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A contract is a fundamental legal instrument that governs agreement between parties. It establishes rights, obligations, and legal protections, ensuring that each party fulfil their commitments. In the realm of business and personal contracts, understanding the legal requirements for a valid contract is crucial. In Indonesia, the validity of a contract is primarily regulated by Article 1320 of the Indonesian Civil Code/KUHPerdata. Additionally, industry-specific regulations may impose further requirements, such as those for labor contracts, real estate transactions, and investment agreements. This article delves into the essential elements that make a contract legally binding under Indonesian law, ensuring your contracts are both enforceable and compliant. Additionally, various legal doctrines and principles have shaped contract law, providing a deeper understanding of its enforceability.

Essential Requirements for a Valid Contract (Article 1320 Indonesian Civil Code)

Under Article 1320 Indonesian Civil Code, a contract is considered valid if it meets the following four conditions:

1. Consent of the Parties (Kesepakatan Para Pihak)

Consent is the fundamental basis of contract formation. Both parties must voluntarily and knowingly agree to the terms of the contract. Consent must be given without coercion (dwang), fraud (bedrog), or mistake (dwaling).

2. Legal Capacity (Kecakapan Para Pihak)

The parties entering into a contract must have the legal capacity to do so. This means they must be:

Of legal age (at least 21 years old or married, as per Article 330 Indonesian Civil Code).
Not under guardianship (curatele), which applies to individuals deemed legally incompetent due to mental illness or excessive debt.

3. Definite Subject Matter (Suatu Hal Tertentu)

The valid contract must have a clear and specific object, which refers to the subject matter of the contract. This means:

The object must be identifiable and specific (e.g., goods, services, or rights).
The object must be capable of being executed (not impossible).
The object must be lawful and not contrary to public policy or morality.

A contract lacking a clear subject matter is considered null and void (batal demi hukum).

4. Lawful Cause (Sebab yang Halal)

A valid contract must have a lawful cause, meaning its purpose should not violate the law, public order, or good morals.

Examples of unlawful contracts include:

Contracts related to illegal activities (e.g., drug trafficking, bribery).
Contracts that violate public order (e.g., contracts to commit crimes).
Contracts that contradict moral values (e.g., contracts promoting unethical conduct).

If a contract is made for an unlawful purpose, it is automatically null and void (batal demi hukum).

Consequences of Non-Compliance with Article 1320 Indonesian Civil Code

If a contract fails to meet the four essential requirements, the legal consequences are as follows:

If there is a defect in consent – The contract is voidable (dapat dibatalkan) and can be annulled by the affected party.
If a party lacks legal capacity – The contract can be challenged and potentially annulled.
If the contract lacks a definite subject matter – The contract is null and void (batal demi hukum).
If the contract has an unlawful cause – The contract is null and void (batal demi hukum).

Key Challenges in Contract Drafting & Review

Despite these clear legal requirements, individuals and companies often face challenges in ensuring contract validity. Below are some of the most common issues:

1. Ambiguous or Unclear Terms

Many contracts lack clarity, leading to disputes over interpretation. Key terms such as scope of work, payment terms, penalties, and dispute resolution must be clearly defined.

2. Unfair or One-Sided Clauses

Some contracts contain excessively burdensome obligations on one party, violating the principle of balance (asas keseimbangan). In consumer contracts, unfair terms may be declared unenforceable under Law No. 8 of 1999 on Consumer Protection.

3. Failure to Meet Legal Formalities

While many contracts are valid upon contract, certain contracts require formal documentation, such as:

Land and property sales – Must be notarized (Article 1879 Indonesian Civil Code).
Employment contracts – Must be in writing for contract employee whereas for permanent employee could be in oral or written contract (Law No. 13 of 2003 on Manpower).
Marriage contracts – Must be notarized (Article 29 of the Marriage Law).

4. Failure to Consider Future Risks & Dispute Resolution

Many contracts fail to address potential risks, such as force majeure, breach of contract, or regulatory changes. A strong dispute resolution clause (e.g., arbitration or mediation) is essential to avoid costly litigation.

5. Compliance with International or Sector-Specific Regulations

Companies operating cross-border or in regulated industries (e.g., healthcare, finance) must ensure contracts comply with sector-specific laws. For example, contracts in the medical devices sector must align with BPOM and Ministry of Health regulations. Then for finance business sector should comply with OJK regulation.

6. Failure to Make a Contract Useful for Business Needs

Companies or a person somehow only considering the formalities of a contract but fail to make a contract agile for their needs. It is a must that a contract should meet your needs and implementable. Many contracts only use as formalities but the content is difficult to understand or even make your flexibility limited.

Solution: Companies or a person as a contract parties should understand their needs and business in the first place. Then understanding the laws, principles, and doctrine also an obligation to make a good contract drafting and review. You are suggested to consult with legal experts to ensure compliance in every aspect and to ensure your contracts fulfil your needs. Contact us to consult!

Legal Principles and Doctrines Related to a Valid Contract

Consensualism Principle (Asas Konsensualisme) – This principle asserts that a contract is formed as soon as the parties reach an contract, without requiring additional formalities unless stipulated by law.
Freedom of Contract (Asas Kebebasan Berkontrak, Article 1338 Indonesian Civil Code) – Parties are free to determine the content of their contract, provided it does not violate the law, public order, or morality.
Pacta Sun Servanda/Legal Certainty – This doctrine states that contracts made legally must be honored and enforced. As stated in article 1338 Indonesian Civil Code “all legally formed contracts act as laws for the parties involved.
Good Faith – The doctrine of good faith requires that all parties to a contract act honestly and fairly in their dealings. This principle is embedded in Article 1338 of the Indonesian Civil Code, which states that contracts must be performed in good faith. This doctrine ensures that parties cannot exploit ambiguities or loopholes in the contract to the detriment of the other party.
Principle of Balance – The principle of balance in contract law ensures fairness and equality between contracting parties. This principle prevents one party from exploiting another through unfair contract terms. This principle stated in article 1339 Indonesian Civil Code that contracts must be executed in good faith and implemented in article 18 of Law No. 8 of 1999 on Consumer Protection that prohibits unfair contract clauses that disproportionately benefit one party.
Non-Discrimination – The principles of non-discrimination ensures that contracts must be entered into without bias based on gender, race, religion, or other protected categories. This principle aligns with human rights principles in business and fair contractual practices.
Impossibility of Performance – This doctrine addresses situations where it becomes impossible to fulfill the terms of a contract due to unforeseen circumstances, such as natural disasters or changes in law. In such cases, the contract may be deemed void or subject to renegotiation. This principle ensures that parties are not unfairly penalized for circumstances beyond their control.
Doctrine of Legal Capacity (Doktrin Kecakapan Hukum) – This doctrine emphasizes that a person must have the ability to understand and undertake legal actions responsibly.
Incapacity Nullifies Consent (Asas Ketidakcakapan Membatalkan Kesepakatan) – A contract made by an incapacitated person may be annulled by law.
Illegality Doctrine (Doktrin Ketidakabsahan) – If a contract’s purpose is illegal, courts will refuse to enforce it.
Ex Turpi Causa Non Oritur Actio – A legal principle stating that no legal action arises from an illegal cause.

Conclusion

A valid contract under Indonesian law must meet the four essential elements of consent, legal capacity, a definite subject matter, and a lawful cause. However, drafting and reviewing contracts present significant challenges, including ambiguous terms, unfair clauses, failure to meet legal formalities, and lack of risk management provisions.

By adhering to best practices in contract drafting and review, businesses and individuals can mitigate legal risks, ensure enforceability, and foster successful contractual relationships. Seeking legal consultation is highly recommended to navigate complex contractual obligations and safeguard interests.

Contract Drafting & Contract Review Assistance in Indonesia with Kusuma & Partners Law Firm

Our firm specializes in Contract Drafting & Contract Review, ensuring that all contracts comply with Indonesian laws and regulations. We provide strategic legal guidance, draft and review contract to mitigate risks, and safeguard our clients interests in every transaction. With extensive experience in Contract Drafting & Contract Review, we help businesses create clear, enforceable, and legally sound contracts tailored to their needs.

Our Services Included:

Drafting & Reviewing Business Contracts – Ensuring clarity, enforceability, and compliance with Indonesian law.
Legal Risk Assessment – identifying and mitigating potential legal risks in contracts
Negotiation Support – Assisting in contract negotiation to protect your business interests

Partner with us for reliable, professional, and strategic legal solutions that safeguard your business from confusing of Contract Law and resolve the dispute with the best solution. Fill out the form below.

“DISCLAIMER: This content is intended for general informational purposes only and should not be treated as legal advice. For professional advice, please consult us

The landscape of Employment in Indonesia is governed by key labor laws, including Law No. 13 of 2003 on Manpower, Government Regulation No. 35 of 2021, and amendments introduced by the Job Creation Law (UU Cipta Kerja) No. 6 of 2023. These laws define various types of employment relationships, each with its own rights, obligations, and legal implications. Employers must understand Employment in Indonesia to ensure compliance, minimize labor disputes, and fostering positive workplace dynamics. Similarly, employees benefit from knowing their rights and entitlements under each category. This article provides an in-depth exploration of the diverse the types of employment in Indonesia, highlighting their legal nuances and practical implications.

