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CLIENT ALERT 2021 | INVESTMENT LIST: THE NEW ERA OF INVESTMENT IN INDONESIA!

15 March 2021

The Update

As mandated by Law No. 11 of 2020 on Job Creation (“Omnibus Law”), as per the date of this publication, the Government of Indonesia (“GOI”) finally enacted 51 implementing regulations (i.e., 47 government regulations and 4 presidential regulations), which cover most of the derivative rules of Omnibus Law, one of which is the awaited Presidential Regulation No. 10 of 2021 on the Business List of Investment (“Investment List”). Through the Investment List, the GOI substantially reduces the number of lines of business which previously were closed to any investment, had foreign ownership limitation and had certain requirements. This relaxation reflects the GOI’s intention to attract more foreign investors to invest in Indonesia. As part of the series of implementing regulations of the Omnibus Law, the Investment List should be thoroughly read along with these other implementing regulations, and relevant existing or upcoming sectoral regulations and policies as they may affect the implementation of Investment List.

The Investment List comes into effect on 4 March 2021, i.e., 30 days after it was enacted on 2 February 2021, and revokes Presidential Regulation No. 44 of 2016 on the List of Business Fields Closed to Investment and Business Fields Conditionally Opened for Investment (“2016 Negative List”).

Discussions

Categorizations under the Investment List

Under the Investment List, the categorizations of line of business for investment are as follows:

1. Closed Lines of Businesses
The Investment List now restricts only six lines of businesses from previously 20 closed line of businesses under the 2016 Negative List. These are:

(a) cultivation and industry of class I narcotics;
(b) any forms of gamble and/or casino;
(c) fish catching listed in Appendix I Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES);
(d) utilization or collection of corals and utilization or collection of corals from nature, used for building material/lime/calcium, aquarium, and souvenirs/jewelry, as well as living coral or recent death coral from nature;
(e) chemical weapons manufacturing industry; and
(f) industrial level chemicals industry and industry of ozone-depleting substances.

In addition to the above-listed lines of businesses, activities in relation to public services or strategic defense and security are reserved solely for the central government.

2. Opened Lines of Businesses

(a) Prioritized Lines of Businesses

The Investment List specifies 245 businesses in its Schedule 1 which meet the following criteria as prioritized businesses, namely:

(i) national strategic projects – the current list is stipulated under the President Regulation No. 109 of 2020 on the Implementation of Acceleration of National Strategic Projects;
(ii) capital-intensive;
(iii) labor-intensive;
(iv) high technology;
(v) pioneer industry;
(vi) export oriented; or
(vii) research, development and innovation oriented.

Prioritized businesses are entitled to receive fiscal and non-fiscal incentives as specified in the Investment List. Fiscal incentives are given in the forms of tax and duties allowances. Tax allowances includes income tax allowance, tax holiday and/or investment allowance. Duties allowances will be in the form of import duty waivers. Meanwhile, non-fiscal incentives are provided in the forms of business licenses simplicity, supporting infrastructure provision, energy availability guarantee, raw materials availability guarantee, immigration, employment and other facilities as provided under the laws.

(b) Lines of Businesses Allocated or Reserved with Partnership with Cooperatives and Micro, Small and Medium Enterprises (“MSME”)

The Investment List now allocates 89 of group lines of business for cooperatives and MSME or in partnership with them. This is another reduction in numbers from the 2016 Negative List which allocates 146 group lines of business for cooperatives and MSME.

(i) Lines of Businesses Allocated for Cooperatives and MSME

The criteria used by the GOI to determine these lines of businesses are:
· business activities implementing no or less advanced technology;
· business activities possess special process, labor incentive, and special and hereditary cultural heritage; and/or
· has capital less than Rp10 billion.

Given the above, since the foreign investors should invest more than Rp10 billion or equivalent to approximately USD720,000 (excluding land and building), it can be concluded that the foreign investors may not invest in this category lines of business if fulfilling the above requirements.

Moreover, there is no further explanation on the requirement or threshold on the technology implementation as mentioned in the first point above. As such, there will be questions when the foreign investors would like to invest in the lines of business in this category but would like to implement the advance technology. Since the implementation of the requirements above is still not clear, we suggest (i) assessing whether or not the sectoral regulations have the provisions on the technology implementation and (ii) having a formal consultation with the Indonesian Investment Coordinating Board (“BKPM”) and relevant sectoral governments before proceeding.

Another point, if a cooperative or MSME achieves the minimum net worth of Rp10 billion or annual sales of Rp50 billion, they are still allowed to continue the business provided that they partner with another cooperative or MSME.

(ii) Lines of Businesses Reserved with Partnership with Cooperatives and MSME

As a reference, according to Law No. 20 of 2008 on the Micro, Small and Medium Enterprise (“MSME Law”), the mechanisms of partnership with MSME can be in several forms including inti-plasma, subcontract, franchise, general trade, distribution and agency, profit sharing, joint venture and outsourcing. Further, to be clear, foreign investors can fully invest in the lines of businesses that are reserved with partnership with cooperatives and MSME as mentioned above.

It remains to be seen how the GOI will monitor the implementation of such partnership in practice.

(c) Lines of Business Opened with Conditions

This part of the Investment List has been closely watched by the market throughout the drafting process. From 350 businesses on which conditions are previously imposed under the 2016 Negative List, there are now 46 lines of businesses which are opened with specific conditions (mostly foreign ownership limitation). While the reduced numbers signal the new era of foreign investment in Indonesia, as mentioned above, foreign investors must thoroughly assess sectoral technical regulations to ensure that their businesses are cleared for foreign investment.

Another notable change is the removal of special treatment to the Association of South East Asian Nations (ASEAN) countries which was provided under the 2016 Negative List.

(d) Lines of Business not Covered in the Investment List

The Investment List expressly states that businesses which are not covered in the Investment List are 100% open to any investments (foreign and domestic). However, it remains to be seen whether the GOI will implement this strictly or this is still subject to the implementing sectoral regulations or government policies like what we had in the previous investment regime.

Other Key Points

  1. The Investment List contains a grandfather clause pursuant to which any investments approved prior to the enactment date of the Investment List (i.e., 2 February 2021) will not be bound to the foreign ownership restrictions as provided for under the Investment List, unless the new foreign ownership limitations are more favorable.
  2. Similar with the 2016 Negative List, the Investment List excludes the conditions on (i) lines of businesses allocated or reserved for partnership with cooperative and MSME, and (ii) lines of business opened with conditions (e.g., certain limitations for foreign investors) for portfolio investments through the domestic stock exchange. We note that in practice, coordination between BKPM and technical ministries is required to implement this exemption.
  3. Under the Investment List, the foreign investors should invest more than Rp10 billion or equivalent to approximately USD720,000 (excluding land and building). The Investment List does not specifically regulate the minimum authorized and paid-up capitals which foreign investors must fulfil. Nevertheless, so long that there is no new regulation or policy governing such matter, foreign investors are subject to the existing BKPM regulation in which sets out Rp2.5 billion as the minimum issued and paid-up capital of foreign investment company. Further consultation with the authority is required to clarify this point.

Conclusion

The publication of the Investment List does not only serve as a ‘fresh air’ to Indonesia investment regime but has triggered immense hopes that Indonesia will enter a completely new investment era. Every country throughout the globe is in survival mode during the COVID-19 pandemic and tries its best to flowing in more investors to their countries in the hope of restoring economic and financial conditions. However, we view that this relaxation should be followed by sufficient and supportive sectoral implementing regulations and policies which are in favor of investment. The GOI will need to work on this to ensure that the relaxation as envisaged by the Investment List can be put into practice.