Business in Indonesia: Legal Insight and Key Considerations for Foreign Direct Investment
Indonesia has increasingly emerged as a key jurisdiction for foreign direct investment (“FDI”) in Southeast Asia, supported by its large domestic market, growing digital economy, strategic geographical location, and abundance of natural resources. In recent years, this position has been reflected in strong FDI realization across key sectors, particularly in base metals, mining, chemical, and pharmaceutical industries, as well as transportation and telecommunication.
This article provides an overview of key legal considerations for foreign investors in Indonesia, focusing on the establishment of foreign investment companies and the underlying rationale for investing in Indonesia.
Incorporation of Foreign Investment Companies
Can all business sectors be opened to FDI?
Foreign investment in Indonesia is principally governed by Law No. 25 of 2007 on Investment and Presidential Regulation No. 10 of 2021 on Investment Business Fields, as amended, along with other sector-specific regulations (collectively, the “Investment Law”). One of the fundamental principles under the Investment Law is the equal treatment of foreign and domestic investors, subject to prevailing laws and regulations. Notwithstanding this principle, the Indonesian government retains the authority to impose certain conditions on foreign investors, including foreign ownership limitations under the “Positive Investment List”.
Under this framework, all business sectors are generally open for foreign investment, except for sectors that are:
- closed for investment, such as certain activities relating to alcohol or prohibited goods;
- conditionally open or subject to foreign ownership limitations, such as certain transportation businesses that are limited to 49% foreign ownership and the Indonesian batik industry, which is reserved for full domestic ownership; and
- exclusively reserved for the Government, particularly those relating to public services, strategic defense, and national security.
Where a business sector is open, whether fully or conditionally, foreign investors may establish a foreign investment company in Indonesia.
Furthermore, with respect to business activities, Indonesia adopts a risk-based licensing regime, whereby the risk classification of the relevant business activity determines the level of licensing and regulatory compliance required. A key aspect of this regime is the determination of the appropriate Indonesian Business Classification (Klasifikasi Baku Lapangan Usaha Indonesia or “KBLI”), which forms the basis for identifying the applicable licensing requirements. Business activities are generally categorized into (i) main business activities, which constitute the primary source of revenue, and (ii) supporting business activities, which complement the main activities.
Following the issuance of the Business Identification Number (Nomor Induk Berusaha or “NIB”), a foreign investment company is required to obtain the relevant business licenses or standard certificates in accordance with the applicable laws and regulations governing its specific sector.
How can an investor establish a Foreign Investment Company?
Under Indonesian law, foreign investment must be conducted through a limited liability company incorporated in Indonesia, commonly referred to as a Perseroan Terbatas Penanaman Modal Asing (“PT PMA”). In practice, there are three primary modes of entry for foreign investors:
1. Establishing a New Company
A PT PMA may be established with at least two shareholders. The incorporation process generally includes the execution of a Deed of Establishment before a notary, obtaining approval from the Minister of Law, registration for a Tax Identification Number (NPWP), registration through the Online Single Submission (“OSS”) system, issuance of a NIB with the appropriate KBLI, and obtaining the relevant business licenses or standard certificates.
2. Joint Venture with an Indonesian Partner
Indonesian law recognizes joint venture arrangements between foreign and domestic investors. Such arrangements remain subject to foreign ownership limitations and sector-specific regulations, which function as a mechanism to regulate shareholding structure. A key element of a joint venture is the joint venture agreement, which governs the commercial relationship between the parties, including capital contribution, governance, profit sharing, and allocation of risks. In practice, this agreement plays a critical role in ensuring legal certainty and managing potential disputes between the parties.
3. Acquisition of an Existing Indonesian Company
Foreign investors may also enter the Indonesian market through the acquisition of shares in an existing company, whether a PT PMA or a domestic company. An acquisition constitutes a legal act resulting in a transfer of control and must comply with applicable corporate and regulatory requirements. These typically include the preparation of an acquisition plan, approvals from relevant parties, announcement obligations, and notification to the Minister of Law.
Regardless of the structure chosen, the foreign investment company remains subject to the regulatory framework applicable to FDI in Indonesia.
Are there specific regulations applicable only to FDI?
Indonesian law imposes specific requirements on foreign investment companies as part of its regulatory framework. In general, a PT PMA must have:
- a minimum investment value of IDR10 billion per business activity (excluding land and buildings);
- a minimum issued and paid-up capital of IDR2.5 billion.
In addition to capitalization requirements, foreign investors are subject to various regulatory obligations, including those relating to employment, environmental protection, and, where applicable, local participation. Indonesia exercises control over foreign investment to ensure that such investment contributes to national development objectives. In practice, this includes requirements to prioritize the employment of Indonesian workers, implement training and technology transfer programs, comply with environmental standards, and, in certain sectors, collaborate with domestic business actors. Through this framework, Indonesia seeks to balance the facilitation of foreign investment with the protection of national economic interests.
Key Considerations for FDI in Indonesia
Indonesia remains an attractive jurisdiction for foreign direct investment, supported by its large domestic market and increasing level of consumption. These factors provide a strong commercial foundation for foreign investors seeking long-term growth.
In addition, Indonesia benefits from a relatively young and productive workforce, which contributes to labor availability and cost competitiveness. Coupled with the government’s ongoing efforts to improve infrastructure and ease of doing business, these factors continue to enhance Indonesia’s position as a key market for foreign investors in the region.
From a fiscal perspective, the Indonesian government also provides various tax incentives to attract foreign investment. Under the prevailing regulations, investors meeting certain criteria, such as having a high investment value, being export-oriented, generating significant employment, or utilizing high local content, may be eligible for incentives. The incentive may include, among others, reductions in net taxable income, accelerated depreciation and amortization of capital assets, as well as preferential income tax treatment on dividends paid to foreign taxpayers, subject to applicable tax provisions.
Disclaimer
This article is prepared for general informational purposes only. The content does not constitute legal advice, a legal opinion, or counsel from IABF Law Firm. The information contained herein may not reflect the most current developments. Any quotation, distribution, or use of this information for any purpose is solely at the user’s own risk.
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Legal News Update
Published on: 17 April 2026 by IABF Law Firm