The Main Types of Employment in Indonesia

Under Indonesia legal system, Indonesian labor laws differentiate between two main types of Employment in Indonesia: Permanent Employment (PKWTT) and Fixed-Term Employment (PKWT).

1. Permanent Employment (PKWTT – Perjanjian Kerja Waktu Tidak Tertentu)

A Permanent Employment Agreement (PKWTT) is indefinite-term contract that does not have a fixed expiration date. It is typically used for positions that are part of a company’s core business operations. Employees under PKWTT contracts enjoy the full employee benefits and are entitled to:

Severance pay if terminated.
Health and social security benefits as mandated by BPJS Kesehatan and BPJS Ketenagakerjaan.
Career development opportunities within the company.
Religious holiday allowance (THR).
Termination protections, requiring employers to follow strict legal procedures before dismissing employees.

PKWTT contracts can be in written or verbal form, but written contracts are strongly recommended to avoid legal disputes.

2. Fixed-Term Employment (PKWT – Perjanjian Kerja Waktu Tertentu)

Fixed-Term Employment Agreement (PKWT) is a contract-based employment with limited tenure and specific conditions. Under Government Regulation No. 35 of 2021, PKWT contracts are subject to the following conditions:

They can be established for a maximum of five years, including contract extensions.
Employees are entitled to compensation when their contract ends, even if it is not renewed.
Health and social security benefits as mandated by BPJS Kesehatan and BPJS Ketenagakerjaan.
Entitled for Religious holiday allowance (THR) based on the working period.
PKWT is commonly used for seasonal work, short-term projects, or specialized roles.
Unlike PKWTT employees, PKWT employees are not entitled to severance pay upon contract expiration.

Employers must register PKWT contracts with the manpower institution to ensure compliance.

Others Types of Employment in Indonesia

1. Outsourcing (Alih Daya)

Outsourcing allows companies to engage third-party service providers. It is usually use to make a company grow faster in term of business strategy while the employees protection will be ensured and taken care by the outsourcing company. According to the Job Creation Law, outsourcing agreements must meet the following criteria:

Employees remain under the employment of the outsourcing company, or could be adjustable under the client company.
The outsourcing company is responsible to ensure salary payments, benefits, and employee protections.
Employees must receive BPJS social security and other labor rights as per legal requirements.
New provisions under Job Creation Law also provide more certainty related to the protection of employees right which is the protection guaranteed by the outsourcing company.

Improperly structured outsourcing arrangements can result in legal disputes, where employees demand recognition as direct employees of the hiring company.

2. Daily Employee

Daily employees are hired on a day-to-day basis, typically for manual or unskilled labor. This category includes:

Employees are usually paid at the end of each working day or could be adjustable based on both parties (employer and employee) agreement under the employment agreement.
Daily employees are entitled to the same benefits as contract employees including compensation based on their period of works.
Employees usually works under one company.

While cost-effective for businesses, the use of daily employees must be carefully managed to avoid legal pitfalls.

3. Freelance

Freelancers work on a project basis. It is actually almost same with a concept of daily employees but not limited in a company. They could work with more than one company as e freelancer. Unlike others concept of employees, freelancers:

Have no fixed working hours and can take multiple projects from different clients.
Are not entitled to severance pay, job security, or employee benefits.
Typically work under a service agreement (perjanjian jasa) rather than a labor contract. However it still possible to use contract agreement following applicable labor law in Indonesia.
Must handle their own tax and social security contributions independently.

Freelancing is increasingly popular in creative industries, IT, content creation, and consulting services. However, companies hiring freelancers should ensure clear contract terms to avoid potential misclassification disputes.

3. Part Time Employment

Part-time employees work fewer hours than full-time employees and are often hired to meet specific business needs. Key aspects include:

Part-time employees typically work less than 40 hours per week.
They are entitled to pro-rated benefits, including social security and THR, based on their working hours.
This arrangement benefits both employers and employees, offering cost savings for businesses and work-life balance for employees.

4. Remote Work

With the rise of digital technology, remote work has become increasingly common in Indonesia. While not explicitly regulated under labor law, remote work arrangements should be formalized through employment contracts or company policies. It is possible to use whether Permanent Agreement or Contract Agreement. Considerations include:

Clear guidelines on working hours and availability.
Remote employees are entitled to the same benefits as in-office employees.
Employers may provide tools and reimbursement for work-related expenses.

Remote work offers flexibility and access to a broader talent pool but requires robust communication and management systems.

5. Internship

An internship program is a structured training arrangement where individuals develop job skills within a company. It was regulated by Minister of Manpower Regulation No. 36 of 2016 until now is revoked and substituted by Minister of Manpower Regulation No. 6 of 2020, which states that:

Internship are not classified as employees but must receive a training certificate.
Companies must provide allowances, though they are not obligated to provide full salaries.
Companies must make internship agreement with internee to protect the internee rights.
The program duration must be specified, the longest duration is twelve months.
Companies whose implement internship have obligation to report the result of internship to the manpower institution and the amount of internee not more than 20% from total amount of employees in a company.

Internship benefit both employers and trainees by fostering skill development and workforce readiness.

6. Business Partnership (Kemitraan)

Certain businesses, such as ride-hailing platforms, online marketplaces, and retail franchises, engage employees as business partners rather than employees. This setup differs from traditional employment because:

Partners are self-employed and generate income based on commission or revenue-sharing agreements.
They do not receive fixed salaries, employee benefits, or labor law protections.
Companies usually provide business support, such as branding, technology access, and operational guidance.
Because of Business Partnership is differs from others employees which is define in labor law, the concept of works shall be different.

For Business Partnership model, we suggest you to consult with the legal expert to determine what kind of works that suitable with this concept. It is also to ensure that your company will comply with the applicable laws in Indonesia.

Key Considerations for Employers

When hiring employees under any type of Employment in Indonesia, companies must ensure:

Compliance with Indonesian labor laws to prevent disputes or penalties.
Properly structured contract that outline rights, obligations, and dispute resolution mechanisms.
Clear distinction between employment and partnership models to avoid legal misclassification.
Know ABC of the right and obligation as an employer to comply with Indonesian legal system.

Kusuma & Partners assists you with comprehensive consultation related to Labor & Employment in Indonesia, ensuring legal interests while complying with all legal requirements.

Conclusion

Understanding Employment Regulations in Indonesia is essential for businesses to maintain legal compliance, operational efficiency, and workforce stability. By choosing the right type of employment contract, employers can optimize labor costs while protecting employees rights.

For professional legal assistance with Labor & Employment in Indonesia, contact us today.

Partnering with Kusuma & Partners Law Firm for Labor & Employment Law Assistance in Indonesia

Our firm specializes in Labor & Employment Law, ensuring full compliance with Indonesian regulations. We provide strategic legal guidance, manage regulatory approvals, and protect our client’s interests at every stage. With extensive experience in Labor & Employment Law, we ensure a compliance, harmonize labor relation, and efficient action.

Partner with us for reliable, professional, and strategic legal solutions that safeguard your business from confusing of labor law and resolve the dispute with the best solution. Fill out the form below.

“DISCLAIMER: This content is intended for general informational purposes only and should not be treated as legal advice. For professional advice, please consult us.

THR Payment Indonesia is a legally required benefit for employees. Companies must ensure timely payments to comply with labor laws and avoid penalties. Religious Holiday Allowance (THR) is a mandatory benefit that businesses in Indonesia must provide annually. THR is typically given ahead of religious holidays, such as Eid al-Fitr, Christmas, Nyepi, Vesak, and Lunar New Year (Imlek). The primary purpose of THR is to provide financial assistance so employees can celebrate their holidays without financial burden. The provision of THR is regulated under Indonesian labor laws, making compliance essential for employers.

For businesses, ensuring THR Payment Indonesia follows legal regulations is crucial to avoiding penalties. This article covers everything employers need to know, including legal basis, eligibility, calculation, deadlines, and penalties for non-compliance.

Understanding THR Payment Indonesia: Legal & Employer Obligations

THR Payment Indonesia is not just an employee benefit—it is a legally mandated obligation. For employees, THR provides financial support during religious holidays. For employers, timely and compliant THR payments help maintain positive labor relations and avoid legal repercussions.

THR Benefits for Employees

Financial Relief: Helps cover holiday expenses, travel, and gifts.
Employee Morale: Receiving THR significantly boosts employee satisfaction.
Better Financial Planning: Employees can manage their expenses effectively during festive seasons.
Increased Workplace Productivity: Employees who receive fair compensation are more motivated and engaged at work.

THR Benefits for Employers

Enhances Employee Loyalty: Workers feel valued and appreciated.
Improves Workplace Productivity: A satisfied workforce leads to better performance.
Ensures Legal Compliance: Avoids fines, labor disputes, and reputational damage.
Boosts Employer Branding: Companies that comply with THR payments attract and retain top talent.
Reduces Employee Turnover: Employees who receive their rightful benefits are less likely to leave the company.

Failure to comply with THR Payment Indonesia regulations can lead to financial penalties and harm a company’s reputation.

