Changes to Investment Law Under Omnibus Law

This newsflash is a follow up to the previously issued newsflash dated November 5, 2020, on the general overview of the Job Creation Law or what is publicly known as the Omnibus Law (link here).

This newsflash will cover further discussion on the amendments to the Law No. 25 of 2007 dated April 26, 2007 on Capital Investment (the “Investment Law”) under the Omnibus Law. The amended Investment Law shall now be the main reference for investment, either domestic or foreign, in all lines of business in Indonesia.

We set the following key provisions.

  • Closed Lines of Business and Activities Reserved for the Central Government

Under the Omnibus Law, in principle, all lines of business are open for investment, except for business activities that are closed for investment and activities reserved for the Central Government. Under the elucidation of the Omnibus Law, activities reserved for the Central Government are service activities or other activities under the defense and security sectors, among others, main weaponry systems, public museums, historical and archaeological remains, provision of air navigation, telecommunication/aids to shipping navigation and vessel.

Previously, the Investment Law did not include an exhaustive list of business activities that are closed for capital investment. These closed business activities were listed under Appendix I of the Negative Investment List. Now it seems that it will be more difficult to change the list of business activities that are closed for investment, since the revision will require the process of getting such revision be passed by the House of Representatives.

Based on the existing Negative Investment List, there used to be 20 (twenty) business activities that are closed for capital investment. The Omnibus Law now simplifies the closed business activities into 6 (six) lines of business. The following business activities are closed for capital investment under the Omnibus Law:

  1. cultivation for and industry of type I narcotics;
  2. gambling and/or casino;
  3. fishing of species in Appendix I of Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES);
  4. utilization and retrieval of coral;
  5. manufacture of chemical weapons; and
  6. manufacture of industrial chemicals and manufacture of ozone-depleting substances.

It is also still unclear whether the remaining business activities that used to be closed for investment under the Negative Investment List, such as production of alcoholic beverages, production of active ingredients for pesticides, will now become open for investment. The elucidation of the Omnibus Law stipulates that capital investment shall be based on national interests, including protection of business activities that are harmful for health. Therefore, it remains to be seen whether there will be any change of restrictive approach towards production of alcoholic beverages, production of pesticides, and other business activities that are no longer listed as closed for investment under the Omnibus Law.

The Omnibus Law also mandates further provisions on investment to be stipulated under a Presidential Regulation. The investment requirements for the priority business activities shall be stipulated in the form of investment priority list under the Presidential Regulation which covers the following:

  1. Priority business activities with fiscal incentives;
  2. Business activities with non-fiscal incentives, among others, in the form of ease of Business Licensing, investment location, infrastructure and energy provision;
  3. Business activities for the Micro, Small, and Medium Enterprises (usaha mikro, kecil, dan menengah or “UMKM”) and partnership requirement between large enterprises and UMKM excluding partnership as a shareholder; and
  4. Business activities that are open with certain requirements.

We expect this Presidential Regulation—which is dubbed as the “Positive Investment List” by the Coordinating Minister for Economic Affairs—to be issued in the near future. However, in order to fully understand the restrictive provision and how it differs with the existing Negative Investment List, we may have to wait for at least three months in order to see the specific provision under the Presidential Regulation governing the Positive Investment List.

  • The Protection of Cooperatives and Micro, Small, and Medium Enterprises

The Omnibus Law also amends Article 13 of the Investment Law. Under this provision, the Central Government or the Regional Governments, in accordance with their authorities, shall provide the convenience, empowerment, and protection to cooperatives and UMKM for their investment in accordance with the standards determined by the Central Government.

In order to protect and empower cooperatives and UMKM, the Omnibus Law provides that foreign capital investment is only allowed for large-scale enterprises and shall establish a partnership with the cooperatives and UMKM. Certain business activities will also be either allocated for cooperatives and UMKM or open for large-scale enterprises with requirement to establish a partnership with cooperatives and UMKM. These protection and empowerment may be in the form of (a) partnership program; (b) human resources training; (c) competitiveness enhancement; (d) innovation and market growth endorsement; (e) accessibility to financing; and (f) widespread dissemination of information.

Further, to support the intention of supporting entrepreneurship in Indonesia the Omnibus Law introduces a specific support provision for partnership arrangement in Indonesia. In this new provision, the Central Government and the Regional Government, in accordance with their authorities, (i) must facilitate the partnership between medium enterprise and large enterprise with cooperatives, micro and small enterprise in the supply chain for increasing competitiveness and business level; (ii) provide incentives and ease of doing business according to the prevailing laws and regulations; and (iii) supervise and evaluate the implementation of partnership between cooperatives, UMKM, and large enterprises. Further provisions will be governed under the Government Regulation.

  • Capital Investment Facilities

Another notable amendment under the Omnibus Law incorporates tourism business development as one of the segments that are eligible to receive investment facilities. The types of investment facilities are no longer listed in this Law and will be subject to laws and regulations on taxation. We note that this change in arrangement is intended to streamline policies relating to tax facilities so that it is governed fully by the Ministry of Finance.

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November 25, 2020

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