Relaxation of Indonesia's foreign investment rules

Overview

Indonesia's long-awaited new investment list has finally been issued with effect from 4 March 2021.  The new investment list was issued under Presidential Regulation No. 10 of 2021 on Investment Business Sectors (which is colloquially referred to as the "Positive List"). The Positive List was enacted as one of the key implementing regulations of Law No. 11 of 2020 on Job Creation (commonly known as the Omnibus Law), which revised, among others, Law No. 25 of 2007 on Investment (the "Investment Law"). 

The Positive List replaces the previous implementing regulation of the Investment Law, Presidential Regulation No. 44 of 2016 which was widely known as the "Negative List". Under this new regime, most of the foreign investment restrictions in the Negative List have been lifted.

The Positive List undoubtedly represents a major opening of the Indonesian economy to foreign investment as foreshadowed by the Omnibus Law and the declared intention of the second President Joko Widodo administration, which has been pushing these reforms for the past 18 months. 

The general approach of the Positive List is that all business sectors are open for investment except for certain limited sectors – these sectors are either (1) closed to foreign investment or reserved for the Indonesian Government; or (2) are open for foreign investment subject to restrictions. Nevertheless, the Positive List has removed a large number of foreign investment restrictions that applied across a raft of business sectors, in addition to providing a broad range of investment incentives to identified "priority sectors".

Key changes introduced by the Positive List

1. Business sectors that are closed for investment

Under the Positive List all business sectors are open for investment, except for (i) business sectors that are declared closed for investment, or (ii) activities that can only be conducted by the Central (Indonesian) Government. The Positive List has reduced the number of sectors completely closed for investment from 20 to only 6.

The six business sectors that remain closed for investment are (1) narcotics cultivation and industry class I; (2) all forms of gambling and/or casino activities; (3) fishing of prohibited species as provided in Appendix I of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES); (4) utilisation or taking of coral from nature, including for building material /lime/calcium, aquarium, and souvenirs/jewellery; (5) chemical weapons manufacturing industry; and (6) industrial chemicals and industry ozone-depleting substances.

2. Business sectors that are open for investment 

Pursuant to Article 3 of the Positive List, there are four categories of business sectors that are open for foreign investment:

1. priority business sectors;
2. allocated business sectors for or partnerships with cooperatives and Micro, Small, and Medium Enterprises (Usaha Mikro, Kecil, dan Menengah or "UMKM");
3. business sectors that are open with certain requirements; and
4. business sectors that are not included in the above three business sectors and are therefore fully open to foreign investment.

Priority business sectors

A business is as a priority business sector if it falls within the following criteria: it is (i) a national strategic program or priority, (ii) capital intensive, (iii) labour-intensive, (iv) high technology, (v) pioneer industry, (vi) export oriented, and/or (vii) oriented in research, development, and innovation activities, set out in Attachment 1 of the Positive List, as elaborated below. 

Both domestic and foreign investors investing in certain priority business sectors may be eligible to receive fiscal incentives and/or non-fiscal incentives, subject to the relevant applicable laws. Fiscal incentives include tax allowances, tax holidays, and investment allowance, as well as customs and excise incentives in the form of exemption from import duties on imported machinery, goods, and material for industrial development and investment. Non-fiscal incentives will be aimed at easing business licencing, provision of supporting infrastructure, energy, guaranteed availability of raw materials, immigration, employment and so on.

Attachment I of the Positive List indicates 245 business sectors that are categorised as priority business sectors, where:

1. 183 business sectors are eligible for tax allowances;
2. 18 business sectors are eligible for tax holiday; and
3. 44 business sectors are eligible for investment allowances.

Sectors allocated for or that require partnerships with cooperatives and UMKM

Despite the significant liberalisation brought by the Positive List, certain business sectors are specifically allocated for cooperatives and UMKM. Unlike the Negative List, the Positive List provides more clarity on the criteria to determine business sectors which are allocated for cooperatives and UMKM:

1. business activities that do not require technology or only use simple technology;
2. business activities that involve specific process, are labour-intensive business, and characterised by a special and hereditary cultural heritage; and/or
3. business activities which involve capital up to IDR 10,000,000,000 excluding land and building for the business.

Examples of such business sectors allocated for or require partnership with cooperative and UMKM as provided in Attachment II to the Positive List include one-star hotels, small and medium voltage electricity installation, certain types of service trading like beauty salons and tailor, and retail trading like non-department store and minimarkets, and courier agents.

Foreign investors cannot engage in the business sectors which are allocated for cooperatives and UMKM. However, foreign investors may potentially partner up with cooperatives and UMKM by using a Large Scale Business with an investment value of more than IDR 10,000,000,000, excluding land and buildings.

The business sectors that are open for Large Scale Businesses to partner up with cooperatives and UMKM are:

1. business activities that are mostly carried out by cooperatives and UMKM; and/or
2. business activities that are aimed to scale-up the operation to enter the supply chain.

Sectors that are open with certain requirements

The Positive List covers a total of 46 business sectors under this category. This represents a significant relaxation from the previous regime under the Negative List which included 350 sectors that applied foreign investment limitations. We set out below some of the key business sectors that are open with certain requirements under the Positive List are:

The most exciting part of the Positive List is that a number of business sectors that were previously open with certain requirements for foreign investment under the Negative List has been made available by the Positive List for foreign investors without condition. Some of the key examples of the newly open business sectors are as follows: 

3. Foreign investment value requirements

Based on the Positive List, foreign investments also have to comply with the following requirements:

1. foreign investors can only engage in a Large Scale Business with a minimum investment value of more than IDR 10,000,000,000, excluding land and buildings;
2. foreign investments can only be in the form of limited liability companies that are established and located in Indonesia; and
3. a special exception can be applied if the investments are carried out within special economic zones for technology-based start-ups where the value of foreign investments can be less than IDR 10,000,000,000.

What to expect?

These changes do not simply open up opportunities for new investment, but will also need to be considered in relation to existing investments. For example, existing investments structured through debt instruments (or equity linked debt instrument) or investors negotiated options to acquire additional equity interests (e.g. warrants) can be revisited and revised to permit direct holding.

The changes may also mean that some terms and conditions in existing joint venture or shareholders agreements may need to be adjusted.

Relevant parties should therefore expect a certain amount of (re)negotiation of existing investment structures and documentation (including articles of association of the company where the investment is held). Naturally, before such actions are taken, the commercial impact analysis and financial modelling needs to be prepared accordingly.

Please click here for the full Presidential Regulation No. 10 of 2021 (available in Bahasa Indonesia only).

Key Contacts
Jakarta: Ratih (Ipop) Nawangsari, Partner; Frédéric Draps, Foreign Legal Consultant; Adhika Aditya, Senior Associate; Nidya Harliani, Associate
Singapore: Simon Brown, Partner; Michelle Phang, Partner; Waltter Kulvik, Partner

1. Except for telecommunication central construction conducted by construction company using simple/ medium technology, which is allocated to UMKM / cooperatives