Legal Basis for THR Payment Indonesia

THR Payment Indonesia is governed by Minister of Manpower Regulation No. 6 of 2016 on Religious Holiday Allowance for Workers. This regulation establishes:

Employers must legally provide THR to all eligible employees.
THR payments must follow strict deadlines.
Non-compliance leads to penalties such as fines and business operation restrictions.

The Ministry of Manpower issues an annual Circular Letter to ensure all stakeholders comply with THR regulations.

Additionally, failure to comply with this regulation can lead to further actions from labor unions and potential disputes in labor courts, impacting business operations and overall corporate reputation.

Eligibility for THR Payment Indonesia

Permanent and Contract Employees who have worked for at least one month are entitled to THR.
Freelancers and Daily Workers qualify if their employment is continuous and meets service duration requirements.
Employees of All Religions receive THR before their respective religious holidays.
Employees whose contracts end within 30 days before the holiday are still entitled to THR.
Employees who have worked for less than 12 months are entitled to receive THR on a pro-rated basis.

Employers must assess each employee’s status and service period to ensure compliance with THR Payment Indonesia regulations.

Kusuma & Partners assist companies in handling Employment Contract in Indonesia, ensuring your legal interests while complying with all legal requirements.

THR Payment Indonesia: Step-by-Step Calculation & Deadlines

Calculating THR Amount

Employees with 12+ months of service receive one month’s salary.
Employees with less than 12 months receive a proportional amount:

Formula: (Months Worked / 12) × Monthly Salary

Example: Employee worked for 6 months with a salary of IDR 10,000,000

(6/12) × IDR 10,000,000 = IDR 5,000,000

THR includes basic salary and fixed allowances.
THR must be paid in full (no installments) unless an exception is issued by the Ministry of Manpower.
Some companies may offer more than one month’s salary as part of their employment benefits policy.
Companies facing financial difficulties must report to the Ministry of Manpower and negotiate alternative payment plans to avoid legal consequences.

Payment Deadlines & Procedures

THR must be paid at least 7 days before the religious holiday.
Employers must ensure timely payments to avoid penalties.
Companies should communicate THR amounts and schedules to employees in advance.
Payroll teams must verify payment details to ensure compliance with labor regulations.
Employers should provide written confirmation or digital payslips to ensure employees receive clear documentation of their THR payments.

Penalties for Non-Compliance

A written warning from labor authorities.
Fines amounting to 5% of the total THR owed.
Business operation restrictions if the issue remains unresolved.

Common Challenges in THR Compliance & Solutions

Financial Constraints: Some businesses may struggle to allocate sufficient funds for THR.

Solution: Employers should plan THR expenses in their annual budgets to ensure timely disbursement.
Alternative: Companies can seek short-term business loans to fulfill THR obligations without disrupting operations.

Misclassification of Employees: Some companies may incorrectly categorize contract workers, leading to compliance issues.

Solution: HR departments must properly classify employees to ensure all eligible workers receive THR.
Compliance Tips: Maintain clear employment agreements to avoid misinterpretation of contract terms.

Delayed or Partial Payments: Some businesses may attempt to delay or divide THR payments.

Solution: Employers must strictly adhere to labor law requirements and avoid installment payments unless officially allowed.
Employer Responsibility: Non-compliance can lead to penalties and employee grievances filed with labor authorities.

Legal Disputes & Employee Complaints: Non-compliance may lead to labor disputes and penalties.

Solution: Employers should maintain clear documentation and seek legal guidance when needed.
Risk Management: Employers should conduct an internal compliance audit before THR payment deadlines.

Best Practices for Employers to Ensure Compliance

Plan Ahead: Include THR in annual financial planning to avoid last-minute issues.

Maintain Clear Records: Keep track of employee tenure, salaries, and payments to ensure compliance.

Communicate Transparently: Inform employees about THR payments in advance to avoid misunderstandings.

Seek Legal Assistance: Consult labor law experts to ensure all regulatory requirements are met.

Engage with Employee Representatives: Collaborate with labor unions or employee representatives to ensure smooth compliance.

Provide Additional Employee Support: Offer financial literacy programs to help employees manage THR effectively.

Conclusion

THR Payment Indonesia is a crucial benefit that ensures employee well-being during religious celebrations. Employers must understand their obligations, follow legal requirements, and adhere to payment deadlines to maintain compliance and a positive work environment. Proactively managing THR compliance not only helps avoid penalties but also strengthens employee trust and business reputation.

Partnering with Kusuma & Partners Law Firm for Labor Law Assistance in Indonesia

Our firm specializes in Labor and Employment Law, ensuring full compliance with Indonesian regulations. We provide strategic legal guidance, manage regulatory approvals, and protect our clients’ interests at every stage. With extensive experience in Labor and Employment Law, we ensure a compliance, harmonize labor relation, and efficient action.

Partner with us for reliable, professional, and strategic legal solutions that safeguard your business from confusing of Labor Law and resolve the dispute with the best solution. Fill out the form below.

“DISCLAIMER: This content is intended for general informational purposes only and should not be treated as legal advice. For professional advice, please consult us.

In today’s fast-paced business world, competition is everywhere. Whether you’re a small startup or a large corporation, staying ahead means constantly innovating and adapting. When competition done fairly, it pushes businesses to offer better products, improve services, and lower prices for consumers.

However, not all competition is fair. Some companies use monopoly, cartel, and price-fixing schemes to gain an unfair advantage, ultimately hurting consumers and smaller businesses. That’s why Indonesia has established strong regulations to ensure a level playing field. In this article, we’ll break down everything you need to know about Antirust & Competition in Indonesia—from why it matters to how the government regulates it.

Why Business Competition Matters

Healthy competition benefits businesses and consumers alike. It drives innovation, ensuring continuous improvement in products and services. It also helps keep prices fair, preventing companies from overcharging due to lack of alternatives. A competitive market offers more choices, giving consumers better options suited to their needs. Additionally, competition boosts efficiency, pushing businesses to optimize resources and improve service quality.

Without fair competition, dominant companies could stifle growth, limit innovation, and drive-up prices. To prevent this, Indonesia has implemented strong regulations to ensure a level playing field for all businesses.

The Legal Framework for Antitrust & Competition Law in Indonesia

To keep competition fair, Indonesia has strict laws in place. The key regulations include:

Law Number 5 of 1999 on the Prohibition of Monopolistic Practices and Unfair Business Competition (“Competition Law”) (as amended by Law Number 6 of 2023 on Job Creation). This law sets the foundation for preventing anti-competitive behavior and ensuring that businesses operate fairly. Competition Law prohibits the following business practices:

Mergers and acquisitions that lead to unfair competition or monopolistic practices.
Agreements that result in unfair business competition or monopolistic practices.
Agreements that require buyers to pay different prices than other buyers for the same goods or services.
Agreements to fix prices below market prices.
Agreements to divide marketing territories or allocate the market for goods or services; etc.

Presidential Decree Number 75 of 1999, which established the Business Competition Supervisory Commission (Komisi Pengawas Persaingan Usaha – KPPU), later amended by Presidential Decree Number 100 of 2024. This decree formalized the role of KPPU in enforcing Competition Law and overseeing market practices.

These laws are designed to prevent monopoly, ensure fair competition, and protect consumers from unfair practices. They also set the legal framework for penalizing companies that engage in anti-competitive behavior.

Common Types of Unfair Business Competition

While competition is essential, not all competitive strategies are ethical or legal. Here are some common types of unfair business practices that Indonesian law prohibits:

Monopoly (Article 17 of Competition Law)

A monopoly happens when a single company controls an entire market, making it impossible for others to compete.
Why is this harmful? Monopoly leads to higher prices, limited product variety, and reduced innovation because the dominant company has no incentive to improve.
Example: A telecom company being the only provider of internet services in a region, charging excessively high prices because consumers have no alternatives.

Oligopoly (Article 4 of Competition Law)

This occurs when only a few companies dominate an industry, limiting consumer choices.
Why is this harmful? It allows a few large companies to control pricing and market conditions, reducing competition.
Example: A handful of cement manufacturers controlling the industry, allowing them to set high prices without competition.

Cartel Agreements (Article 11 of Competition Law)

When businesses secretly agree to fix prices, divide markets, or limit production, they create a cartel.
Why is this harmful? Cartels eliminate competition, leading to artificially high prices and lower product quality.
Example: Airline companies coordinating to keep ticket prices high instead of competing fairly.

Dumping (Article 20 of Competition Law)

Selling products in foreign markets at prices lower than domestic prices, sometimes even below production costs, to drive out competitors.
Why is this harmful? It damages local industries by undercutting prices, forcing domestic businesses to close.
Example: An Indonesian company selling cheap garment overseas to push local garment producers out of business.

Predatory Pricing (Article 20 of Law Number 5 of 1999)

Predatory pricing occurs when a company deliberately sets prices below production costs to drive competitors out of the market, then raises prices once competition is eliminated.
Why is this harmful? It creates short-term benefits for consumers but long-term harm by reducing market diversity and increasing prices once the dominant company controls the market.
Example: A large retail chain selling essential goods at a loss to force small independent stores to shut down, then raising prices once it has market dominance.

