perwakilan Perusahaan Asing, abbreviated KPPA). This office is the local representative of the foreign parent company. It needs to be emphasized that this foreign representative office is strictly forbidden from engaging in commercial activities and generate revenue/profit, send invoices, etc. For these kind of business activities a foreign investment company (PT PMA) is required.
It frequently occurs that a foreign investor opens a representative office in Indonesia first in order to ‘get to know the market’. If his findings are positive, then he can open a PT PMA. The advantage of opening a representative office first is that it requires no large capital investment and it is a relatively easy and quick way to establish a legal entity in Indonesia. Contrary to the PT PMA (which is restricted by the Negative Investment List), a representative office can be established in most – but not all (!) – industry sectors (for example, a law firm cannot open a representative office in Indonesia).
Indonesia is a lucrative market for foreign entrepreneurs due to the country’s huge population (a giant consumer force), low minimum wages, and abundant natural resources. However, if Indonesia is a new market for you, or, if you are not sure whether your product, services or project can become a success, or, your financial resources are limited, you are advised to open a “Rep office” first, and use this legal entity to explore the market, promote your products, find business partners (distributors) and become acquainted with Indonesia’s (business) culture. But, we emphasize again, you cannot use your “Rep office” to generate profit or engage in direct business activities.
Besides being a much cheaper option compared to the PT PMA, the advantage of a Rep Office is that you have 100 percent (foreign) control over this legal entity and there are no director or shareholder requirements. However, we emphasize here, as this is sometimes misunderstood, that there has to be a foreign parent company abroad before you can open a Rep Office in Indonesia. A strategy that is often used by foreign companies is that the Rep Office promotes and offers the parent company’s products to Indonesian retailers/clients (invoices to the Indonesian client are sent by the parent company abroad). Then, after a strong client portfolio has been established, the foreign company decides to open a PT PMA in Indonesia (this strategy does have an impact on the corporate income tax liability of the Rep Office as it is considered “guiding indirect profits for the parent company abroad”, this is further explained below).
Besides the general foreign representative office, which is the main topic that is discussed in this section, there are also the foreign trade representative office (K3PA) and the foreign construction services representative office (BUJK). Both are separate entities from the general representative office and are thus subject to different requirements (regulated by the Ministry of Trade and Ministry of Public Works, whereas the general foreign representative office is regulated by Indonesia’s Investment Coordinating Board, abbreviated BKPM). The K3PA and BUJK are not further discussed in this section. So, lets get back to the general foreign representative office.
What are the Allowed Activities of a Representative Office in Indonesia?
Based on Article 68 (2) of BKPM Regulation No. 5/2013, the activities of a general foreign representative office are limited to:
Taking care of the interests of the foreign parent company or its affiliated companies
Preparing the establishment and development of a foreign investment company (PT PMA) in Indonesia
What are the Restricted Activities of a Representative Office in Indonesia?
Article 2 BKPM 22/2001 explicitly regulates that the general foreign representative office is not allowed to:
Search for income from sources inside Indonesia, including carrying out activities or doing anything related to the engagement in and/or sales and purchases of goods or services with a company or individual inside Indonesia, and/or
Participate in any form in the management of a company, a subsidiary or branch office in Indonesia
Based on Article 4 (3) of BKPM Regulation 22/SK/2001, the Chief Representative of the representative office is allowed to employ foreign employees (if they possess the relevant expertise). All foreigners working in Indonesia need a permit called KITAS (non-permanent stay permit) and an IMTA (work permit). These can be issued through representative offices for the representative office executive, while business visas for limited stays can, without limitations, also be sponsored by the representative office.
However, KITAS sponsorships are restricted by the rule that for each foreign national working at the Rep Office there needs to be (at least) three Indonesian employees. Hence, if you want two expats to work at your Rep Office in Indonesia, then you need to hire at least six Indonesian staff-members (either experts or administrative staffs). This regulation was made in order to combat Indonesia’s unemployment rate. Authorities will check whether this foreign/local worker ratio is being respected and therefore you need employment contracts, payment (salary) slips, and copies of the staff-members’ identification papers as evidence.
In case you do not want to have any expats working at your Indonesian Rep Office (and even if the Rep Office Head or Chief Representative is an Indonesian citizen), then you will still need to hire three Indonesian staff-members.
The representative office needs to be located in an office building (or commercial building) in a provincial capital city in Indonesia (a virtual office is not allowed). You cannot open the Rep Office in a house or apartment.
About the Chief Representative Officer of the Rep Office
The Rep Office Head in Indonesia (also known as Chief Representative Officer or Chief Representative) needs to be appointed by the director of the parent company abroad. It is important to know that both positions cannot be filled by the same person; the foreign director needs to appoint someone else as Rep Office Head in Indonesia (or the director of the parent company abroad needs to step down from his position first, appoint a new director for the foreign parent company, and then can become the Rep Office Head in Indonesia). Regarding the nationality of the position of Rep Office Head, this can be filled by an expat or an Indonesian individual. General guidelines are that he/she holds at least a Bachelor degree and three years of working experience in the related field.
