Conversion of Company Status in Indonesia (PT PMDN to PT PMA)
Company Status in Indonesia – The Indonesian government stipulates that every foreign citizen and/or foreign legal entity who is willing to buy shares or invest in a domestic company (Perseroan Terbatas Penanaman Modal Dalam Negeri – PT PMDN) must first reconsider hat the local company status will be converted to a foreign-owned company (Perseroan Terbatas Penanaman Modal Asing – PT PMA). However, when they want to invest, business owners or potential investors must perform extensive research on whether their business fields are open or close for foreign investments.
Preparations of converting PT Status to PMA
Before you decide to convert your company status from a domestic-owned limited liability company (PT PMDN) to a foreign-owned limited liability company (PT PMA), you must be aware of some the preparation steps. For more details, see the following provisions.
1. Business Fields Status
The Indonesian government provides provisions regarding the investment that refer to the latest regulations. at this stage, all forms of business that are commercial are open for investment, except for business fields that are expressly closed and managed by the central government or those dedicated to solely owned by the small-micro business. As a side note, investors from ASEAN countries can get a higher percentage of foreign shareholding in some business classifications.
Before you decide to buy or invest in a local company, it is important to know in advance the business classification of the company, which will affect the percentage of shares that foreign shareholders are allowed to invest. For complete information, you can access which sectors are included in the classification through the Investment Business Sector (Bidang Usaha Penanaman Modal – BUPM) in accordance with the regulations based on Presidential Regulation No. 49 of 2021 (Perpres Nomor 49 Tahun 2021).
2. Investment Compliance
Many business fields are operating in Indonesia, ranging from small, medium, and large-scale enterprises. However, not many manage all licensing processes properly, especially in carrying out their business activities. It could happen, the existing local companies do not pay taxes and some obligations related to the requirements of business licensing and may have some missing reports for the company to submit.
Therefore, before you decide to own the company and convert the status to foreign investment (PMA) you must perform legal due diligence before the converting process.
3. Minimum Capital Requirements
Indonesia’s commitment has indeed provided many conveniences for foreign investors who want to invest in Indonesia, one of which is by increasingly open regulations, especially in the commercial sector according to Presidential Decree No. 49 of 2021 (Perpres Nomor 49 Tahun 2021) and structural reforms through online single submission (OSS). The capital requirement for the foreign-owned company (PT PMA) is at the minimum of IDR. 10 billion (USD 745,000) with fully stored paid-up capital; whereas a PT PMDN has no minimum value of capital investment.
Furthermore, the investment value, which is often confused as capital, is set at Rp. 10 billion (USD 745,000), per business activity. however, if the classification is different, the value of the investment plan will increase simultaneously. The regulations regarding this type of investment value and classification may be read here:
Status Converting Process
The PT PMA application process itself can be done online. Before processing the online application, the company must fulfil the administrative process through a Notary recognized by applicable law in Indonesia. This stage will require the company to have a shares transfer; be it through sales-purchase process, acquisition and/or merger, or from the options of many other recognized processes of shares transfer in Indonesia.
Once partial amount of shares is owned by a foreign legal entity (individual and/or foreign enterprises), the PT status will be converted from PT PMDN (fully owned by domestic legal entities) to PT PMA (foreign-own investment company).
The procedure was previously processed through the Electronic Investment Licensing and Information Service System (SPIPISE), which the stages are now incorporated based on the online single submission (OSS) system. The OSS provisions themselves are based on Presidential Regulation Number 05 of 2021 (Perpres Nomor 5 Tahun 2021) concerning risk-based business licenses.
Documents performed by the Notary will then be processed through the OSS system and the Company will acquire its new status in no time.
However, prior to conversion, there are several terms to be noted :
- Own proper PT establishment documents in general, some of the existing documents starting from the company establishment deed and amendment deed, if any, the Decree of the Minister of Law and Human Rights for the establishment and ratification stage, and the company’s Taxpayer ID Number.
- Own a Business Identification Number (NIB) and a business license previously processed through OSS or BKPM in accordance with the business sector. Which then, will be adjusted to the new investment status.
- The location of the business is under the correct required area of the governed spatial layout with a registered address for the company.