Intellectual Property Theft (Article 10 of Competition Law)

This involves using another company’s patented designs, trademarks, or copyrights without permission.
Why is this harmful? It undermines fair competition by allowing companies to profit from stolen ideas.
Example: A brand copying another company’s logo to deceive customers into thinking they are buying an original product.

Considerations for Companies in Indonesia

For companies operating in Indonesia, understanding and complying with competition laws is crucial. Here are some key considerations:

Compliance with Regulations: Companies must ensure their business practices align with Law Number 5 of 1999 and other competition regulations to avoid penalties.
Fair Pricing Strategies: Setting competitive prices while avoiding price-fixing or predatory pricing ensures compliance with the law.
Market Entry Strategies: New companies should be aware of potential monopolistic barriers and seek legal counsel when entering highly competitive industries.
Transparent Business Agreements: Contracts, partnerships, and collaborations must be structured to avoid collusion or cartel-like arrangements.
Corporate Ethics and Training: Educating employees and executives on fair competition practices can prevent unintentional violations.

By following these best practices, companies can thrive while contributing to a fair and competitive marketplace.

Kusuma & Partners assist companies in handling Antitrust & Competition matters in Indonesia, ensuring your legal interests while complying with all legal requirements.

The Role of the Business Competition Supervisory Commission (KPPU)

Indonesia’s Business Competition Supervisory Commission (KPPU) plays a crucial role in ensuring companies follow competition laws. Here’s what they do:

Issues regulations and guidelines to implement the Competition Law.
Oversees the implementation of the Competition Law.
Monitor business agreements to identify potential monopolistic practices.
Investigate unfair competition and take action against violators.
Prevent abuse of dominance by big corporations.
Educate businesses and consumers about their rights and obligations.
Evaluate mergers, acquisitions, and consolidations that could lead to unfair competition or monopolistic practices.
Impose fines and sanctions on companies that break the rules.

To carry out these duties, KPPU has the power to:

Conduct investigations into suspected unfair practices.
Summon companies, business owners, witnesses, and experts for hearings.
Impose penalties and fines on companies violating competition laws.
Make policy recommendations to the government for improving competition regulations.

Case Study: Temasek Holdings and Allegations of Monopolistic Practices in Indonesia’s Telecommunications Sector

In 2007, Indonesia’s Business Competition Supervisory Commission (KPPU) investigated Temasek Holdings, a Singaporean investment company, for alleged monopolistic practices in the country’s telecommunications sector. Temasek held significant stake in two major Indonesian mobile operators: PT Telkomsel and PT Indosat. The KPPU concluded that this dual ownership led to reduced competition and higher prices for consumers. As a result, Temasek was found guilty of unfair behavior and was fined accordingly.

From the above case, it underscores the importance for companies operating in Indonesia to:

Avoid Cross-Ownership in Competing Companies: Holding significant shares in competing companies can lead to allegations of reduced market competition.
Ensure Compliance with Local Competition Laws: Understanding and adhering to Indonesia’s antitrust regulations is crucial to prevent legal disputes and penalties.
Engage in Fair Pricing Strategies: Dominant market positions should not be exploited to impose unfair pricing on consumers.

By maintaining transparent and fair business practices, companies can contribute to a competitive and healthy market environment in Indonesia.

Conclusion

At its core, business competition is about fairness. When companies compete fairly, consumers benefit from better prices, higher-quality products, and more choices. Strengthening competition laws and enforcement will help create a market where everyone has a fair chance to succeed, ultimately leading to a stronger economy and a more innovative business environment in Indonesia.

Partnering with Kusuma & Partners Law Firm for Antitrust & Competition

Navigating Indonesia’s complex competition laws requires expert guidance. Our law firm specializes in Antitrust & Competition legal services, providing:

Regulatory Compliance: Ensuring your business adheres to Law 5/1999 and other competition regulations.
Risk Assessment & Prevention: Identifying and mitigating potential antitrust risks before they become legal issues.
Legal Representation: Defending your business in KPPU investigations and litigation.
Mergers & Acquisitions (M&A) Support: Assisting in structuring deals to comply with competition laws.
Tailored Legal Advisory: Crafting strategies to help businesses operate competitively and legally in the Indonesian market.

Partner with us for reliable, professional, and strategic legal solutions that safeguard your business from competition law violations. Fill out the form below.

“DISCLAIMER: This content is intended for general informational purposes only and should not be treated as legal advice. For professional advice, please consult us.“

Merger plays a strategic role in corporate growth, allowing companies to expand, streamline operations, and enhance competitiveness. However, the process requires careful legal planning and compliance with Indonesian regulations. Understanding the legal framework governing mergers is essential to ensure a seamless transaction.
Mergers in Indonesia are primarily regulated under Law No. 40 of 2007 on Limited Liability Company, as amended by Law No. 6 of 2023 on Job Creation (the “Company Law”). This guide outlines the legal procedures, requirements, and key considerations to ensure legal compliance and mitigate risks.

Definition and Legal Implications of a Merger

A merger occurs when one or more companies integrate into an existing company, leading to the following legal consequences:

Transfer of Assets and Liabilities – All assets and liabilities of the merging companies are automatically assigned to the surviving company.
Change in Shareholding Structure – Shareholders of the merging entities become shareholders of the surviving entity based on an agreed conversion ratio.
Legal Dissolution Without Liquidation – The legal status of the merging companies is terminated without undergoing a separate liquidation process.

Mergers must be conducted in accordance with the principles of fairness and transparency, taking into account the interests of:

Shareholders, including minority shareholders.
Employees, ensuring compliance with labor laws.
Creditors and business partners, by safeguarding contractual obligations.
Market competition laws, ensuring compliance with Indonesia’s anti-monopoly regulations.

A well-executed merger can offer numerous advantages, such as increased market share, enhanced operational efficiency, and improved financial stability. However, improper planning or non-compliance with legal requirements can lead to disputes, financial losses, or regulatory penalties.

Types of Mergers in Indonesia

Mergers in Indonesia can be classified into several types, depending on the structure and objectives of the transaction. The most common types include:

Statutory Merger – This occurs when one company is completely absorbed by another, with the absorbed company ceasing to exist while the surviving company retains its legal identity and assets.
Subsidiary Merger – A parent company merges with its wholly-owned subsidiary, consolidating operations under a single legal entity. This is often used to simplify corporate structures.
Consolidation Merger – Unlike a statutory merger, a consolidation results in the formation of an entirely new company. The merging entities dissolve, and their assets, liabilities, and business operations are transferred to the newly created company.
Horizontal Merger – This involves the merger of two or more companies operating within the same industry, often to increase market share, reduce competition, or achieve economies of scale.
Vertical Merger – A merger between companies within the same supply chain, such as a manufacturer merging with a supplier or distributor, to improve operational efficiency and cost management.
Conglomerate Merger – A merger between companies operating in unrelated industries, primarily for diversification and risk management purposes.

Each type of merger has unique legal and regulatory considerations, particularly regarding shareholder rights, competition law compliance, and tax implications.

The Legal Process of a Merger in Indonesia

Preliminary Considerations and Feasibility Study

Before initiating a merger, companies must conduct a feasibility study to evaluate:

Financial health and liabilities of the entities involved.
Tax implications and compliance requirements.
Market and competitive impact of the merger.
Operational integration challenges and employee rights.

A well-structured feasibility study helps mitigate risks and align the merger with business objectives.

Kusuma & Partners assist business in preparing the Legal Due Diligence and Tax Due Diligence, ensuring your legal interests while complying with all legal requirements.

Preparation of the Merger Plan

The Board of Directors (BOD) of all participating companies must jointly draft a merger plan, which serves as the foundation for regulatory approvals. The plan must include:

Company Information: Names, domiciles, and organizational structures of the companies involved.
Legal and Financial Rationale: Justification for the merger.
Share Conversion and Valuation: A detailed process for converting shares of the merging entities into shares of the surviving company.
Amendments to Articles of Association (if applicable).
Financial Statements: Audited financial reports for the past three years and a pro-forma balance sheet post-merger.
Employee and Creditor Protections: Measures to fulfil obligations and safeguard rights.
Merger Timeline and Execution Plan.

Board of Commissioners’ Approval

Following the merger plan’s preparation, it must be approved by the Board of Commissioners (BOC) of each company through:

A formal BOC meeting, or
A circulating resolution, where commissioners approve the plan in writing without a physical meeting.

Public and Employee Announcements

To ensure transparency, the BOD must:

Publish an announcement in at least one nationally circulated Indonesian newspaper.
Notify employees in writing about the proposed merger.

The announcement must contain:

A summary of the merger plan.
A notice that interested parties may review the merger plan at the company’s office.

This announcement must be issued at least 30 days before the General Meeting of Shareholders (GMS).

Addressing Creditors’ Objections

Creditors who object to the merger have 14 days from the public announcement date to submit their objections. If objections remain unresolved at the time of the GMS, the merger cannot proceed until a resolution is reached.

Shareholders’ Approval (GMS)

A General Meeting of Shareholders (GMS) must be held to approve the merger. Shareholders must receive formal notice at least 14 days in advance. The legal quorum and approval thresholds are as follows:

First GMS: Requires at least 75% of voting shareholders to be present, with a minimum 75% approval vote.
Second GMS (if quorum is not met): Requires two-thirds of voting shareholders, with a minimum 75% approval vote.
Third GMS (if second fails): Requires a court-determined quorum.