What Taxes Does the Representative Office Has to Pay?
Even though the representative office in Indonesia is not engaged in direct sales and therefore cannot generate revenue or profit, it is a taxable entity and therefore it is mandatory to report and pay tax every month (as well as the monthly social security report). Income tax will be zero.
Each month you will have to report withholding tax (amount of an employee’s pay withheld by the employer).
But what about the Rep Office guiding indirect profit for the parent company abroad? There is also a specific regulation for those representative offices that (seemingly) facilitate the generation of profit for their parent company abroad as a result of the Rep Office’s activities in Indonesia. Despite revenues being paid directly from Indonesian client to the parent company abroad, a tax liability can be levied by authorities. This is why social media platforms like Facebook and Twitter encountered problems in Indonesia. Although earnings from advertisement – originating from the Indonesian audience (through doing business in Indonesia) – were booked at the regional office in Singapore, tax officials found these social media to be liable for corporate income tax as well as value added tax (related to service delivery in Indonesia).
If the Rep Office is indeed guiding indirect profits for the parent company abroad from Indonesia – generated through the Rep Office’s activities in Indonesia -, then it must apply the “special metric of gross export value when calculating corporate income tax”. In this case income tax would not be zero but the applied rate for gross export values is 0.44 percent (however, in case of a tax treaty between Indonesia and the country abroad, the corporate income tax rate follows the branch profit tax rates as set in the tax treaty).
Opening a Bank Account by a Rep Office or Expat
Being a legal entity incorporated in Indonesia, your Rep Office can open a bank account at a local bank. Usually Rep Offices open a rupiah-denominated account for administrative matters, including the transfer of wages for the employees (a US dollar-denominated account is also possible). Per bank, the exact requirements may differ but in general you will need to show the Rep Office’s Copy of Company Registration (TDP), Business License, and Copy of tax number (NPWP). Usually a minimum deposit is required (for example IDR 1 million or approx. USD $100). Also the expat working for the Rep Office in Indonesia can open a personal bank account. Generally, the expat simply needs to show his passport, KITAS and place a minimum deposit. Based on our experience the process takes less than one hour (provided you bring all necessary documents).
Required Documents and Steps for the Setting Up of a Rep Office in Indonesia:
The following licenses/documents are required for the establishment of a (general) foreign representative office in Indonesia:
|• A Letter of Appointment from the foreign parent company|
|• Articles of Association of the foreign parent company including amendment(s) in English|
|• Copy of registration at Chamber of Commerce of parent company|
|• Power of Attorney to sign the application if being represented by another party|
|• Copy of a valid passport (of foreign national), or, copy of identification card number and tax number/NPWP (of Indonesian national) who will be proposed as Representative Office Head|
|• Letter of Intent & Letter of Statement concerning the commitment to stay, and only work in the position as a Representative Office Executive without conducting other business in Indonesia|
Please note that the Letter of Appointment (LOA), Letter of Intent (LOI), Letter of Statement (LOS), Power of Attorney (POA), copy of registration at Chamber of Commerce, and Articles of Association (including amendments) need to be legalized by a Public Notary and an Indonesian Embassy in the country of the foreign parent company.
The following steps are required to set up a (general) foreign representative office in Indonesia:
|Required Steps|| Estimated Time
|• Request BKPM Letter of Approval||10|
|• Letter of Domicile of the representative office||5|
|• Power of Attorney to sign the application if being represented
by another party
|• Tax identification number (NPWP)||2|
|• TDP/Company registration certificate||14-21|
The license of a general representative office (KPPA) lasts for 3 (three) years and can be extended twice, each for a period of 1 (one) year, to a total of 5 (five) years. Hereafter it cannot be extended, unless the representative office can show that its activities are different from its earlier activities. Generally, after five years, you have the choice: set up a PT PMA or exit Indonesia.
For foreigners who are not familiar with Indonesian bureaucracy the establishment of a Rep Office can be a complex and time-consuming affair. Therefore, in many cases it is better to appoint a local business consultancy or agent to set up the office for you.
What Can Indonesia Investments Do for You?
Establish the representative office in accordance with existing laws and regulations
Assist finding the right office space at the right location (Jakarta only)
Assist making the employment contracts between you and the staff-members
Arrange the immigration process for your expat workers and/or Rep Office Head
What Does the Representative Office Establishment Package Cost?
Approx. USD $2,000 (excluding immigration services); it will take about two months
If you have any further questions regarding the establishment of a foreign representative office, or need support to establish such office, please contact Indonesia Investments.