- The company must then perform a shares transfer process in order to finalize the status conversion of the company
General Terms of PT PMA
Several general requirements must be met to carry out the PT PMA conversion process, see the full explanation.
1. Legality of the Company
- The deed of establishment of the company and amendment, if any, have acquired the approval of the Ministry of Law and Human Rights.
- The company’s taxpayer ID (Nomor Pokok Wajib Pajak – NPWP) must obtain confirmation as an active taxpayer status following the related tax regulation.
- obtain the active NIB and related business license in accordance to the business activity.
2. Legality of the Domicile
The company is obliged to present the required legality related to the company’s office address or project (if the project is located in a different area than the office), in the form of lease agreement, Land Ownership Rights Certificate (HGU/HGB), borrow-to-use agreements for groups and/or affiliates. Other than mentioned, the company is also mandatory to perform land and building tax obligations, if they own the premises by themselves.
3. Environmental Compliance
Several business activities will require the company to acquire compliance upon the Environmental Regulation, which must be periodically checked before the process of investment status conversion.
4. LKPM – Activity Investment Report
The documents in the form of receipt of the latest Investment Report / LKPM must be acquired by the company through submission of the quarterly report of the company, specifically for a foreign company and local company that has met the requirement to perform the LKPM submission to BKPM.
5. Organizational Structures
The company must perform thorough checks on its organizational structures. Be it owned and managed by individuals and/or legal entities; the personnel as recognized in the structure will be required to have themselves be checked of all the compliance nature related to the company. The most common example is the tax obligation based on each taxpayer ID number related to the company, i.e. Director, Commissioner, and Shareholders. To perform the submission of PT PMA conversion, the Director of the company must acquire approval from Shareholders and perform the conversion in accordance to the governed regulated law assisted by a Notary; if not a Power of Attorney is required to be made. More information regarding shares transfer in a company will be provided in the next article.
We will discuss the most frequently asked topics in short through this below sub-title: Business Investment Sectors (Bidang Usaha Penanaman Modal – BUPM)
Effective on on May 12, 2016, Perpres No. 44 of 2016 concerning the Negative Investment List (DNI) which regulates open and closed business fields, is now amended under Presidential Regulation Number 49 of 2021 (Perpres No. 49 Tahun 2021). Through this Regulation, investment activities are divided into several classifications, including:
1. Open Business Fields
Through the latest regulations, the Government of Indonesia provides access to some commercial fields of business. And the business fields under this category will allow the foreign investors to own up to 100% of shares. More details on the business sectors and classifications will be discussed more thorough in our next article.
2. Business Fields Dedicated to Partnership with Small-Micro Business and Cooperation
The latest regulation also explains that there are provisions for some businesses that are closed for fully owned by foreign investors. Such businesses are concentrated to be owned and acquire partnership by small-micro business, cooperation and/or the government as the sectors are regulated under Law No. 11 of 2020 (UU No 11 Tahun 2020) concerning the Job Creation, as an example the alcoholic liquor industry containing malt (KBLI 11031), and some other industries managed by the central government.
3. Business Fields with Certain Requirements
The classification of some business classifications will appoint limitations to some sectors in which, might be owned by foreign investors with a certain percentage of the foreign shares; also require other shares to be owned by fully domestic investors.
4. Priority Business Fields
These are the business sectors with compliance priorities related to Tax holidays, Tax Allowance, and Investment Allowance. In which some of the more specialized activities within the classification might require additional notes prior to registering the license.
What If Foreign Investors Have Invested and Changes of Regulations are Applied After all the Process is Completed?
At this stage, the company documents must be adjusted to the regulations that are governed according to the latest law. The process must be performed through a notary since it will require the Article of Association to be amended. There are several actions that you can do for this process, the stages can be done by selling some of the value of foreign shares to Indonesian individuals or fully-owned local companies. Then you can run a business in Indonesia with the classification of business in accordance with the regulations that may be fully / partially owned by foreign entities. A thought of finding alternatives on the business activity might also be given for those willing to adjust their business. Another solution might allow a drastic change: from a local company to a whole new status of the completely foreign-owned company. It is true that the stages may seem very difficult and take long time to process, but once you gain a deeper insight into Indonesian law and regulations regarding limited liability companies, it is actually a pretty simple and easy process. Not to mention, with the new online system, the conversion might be completed in a short time.