Alternatively, shareholders may approve the merger without a GMS through a unanimous written resolution.

Shareholder Rights and Buyback Mechanism

Dissenting shareholders have the right to request a buyback of their shares at a fair market value. If the company cannot fulfil all buyback requests, it must arrange for a third party to acquire the shares.

Regulatory Approval for Foreign-Owned Company (PT PMA)

If the merger involves a foreign-owned company (PT PMA), it must obtain prior approval through the One Single Submission (OSS) system, in compliance with Indonesia Investment Coordinating Board (BKPM) regulations.

Notification to the Indonesian Competition Supervisory Commission (KPPU)

In accordance with Law No. 5 of 1999 on the Prohibition of Monopolistic Practices and Unfair Business Competition, certain mergers must be reported to the Indonesian Competition Supervisory Commission (KPPU). Companies must notify the KPPU if the merger meets specific financial thresholds related to total assets or revenue as stipulated in KPPU Regulation No. 3 of 2023. Failure to notify KPPU when required may result in administrative sanctions or fines.

Kusuma & Partners assist businesses in handling Antitrust & Competition matters, ensuring your legal interests while complying with all legal requirements.

Execution of the Merger Deed

Once all approvals are obtained, the merger must be formalized in a Merger Deed, which must be:

Drafted in Indonesian language.
Executed before a public notary.

Submission to the Ministry of Law and Human Rights (MoLHR)

The Merger Deed and GMS resolution must be submitted to the Ministry of Law and Human Rights (MoLHR). The merger becomes legally effective:

Upon approval from MoLHR, or
On a later date specified in the Merger Deed.

Post-Merger Public Disclosure

Within 30 days of the merger’s effective date, the BOD of the surviving company must publish a post-merger announcement in an Indonesian newspaper.

Conclusion

Mergers in Indonesia require strict legal compliance, financial; tax and legal due diligence, and strategic execution. Ensuring all legal requirements are met is essential to avoid disputes, regulatory delays, or contractual liabilities.

At Kusuma & Partners Law Firm, we provide expert legal counsel to navigate the complexities of mergers, ensuring a legally sound and commercially beneficial outcome.

For professional legal assistance with Mergers and Acquisitions (M&A), contact us today.

Partnering with Kusuma & Partners Law Firm for Merger Transaction

Our firm specializes in corporate Mergers and Acquisitions (M&A), ensuring full compliance with Indonesian regulations. We provide strategic legal guidance, manage regulatory approvals, and protect our clients’ interests at every stage of the merger process. With extensive experience in corporate law, we ensure a smooth, legally sound, and efficient merger transaction.

“DISCLAIMER: This content is for general informational purposes only and is not a substitute for professional advice. Users rely on its content at their own risk. For professional advice, please consult us.”

Guarantees in Loan Agreements are essential for securing repayment and minimizing lender risks. Whether for personal or corporate loans, these guarantees provide financial security, reduce default risks, and ensure compliance with loan terms. This article explores the importance, types, and legal considerations of guarantees in loan agreements.

Definition of Loan Agreement

According to the Indonesian Civil Code, a loan agreement is a contract where one party (the creditor) provides funds or assets to another party (the debtor) with the understanding that the debtor will return the same amount, typically with interest, at a specified future date. This legal definition underscores the mutual obligations and expectations of both parties involved in the transaction. The relevant provisions can be found in Article 1754 of the Civil Code, which outlines the basic principles of loan agreement.

Responsibilities of Debtors and Creditors

Debtors’ Responsibilities

Debtors are obligated to repay the principal amount of the loan along with any agreed-upon interest by the due date specified in the loan agreement. Failure to meet these obligations can result in legal consequences, including penalties and potential legal action by the creditor.

Creditors’ Responsibilities

Creditors are responsible for providing the agreed-upon funds or assets to the debtor in a timely manner. They must also ensure that the terms of the loan agreement are fair and transparent, avoiding any practices that could be deemed exploitative or unfair.

Legal Implications of Defaulting on Loans (Wanprestasi)

Defaulting on a loan, known as “wanprestasi” in Indonesian legal terminology, has significant legal implications. When a debtor fails to repay the loan as stipulated, the creditor can initiate legal proceedings to recover the outstanding amount. The Indonesian Civil Code provides a structured process for creditors to follow in such cases, ensuring that justice is served while protecting the rights of both parties. Article 1243 of the Civil Code outlines the consequences of default, allowing creditors to seek damages and enforce their rights through the courts.

The Role of Guarantees

Guarantees are a crucial component of loan agreements, serving as a risk mitigation strategy for creditors. A guarantee is a legal commitment by a debtor or third party (the guarantor) to repay the loan if the debtor fails to do so. This arrangement provides creditors with an additional layer of security, reducing the risk of financial loss in the event of debtor default.

Types of Guarantees in Loan Agreements

There are several types of guarantees that can be included in loan agreement:

Personal Guarantee: A guarantee provided by an individual, typically by a debtor; a family member; or business associate of the debtor.
Corporate Guarantee: A guarantee provided by a company, often used in business-to-business transactions.
Collateral Guarantee: A guarantee provided by the debtor or a third party using specific assets as collateral.

Collateral Types as Guarantees in Loan Agreement

Collateral serves as a security for creditors, ensuring that they have a claim to specific assets if a debtor defaults on their loan obligations. In Indonesia, various types of collateral can be utilized in loan agreement, each with its own characteristics, advantages, and legal implications.

Real Estate Collateral

Real estate collateral involves using property, such as land or buildings, as security for a loan. This is one of the most common forms of collateral due to the high value and stability of real estate. Real estate typically has a significant market value, providing substantial security for creditors. Real estate values tend to be more stable over time compared to other asset types.

Vehicles, Equipment, and Machinery

Vehicles, including cars, trucks, and machinery, can also be used as collateral. This type of collateral is common in personal loans and business financing. Vehicles can often be sold quickly, providing a fast recovery option for creditors. Using equipment as collateral allows businesses to maintain operations while securing financing.

Financial Assets

Financial assets, such as stocks, bonds, and bank accounts, can be pledged as collateral. This type of collateral is often used in corporate financing. Financial assets can be quickly converted to cash, providing immediate recovery options for creditors. These assets often have a clear market value, making them easy to assess.

Intellectual Property

Intellectual property rights, such as patents, trademarks, and copyrights, can also serve as collateral. This is particularly relevant for businesses in creative industries. Intellectual property can have significant value, especially for innovative companies. This type of collateral does not require physical storage or maintenance.

Kusuma & Partners assist businesses in handling Contract Drafting & Contract Review, ensuring your legal interests while complying with all legal requirements.

Legal References on Guarantees in Loan Agreements

The legal framework governing guarantees in Indonesia is primarily found in the Indonesian Civil Code, particularly in Articles 1820 to 1832, which detail the nature and enforceability of guarantees. Additionally, the Supreme Court of Indonesia has issued various rulings that clarify the application of these articles in real-world scenarios, emphasizing the importance of clear terms in guarantee agreements.

Legal Options for Creditors in Case of Debtor Default

In the event of debtor default, creditors have several legal options available to them:

Legal Action: Creditors can file a lawsuit against the debtor to recover the outstanding amount. This process involves presenting evidence of the loan agreement and any supporting documents.
Enforcement of Collateral: If the loan agreement includes collateral, creditors can seize and sell the collateral to recover the debt. The procedures for this are outlined in Article 1131 of the Civil Code, which allows creditors to enforce their rights over secured assets.
Negotiation: Creditors may negotiate with the debtor to reach a mutually acceptable resolution, such as an extension of the repayment period or a reduced repayment amount.
Bankruptcy Proceedings: In cases where the debtor is unable to repay the debt, creditors can initiate bankruptcy proceedings to liquidate the debtor’s assets and distribute the proceeds among creditors.

Kusuma & Partners assist businesses in handling Litigation & Dispute Resolution, ensuring your legal interests while complying with all legal requirements.

Conclusion

A clear understanding of guarantees in loan agreements is crucial for both lenders and borrowers. These guarantees provide financial protection, strengthen loan security, and help mitigate risks. Whether dealing with collateral, personal, or corporate guarantees, ensuring compliance with legal requirements is essential for a smooth loan process.

Choose Kusuma & Partners Law Firm for Expert Drafting, Reviewing Loan Agreements, and Managing Litigation & Dispute Resolution

Choosing Kusuma & Partners ensures that your loan agreements are meticulously drafted and reviewed to protect your interests, while our experienced team is equipped to handle any litigation and dispute resolution processes efficiently, providing you with peace of mind and expert guidance throughout the entire transaction.

“DISCLAIMER: This content is for general informational purposes only and should not be treated as legal advice. For professional advice, please consult us.“

Setting up a business in Indonesia is just the first step. After incorporation, companies must comply with various legal, tax, employment, permit, and administrative obligations to operate smoothly and avoid penalties. Understanding these post-incorporation compliance requirements is crucial for maintaining a lawful and sustainable business presence in Indonesia.

This article provides a comprehensive guide to key post-incorporation compliance under Indonesian laws and regulations, covering Legal Compliance, Tax Compliance, Labor & Employment Compliance, Permit Compliance, and Other Administrative Post-Incorporation Compliance.

