Presidential Regulation 10/2021 Revamps Investment Landscape in Indonesia

Law No. 11 of 2020 dated November 2, 2020 on Job Creation (the “Job Creation Law”) was enacted with the aim of attracting both foreign and domestic investors to ultimately create more jobs. Recently, the government issued 49 new implementing regulations to support the Job Creation Law. One notable regulation among the 49 new ones is Presidential Regulation No. 10 of 2021 dated February 2, 2021 on Capital Investment Business Lines (“PR 10/2021”). PR 10/2021 will enter into force 30 (thirty) days as of its promulgation or on March 4, 2021.

PR 10/2021 is the Government’s attempt at revamping Indonesia’s investment landscape. Previously, foreign investment activities in Indonesia, which is regulated under Law 25 of 2007 dated April 26, 2007 on Capital Investment as amended by the Job Creation Law (collectively, the “Investment Law”), were subject to the limitations imposed by Presidential Regulation No. 44 of 2016 dated May 18, 2016 on the List of Businesses Closed and Opened Under Certain Conditions for Investment (“PR 44/2016”), which is now revoked and replaced by PR 10/2021.

PR 44/2016 still lays out a long list of businesses that are either closed off entirely for foreign businesses or those that are open, with certain conditions, for investment, including a cap to the percentage of foreign ownership. This has led foreigners to associate investing in Indonesia with the “Negative List”. PR 10/2021 tries to erase this association by presenting a “positive list” instead.

The most notable difference between PR 10/2021 and PR 44/2016 is the fact that PR 10/2021 states that all business activities are fully opened for investment, except for activities that are reserved for the Central Government and six business fields that are now stipulated under Article 12 of the Investment Law, i.e.:

  1. cultivation and industry of class I narcotics;
  2. all forms of gambling and/or casino;
  3. fishing of species of fish listed out in Appendix I Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES);
  4. utilization or taking of coral and utilization or taking of coral reefs from nature to be used as building material/lime/calcium, in aquariums, as souvenirs/jewelry, or taking recent death corals from nature;
  5. chemical weapons manufacturing industry; and
  6. industrial chemicals industry and ozone-depleting substances industry.

This makes all other business fair game for investors (subject to certain conditions), as opposed to PR 44/2016, which puts its focus on the business fields that are closed or restricted for foreign investment.

PR 10/2021 classifies the types of businesses that are open for investment into 4 categories:

  1. priority business lines;
  2. business lines that are allocated for or required for partnerships with cooperatives and Micro, Small and Medium Enterprises (“UMKM”);
  3. business lines open with certain requirements; and
  4. other business lines not included in the above, which shall be open for all investors.
  • PRIORITY BUSINESS LINES

Previously, regulations on “priority” industries that are eligible for certain incentives were somewhat scattered and can be found in numerous regulations, including Government Regulation, Minister of Finance Regulations, and Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal or “BKPM”) Regulations.

PR 10/2021 simplifies this matter by listing down priority businesses lines, that are fully open to investors, and are eligible for fiscal (tax allowance, tax holiday, various types of investment allowance, or customs and excise incentives) or non-fiscal incentives (facilitated business licenses, supporting infrastructure, etc.)  in its Attachment I. Note that PR 10/2021 sets out conditions for certain priority business lines, such as integration with other related business lines or use of certain technology. Business lines that are not listed in Attachment I of PR 10/2021 are still eligible for incentives if it is stipulated in other laws and regulations.

  • BUSINESS LINES ALLOCATED FOR OR REQUIRED FOR PARTNERSHIPS WITH COOPERATIVES AND UMKM

Business lines allocated for cooperatives and UMKM must fulfill the following criteria:

  1. business lines that do not utilize technology/utilize simple technology;
  2. business lines with specialized processes, such as those that are labor intensive or specialized, inherited cultural heritage; and
  3. business lines with a capital not exceeding Rp10,000,000,000 (ten billion rupiah) excluding land and building value.

Large-scale businesses (including foreign investment companies) are not allowed to participate in these business lines allocated for cooperatives and UMKM.

PR 10/2021 also stipulates large-scale businesses that are required to partner with cooperatives or UMKM. The partnership shall be carried out in accordance with Law No. 20 of 2008 dated July 3, 2008 on UMKM as amended by the Job Creation Law and its implementing regulations.

Both business lines that are allocated for cooperatives and UMKM and business lines that are required to partner with cooperatives and UMKM are listed in Attachment II of PR 10/2021.

  • BUSINESS LINES OPEN WITH CERTAIN REQUIREMENTS

PR 10/2021 substantially cuts down the number of business fields that are in the “Open with Certain Requirements” under PR 44/2016. Previously, there were 350 business fields listed under this category, all imposed with certain conditions, such as not being opened for foreign investors, or having a cap on its foreign investment. In PR 10/2021 this number is reduced to 46, as listed in its Attachment III, and the requirements can be any of the following:

  1. closed for foreign investors (only open for Indonesian investors);
  2. has a cap on its foreign investment; or
  3. requires special licenses.

The above requirements shall not apply for any foreign investor with special rights under the bilateral investment treaty between Indonesia and its country of origin, except if the requirements under PR 10/2021 is more favorable to the investor.

Some notable business lines that are no longer listed as business lines that are open with certain requirements are:

  1. wholesale distribution (previously it was open for up to 100% foreign investment if it is affiliated with the manufacturer and only open for up to 67% foreign investment if it is not affiliated with the manufacturer);
  2. retail sale, except for retail sale of alcoholic beverages (previously it was closed for foreign investment); and
  3. online marketplace (previously it was open for only up to 49% foreign investment, except if the investment is more than Rp100 billion).
  • MINIMUM INVESTMENT REQUIREMENT

Article 7 of PR 10/2021 is another important thing to take note of. This provision requires foreign investors to invest in large-scale businesses with a minimum investment value of Rp10 billion, excluding land and building value. This requirement was previously only regulated in BKPM regulations. The inclusion of this requirement in a Presidential Regulation level provides stronger legal certainty to foreign investors, as well as protection to UMKM.

  • INVESTMENT IN SPECIAL ECONOMIC ZONES

Similar to PR 44/2016, under PR 10/2021, all business lines are open for investment (including foreign investment for up to 100%) in Special Economic Zones (Kawasan Ekonomi Khusus or “KEK”). PR 10/2021 takes one step further by allowing foreign investment in tech-based startups located in KEK to have investment value of less than Rp10 billion (excluding land and building).

  • OTHER NOTABLE PROVISIONS

Similar to PR 44/2016, PR 10/2021 also provides that investment requirements thereunder are not applicable to indirect or portfolio investment which transactions are made through Indonesian capital market.

PR 10/2021 also stipulates that investment in finance and banking sectors shall be subject to specific laws and regulations applicable for those sectors. Although it has long been a public knowledge that finance and banking sectors are subject to different sets of regulations, the Government now clarifies this information by including it in PR 10/2021.

With the enactment of PR 10/2021, it is expected that foreign investors will be eyeing Indonesia to try and capitalize on the changes introduced by the regulation, considering that potential investors can enjoy various new opportunities, facilities, and benefits due to PR 10/2021. It is also expected that this regulation would be able to achieve its aim of attracting investors and boosting the Indonesian economy.

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March 1, 2021

Please contact Abadi Abi Tisnadisastra (atisnadisastra@aksetlaw.com), Inka Kirana (ikirana@aksetlaw.com), Alfa Dewi Setiawati (asetiawati@aksetlaw.com), N. Sekar Lestari (nlestari@aksetlaw.com), or Caleb Sitorus (csitorus@aksetlaw.com), for further information.

 

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