Legal Compliance

Businesses in Indonesia must ensure compliance with corporate governance and legal regulations to avoid penalties or revocation of business licenses. Key legal compliance requirements include:

1.1 General Company Laws and Regulatory Compliance

Companies must operate in accordance with Law No. 40 of 2007 on Limited Liability Companies (UU PT), which governs business activities; corporate structure; shareholders’, directors’, and commissioners’ duties and responsibilities; etc.
Companies must comply with investment related matters in Indonesia under Law No. 25 of 2007 on Investment Law which regulates both domestic and foreign investment activities within Indonesia, it mandates that foreign investment must be conducted through a limited liability company (PT PMA) established under Indonesian law and supervised by the Investment Coordinating Board (BKPM).
Law No. 6 of 2023 on Job Creation (Omnibus Law) introduced significant changes to corporate compliance, which aims to significantly simplify regulations, streamline business processes, and attract investment by amending multiple existing laws across various sectors, essentially consolidating them into one large piece of legislation, with the primary goal of boosting economic growth and job creation in the country; it is often referred to as the “Job Creation Law” as well.
Businesses must adhere to Indonesia Antitrust & Competition Law (Law No. 5 of 1999) on the Prohibition of Monopolistic Practices and Unfair Business Competition; it governs and prohibits anti-competitive practices like collusion, monopolies, and unfair business conduct, aiming to promote fair market competition and protect consumers.
Compliance with consumer protection laws under Law No. 8 of 1999 on Consumer Protection is essential for businesses engaging in B2C transactions.

Tips: consult with trusted Indonesia Business Lawyer to seek a precise legal advice and ensure legal compliance.

1.2 Business Registration and Corporate Documents

Businesses must ensure that their corporate documents, such as the Deed of Establishment, Articles of Association, and Business Identification Number (NIB), remain updated.
Any changes in company structure (e.g., shareholders, directors, or capital) must be reported to the Ministry of Law and Human Rights (MOLHR) within 30 days under Law No. 40 of 2007 on Limited Liability Companies.
Failure to update company documents may lead to administrative sanctions, fines, or potential legal disputes.

Kusuma & Partners assist businesses in handling company deed of amendment, ensuring a smooth process while complying with all legal requirements.

1.3 Investment Compliance (For PT PMA)

Foreign-owned companies (PT PMA) must:

Submit Investment Activity Reports (LKPM) to the Indonesia Investment Coordinating Board (BKPM) on a quarterly or annual basis as per BKPM Regulation No. 5 of 2021.
Maintain the minimum investment capital requirements of IDR 10 billion per business activity, excluding land and buildings.
Report any expansion, mergers, or acquisitions to BKPM to maintain investment compliance.

Read more our article to get better understanding: A Guide to Setting Up a Foreign-Owned Company (PT PMA) in Indonesia.

1.4 Annual General Meeting of Shareholders (A GMS)

Indonesian companies must hold an Annual General Meeting of Shareholders (A GMS) at least once a year under Article 78 of Law No. 40 of 2007 to approve financial statements, dividend distributions, and appoint or dismiss directors.
The A GMS must be recorded in the company’s Minutes of Meeting (MoM) and reported to MOLHR if there are changes to the company structure.

Kusuma & Partners assist businesses in handling Annual General Meeting of Shareholders, ensuring a smooth process while complying with all legal requirements.

1.5 Intellectual Property (IP) Protection

Businesses dealing with proprietary products, trademarks, or patents should register their Intellectual Property (IP) Rights with the Directorate General of Intellectual Property (DGIP) in compliance with Law No. 20 of 2016 on Trademarks and Geographical Indications.
Unregistered trademarks may be subject to legal disputes, counterfeiting, or business identity theft.

Tips: consult with trusted Indonesia Business Lawyer to seek a precise legal advice and ensure legal compliance on Intellectual Property protection.

Tax Compliance

Tax compliance is a critical aspect of post-incorporation obligations in Indonesia. Businesses must ensure timely tax registrations, filings, and payments to avoid penalties.

2.1 Taxpayer Registration

All companies must register with the Indonesian Tax Office (DJP) to obtain a Taxpayer Identification Number (NPWP) and be classified under the appropriate tax regime as per Law No. 7 of 2021 on Tax Regulation Harmonization.
Companies with foreign ownership (PT PMA) must also register for VAT (PPN) obligations if their annual revenue exceeds IDR 4.8 billion under Minister of Finance Regulation No. 197/PMK.03/2021.

2.2 Monthly and Annual Tax Reporting

Businesses must fulfil the following tax obligations:

Corporate Income Tax (PPh Badan) – Companies must file annual tax returns, with the general tax rate set at 22% under Law No. 7 of 2021.
Value-Added Tax (VAT / PPN) – Companies must submit monthly VAT reports and payments as per Law No. 42 of 2009 on VAT.
Withholding Tax (PPh 21, PPh 23, and PPh 4(2)) – Companies must withhold tax on employee salaries, service fees, rental income, and dividends.

Kusuma & Partners assist companies in handling Monthly and Annual Tax Compliance, ensuring a smooth process while complying with all legal requirements.

2.3 Payroll and Employee Tax Compliance

Employers must deduct, report, and remit employee income tax (PPh 21) to the tax office by the 10th of the following month.
BPJS contributions for employees must be reported and paid to BPJS Ketenagakerjaan and BPJS Kesehatan monthly under Law No. 24 of 2011 on BPJS.

2.4 Tax Audit and Compliance Reviews

The Indonesian Tax Authority (DJP) regularly audits businesses. Companies should maintain accurate financial records and be prepared for tax reviews.
Failure to comply may result in tax penalties, interest, or even legal proceedings.

Kusuma & Partners assist companies in handling Tax Due Diligence, ensuring a smooth process while complying with all legal requirements.

Labor & Employment Compliance

Compliance with Indonesian labor laws is essential for businesses employing workers. Key aspects include:

Employment Contract – Must comply with Law No. 13 of 2003 on Manpower as amended by Law No. 6 of 2023 on Job Creation Law, distinguishing between permanent and fixed-term employment contracts.
Minimum Wage Compliance – Companies must adhere to provincial or sectoral minimum wage regulations set annually by regional governments.
Employee Benefits and Social Security Contributions (BPJS Contributions) – Mandatory contributions to BPJS Kesehatan (Health Insurance) and BPJS Ketenagakerjaan (Employment Insurance).
Foreign Employment Compliance:
Companies hiring expatriates must obtain a Foreign Worker Utilization Plan (RPTKA) and a Work Permit (IMTA) under Minister of Manpower Regulation No. 8 of 2021.
Foreign workers must obtain a Limited Stay Visa (VITAS) and Stay Permit (KITAS) through the Directorate General of Immigration.

Kusuma & Partners assist companies in handling Labor & Employment Compliance, as well as Immigration matter, ensuring a smooth process while complying with all legal requirements.

Permit Compliance

Businesses must comply with various sectoral and operational permits to maintain legal operations. Key permits include:

Business License (NIB & OSS) – Issued via the Online Single Submission (OSS) system under Government Regulation No. 5 of 2021.
Sector-Specific Licenses – Additional licenses are required based on business activities, such as:
- Industrial Business License (IUI)
- Construction Business License (SIUJK)
- Trading Business License (SIUP)
Environmental Permits – Required for businesses impacting the environment under Law No. 32 of 2009 on Environmental Protection and Management.

Important Considerations for Company

Consult a Professional – Due to the complex nature of Indonesian regulations, seeking guidance from a local legal and tax professional is crucial for ensuring proper compliance.
Regular Monitoring – Regularly review and update compliance procedures to stay informed about any regulatory changes.
Penalties for Non-Compliance – Failure to comply with post-incorporation regulations can lead to significant fines and legal consequences.

Conclusion

Post-incorporation compliance is essential for companies’ continuity in Indonesia. Ensuring Legal, Tax, Labor & Employment Compliance, Permit, and Other Administrative Post-Incorporation Compliance helps companies avoid penalties, build credibility, and operate efficiently. Partnering with Kusuma & Partners Law Firm guarantees that your company stays compliant with Indonesian regulations, allowing you to focus on growth and success.

Need Assistance? Contact Us Today!

For expert legal and tax compliance services in Indonesia, consult Kusuma & Partners Law Firm today. Our team is ready to assist your business in navigating Indonesia’s regulatory landscape with confidence.

Why Choose Kusuma & Partners Law Firm?

Navigating post-incorporation compliance in Indonesia can be complex and time-consuming. Kusuma & Partners Law Firm offers expert legal, tax, employment, and business advisory services to help businesses stay compliant and grow successfully. With our deep expertise in Indonesian corporate, tax, and employment law, we provide practical solutions tailored to your business needs. Our team ensures your business remains legally sound, tax-efficient, and operationally secure, avoiding any regulatory pitfalls.

Indonesia, as Southeast Asia’s largest economy, presents a wealth of opportunities for foreign investors. The government has actively promoted Foreign Direct Investment (FDI) by improving regulations, offering incentives, and easing restrictions. However, understanding the available structures for FDI is crucial for investors looking to establish a presence in Indonesia. This guide explores the common forms of FDI, the legal frameworks governing them, and why choosing Kusuma & Partners Law Firm is your best option for navigating Indonesia’s business landscape.

FDI in Indonesia typically takes several forms, each with distinct regulatory and operational implications.

Foreign-Owned Limited Liability Company (PT PMA)

PT Penanaman Modal Asing (PT PMA) is the most common vehicle for foreign investors. Governed by Law No. 25 of 2007 on Investment, PT PMA allows foreign ownership based on the Positive Investment List (replacing the former Negative Investment List).

Key Requirements:

Minimum Capital Investment: IDR 10 billion (+ USD 700,000), excluding land and buildings.
Foreign Ownership Limitations: Varies by sector (some allow 100% foreign ownership, others require local partners).
Business Licensing: Must be registered via the Online Single Submission (OSS) system.
Reporting & Compliance: Subject to BKPM (Investment Coordinating Board) reporting obligations.

For a detailed understanding on PT PMA, consider reading this article A Guide to Setting up PT PMA in Indonesia. It provides insights into the legal steps and requirements for setting up PT PMA in Indonesia.

Representative Office

Foreign companies may establish a Representative Office for non-commercial activities. This structure is suitable for market research, promotional activities, or liaising with Indonesian entities.

Types of Representative Office:

KPPA (General Representative Office) – Focused on liaison and coordination.
KP3A (Trade Representative Office) – For conducting market analysis and trade promotion.
BUJKA (Foreign Construction Services Representative Office) – For foreign construction firms operating in Indonesia.
KPD (Foreign Banking Representative Office) – Used by foreign banks to explore potential banking operations.

Joint Venture (JV) with Local Partners

Certain industries require foreign investors to form a Joint Venture (JV) with Indonesian entities to comply with ownership restrictions. Joint ventures provide local market knowledge, government relationships, and access to local resources.

Common Sectors Requiring JVs:

Oil & Gas
Media & Telecommunications
Financial Services
Distribution and Retail

Public-Private Partnerships (PPP)

The Indonesian government encourages FDI in infrastructure through Public-Private Partnerships (PPP). These partnerships allow foreign investors to collaborate with the government on projects in:

Toll roads and transportation
Power generation and renewable energy
Water supply and waste management

PPP investments are regulated under Presidential Regulation No. 38 of 2015 on Cooperation between Government and Business Entities.

Mergers & Acquisitions (M&A)

Foreign investors can acquire shares or assets of Indonesian companies through Mergers & Acquisitions (M&A). These transactions are regulated by:

Law No. 40 of 2007 on Limited Liability Companies
Financial Services Authority (OJK) Regulations for public companies
Business Competition Supervisory Commission (KPPU) for antitrust compliance

Kusuma & Partners assist businesses in handling Merger & Acquisitions (M&A), ensuring a smooth process while complying with all legal requirements.

Foreign Investment in Capital Markets

Foreign investors can participate in Indonesia’s capital markets by purchasing shares of publicly listed companies on the Indonesia Stock Exchange (IDX). Regulations governing foreign investment in securities include:

Law No. 8 of 1995 on Capital Markets
Financial Services Authority (OJK) Regulations
Securities ownership restrictions for strategic industries

Franchise and Licensing Arrangements

Foreign businesses can enter the Indonesian market through franchise or licensing agreements, regulated under:

Law No. 7 of 2014 on Trade
Regulation of the Minister of Trade No. 71 of 2019 on Franchising
Intellectual Property Laws for trademark and patent protection

Kusuma & Partners assist businesses in handling Contract Drafting & Contract Review of Franchise and Licensing Arrangements, ensuring a smooth process while complying with all legal requirements.

Special Economic Zones (SEZs) and Industrial Parks

Indonesia offers Special Economic Zones (SEZs) with tax incentives, simplified licensing, and infrastructure support to attract FDI. SEZs are regulated under Law No. 39 of 2009 on Special Economic Zones.

Legal and Regulatory Considerations

FDI in Indonesia requires compliance with various legal and regulatory frameworks:

Investment Licensing & Approvals – Governed by BKPM.
Taxation & Incentives – Corporate income tax, VAT, withholding taxes, and tax holidays.
Employment Laws – Hiring foreign employees requires work permits and compliance with Employment Law.
Intellectual Property Protection – Patent, trademark, and copyright registrations with DGIP.
Antitrust & Competition Laws – Compliance with KPPU to avoid monopolistic practices.

Conclusion

Indonesia presents lucrative investment opportunities, but regulatory complexities require careful structuring. Kusuma & Partners Law Firm ensures a seamless investment process with expert legal guidance. Contact us today to discuss your investment needs!

Start Foreign Direct Investment (FDI) in Indonesia with Kusuma & Partners Law Firm

Navigating Indonesia’s FDI landscape requires expert legal guidance. At Kusuma & Partners Law Firm, we provide:

Comprehensive Legal Support: From company incorporation to compliance.
Industry-Specific Expertise: Deep knowledge of FDI regulations across multiple sectors.
Efficient Licensing and Approvals: Seamless processing of business licenses via OSS and BKPM.
Legal, Tax & Investment Structuring: Optimizing tax efficiency and mitigating risks.
Proven Track Record: Successfully assisting multinational clients with market entry and expansion.

Ready to expand into Indonesia? Fill out the form, and let’s build your success together!

“DISCLAIMER: This content is for general informational purposes only and should not be treated as legal advice. For professional advice, please consult us.”

Expanding your business to Indonesia? Setting up a PT PMA in Indonesia is the key to legally operating as a foreign investor. PT PMA (Penanaman Modal Asing) is a foreign-owned limited liability company that allows international businesses to enter Indonesia’s growing market. However, the process involves legal compliance, business licensing, tax registration, and investment approvals. In this guide, we will walk you through the essential steps to successfully establish a PT PMA in Indonesia while ensuring compliance with local regulations.

Definition and Importance of PT PMA

PT PMA (Penanaman Modal Asing) is a type of limited liability company in Indonesia that can be wholly or partially owned by foreign investors, structured for foreign investors to legally operate a business within the country. It provides foreign entities with the legal framework to conduct business in Indonesia, making it a popular choice for international companies looking to enter the market.

Importance of PT PMA

Market Access: PT PMA allows foreign investors to directly engage in Indonesia’s market, offering opportunities across various sectors.
Legal Entity: As a recognized legal entity, PT PMA provides operational legitimacy and legal protection under Indonesian laws.
Investment Flexibility: PT PMAs have flexibility in ownership structures and can operate in many industries, subject to regulations and restrictions as outlined in the Positive Investment List.

Corporate Structures, Shares, and Ownership of PT PMA

Corporate Structures

Single-tier Structure: Consisting of shareholders, director, and commissioner, this structure simplifies decision-making and governance.
Two-tier Structure: Involves both a Board of Directors (BOD) for daily management and a Board of Commissioners (BOC) for oversight and strategic guidance.

Shares and Ownership

Class of Shares: PT PMA can issue common and preferred shares, each with distinct rights and obligations for shareholders.
Foreign Ownership Limits: According to the Positive Investment List, certain sectors allow full foreign ownership, while others require local partners or have specific ownership caps.

Tips: Engage legal consultant for accurate foreign ownership guidance, ensuring compliance and efficiency.

Essential Documents for Establishing PT PMA

Deed of Establishment: Contains Articles of Association (AoA) and must be notarized by an Indonesian notary.
Investment Registration: Issued by the Investment Coordinating Board (BKPM), this is required for foreign entities to invest.
Business Identification Number (NIB): Issued through the OSS system, serving as the company’s primary business license.
Tax Identification Number (NPWP): Necessary for tax reporting and compliance.
Sector-Specific Licenses: Depending on the business type, additional permits may be required, such as industry-specific licenses, location permits, and environmental permits.

Step-by-Step Guide to Setting up a PT PMA in Indonesia

Step 1: Set Up a Local Office

PT PMA must have a registered office in Indonesia. Investors can opt for a physical or virtual office, depending on the business structure.

Step 2: Classification of Business Activity (KBLI)

Every business in Indonesia must classify its activities under the Indonesian Standard Industrial Classification (KBLI) codes, which determine licensing requirements.

Step 3: Obtain Necessary Licenses

Register the Company Name
Preparing Deed of Establishment
Obtain Business Identification Number (NIB)
Acquire Sector-Specific Licenses (depending on the industry)

Step 4: Open a Bank Account and Deposit Capital

Bank Account: Open a corporate bank account in Indonesia to deposit the required capital.
Minimum Capital Requirement: Generally, a PT PMA mush have a minimum investment of IDR 10 billion (around USD 700,000), with at least 25% of the capital paid up.

Step 5: Register with the Social Security System

Your employees must be registered with BPJS Ketenagakerjaan (social security)and BPJS Kesehatan (healthcare).

Step 6: Employing Foreign Employees

Foreign employees require Work Permits (KITAS) and Visa documents, and investors must ensure compliance with Indonesian labor laws, including quotas for local and foreign workers.

Legal, Accounting, and Tax Compliance for PT PMA

Legal Compliance: the company’s business activities must comply with the prevailing laws and regulations.
Annual Financial Reports: certain businesses must be audited and submitted to relevant Government authority.
Corporate Income Tax (CIT)
VAT (Value Added Tax) and Payroll Taxes: must register for VAT and ensure compliance with payroll taxes for employees.

Ensuring ongoing compliance is crucial for the long-term success of your PT PMA in Indonesia.

Investment Dynamics in Indonesia

Foreign Direct Investment (FDI) Environment

Indonesia actively encourages foreign investment through various incentives and reforms designed to improve the ease of doing business. Key drivers include a young, dynamic workforce, increasing consumer spending, and government initiatives in infrastructure and digital transformation.

Investment Incentives

Tax Incentives: Tax holidays, reductions, and investment allowances for certain industries and regions.
Special Economic Zones (SEZs): Offer additional benefits such as reduced tax rates, expedited licensing, and other incentives.

Regulatory Landscape and Applicable Laws

Key Regulatory Bodies

Ministry of Law and Human Rights: Responsible for company registrations and legal entity recognition.
Investment Coordinating Board (BKPM): Oversees foreign investment approvals and coordinates regulatory processes.
Financial Services Authority (OJK): Regulates financial sector companies, ensuring compliance with financial and investment laws.

Applicable Laws

Law No. 40 of 2007 on Limited Liability Companies: Governs the establishment and operation of PT PMA.
Law No. 25 of 2007 on Investment: Provides the legal framework for foreign investment, including investor rights and obligations.
Omnibus Law on Job Creation: Simplifies regulations and procedures, aiming to attract more foreign investment by enhancing the business environment.

Benefits of Setting Up a PT PMA in Indonesia

Full 100% or Partial Foreign Ownership: In most sectors, foreign investors can fully own and control their company.
Access to Growing Market: Indonesia’s rapidly expanding consumer base provides ample opportunities across various sectors.
Government Incentives: PT PMAs may enjoy tax holidays, investment allowances, and customs incentives in special economic zones (SEZs).
Stable Economic Growth and Business Climate

By setting up a PT PMA in Indonesia, investors gain access to a thriving business environment with strong growth potential.

Challenges in Setting Up a PT PMA in Indonesia

Common Challenges

Regulatory Complexity: Navigating Indonesia’s regulatory environment can be challenging without local expertise.
Sectoral Restrictions: Certain industries are closed or restricted to foreign investors, necessitating careful planning.
Capital and Local Content Requirements: High capital requirements and local content rules can pose barriers for smaller investors.

Solution: Partner with a trusted legal consultant to navigate the process efficiently.

Important Things to Consider When Setting Up a PT PMA

Business Sector Restrictions: Review the Positive Investment List to understand the limits on foreign ownership and required partnerships.
Compliance with Labor Laws: Ensure that you meet labor laws, especially concerning hiring local employees and expatriates.
Cultural and Market Knowledge: Understanding local business practices and consumer behaviour is crucial for success.

Best Sectors and Industries to Invest in Indonesia

High-Potential Sectors

Manufacturing and Export-oriented Industries: Particularly in electronics, automotive, and consumer goods, driven by Indonesia’s competitive labor market.
Digital Economy: Rapid growth in e-commerce, fintech, and digital services, fueled by a young, tech-savvy population.
Renewable Energy: Increasing demand for sustainable energy solutions offers opportunities in solar, wind, and geothermal power.

Emerging Opportunities

Healthcare: Rising demand for healthcare services and products, spurred by a growing middle class.
Tourism and Hospitality: Indonesia’s diverse attractions continue to drive growth in the tourism sector, creating opportunities in hospitality and infrastructure.

Future Outlook for Foreign Investment in Indonesia

Indonesia’s investment outlook remains positive, supported by ongoing economic reforms and a commitment to improving the investment climate. Key trends include:

Continued Economic Growth: Indonesian remains a major investment destination.
Digital Transformation: Continued growth in the digital economy presents vast opportunities for tech-driven investments.
Sustainable Investments: Emphasis on green and sustainable projects aligns with global trends towards environmental responsibility.
Regulatory Reforms: Ongoing efforts to simplify business regulations and enhance transparency are expected to further attract foreign capital.

Recommendations for Foreign Investors

Conduct Market Research before entering the Indonesian market.
Partner with a Trusted Legal Advisor to navigate regulations efficiently.
Ensure Compliance with Tax, Labor, and Licensing Regulations.

Conclusion

Setting up a PT PMA in Indonesia opens doors to a thriving market but requires legal, tax, and regulatory compliance. By following the proper steps and seeking professional legal guidance, foreign investors can successfully enter Indonesia’s growing market. By partnering with our law firm, you can ensure a smooth and efficient business setup.

Why Choose Kusuma & Partners Law Firm to Setting Up Your PT PMA?

Expertise in Indonesian Corporate Law: We have deep knowledge of Indonesian business regulations, ensuring that your PT PMA is set up in full compliance with local laws.
End-to-End Services: From document preparation and regulatory filings to obtaining licenses and handling tax registrations, we offer comprehensive legal support throughout the entire incorporation process.
Strong Regulatory Relationships: We have established strong connections with key regulatory bodies, including BKPM and the Ministry of Law and Human Rights, enabling us to expedite the incorporation process and minimize bureaucratic delays.
Tailored Legal Solutions: We offer customized services to meet your business needs.
Proven Success: With years of experience helping foreign investors set up PT PMAs in Indonesia, our firm has a proven track record of success across various industries.

Start Your PT PMA with Confidence

Setting up a PT PMA is a big step, and we’re here to make it smooth and successful. With Kusuma & Partners Law Firm, you’re not just getting a consultant—you’re gaining a dedicated partner committed to your business growth. Ready to expand into Indonesia? Fill out the form below, and let’s build your success together.

“DISCLAIMER: This content is for general informational purposes only and should not be treated as legal advice. For professional advice, please consult us.”

Frequently Asked Questions

How to Create a Valid Contract in Indonesia

Essential Requirements for a Valid Contract (Article 1320 Indonesian Civil Code)

Consequences of Non-Compliance with Article 1320 Indonesian Civil Code

Key Challenges in Contract Drafting & Review

Legal Principles and Doctrines Related to a Valid Contract

Conclusion

Contract Drafting & Contract Review Assistance in Indonesia with Kusuma & Partners Law Firm

Employment in Indonesia: Types and Regulations

The Main Types of Employment in Indonesia

1. Permanent Employment (PKWTT – Perjanjian Kerja Waktu Tidak Tertentu)

2. Fixed-Term Employment (PKWT – Perjanjian Kerja Waktu Tertentu)

Others Types of Employment in Indonesia

1. Outsourcing (Alih Daya)

2. Daily Employee

3. Freelance

3. Part Time Employment

4. Remote Work

5. Internship

6. Business Partnership (Kemitraan)

Key Considerations for Employers

Conclusion

Partnering with Kusuma & Partners Law Firm for Labor & Employment Law Assistance in Indonesia

THR Payment Indonesia: Employer Guide to Rules, Calculation & Compliance

Understanding THR Payment Indonesia: Legal & Employer Obligations

THR Benefits for Employees

THR Benefits for Employers

Legal Basis for THR Payment Indonesia

Eligibility for THR Payment Indonesia

THR Payment Indonesia: Step-by-Step Calculation & Deadlines

Calculating THR Amount

Payment Deadlines & Procedures

Penalties for Non-Compliance

Common Challenges in THR Compliance & Solutions

Best Practices for Employers to Ensure Compliance

Conclusion

Partnering with Kusuma & Partners Law Firm for Labor Law Assistance in Indonesia

Understanding Antitrust and Competition Law in Indonesia

Why Business Competition Matters

The Legal Framework for Antitrust & Competition Law in Indonesia

Common Types of Unfair Business Competition

Considerations for Companies in Indonesia

The Role of the Business Competition Supervisory Commission (KPPU)

Case Study: Temasek Holdings and Allegations of Monopolistic Practices in Indonesia’s Telecommunications Sector

Conclusion

Partnering with Kusuma & Partners Law Firm for Antitrust & Competition

Merger in Indonesia: A General Overview for Businesses

Definition and Legal Implications of a Merger

Types of Mergers in Indonesia

The Legal Process of a Merger in Indonesia

Conclusion

Partnering with Kusuma & Partners Law Firm for Merger Transaction

Why Guarantees in Loan Agreements Matter

Definition of Loan Agreement

Responsibilities of Debtors and Creditors

Legal Implications of Defaulting on Loans (Wanprestasi)

The Role of Guarantees

Types of Guarantees in Loan Agreements

Collateral Types as Guarantees in Loan Agreement

Legal References on Guarantees in Loan Agreements

Legal Options for Creditors in Case of Debtor Default

Conclusion

Choose Kusuma & Partners Law Firm for Expert Drafting, Reviewing Loan Agreements, and Managing Litigation & Dispute Resolution

Key Post-Incorporation Compliance for Company in Indonesia

Legal Compliance

Tax Compliance

Labor & Employment Compliance

Permit Compliance

Other Administrative Post-Incorporation Compliance

Important Considerations for Company

Conclusion

Forms of Foreign Direct Investment (FDI) in Indonesia

Foreign-Owned Limited Liability Company (PT PMA)

Representative Office

Joint Venture (JV) with Local Partners

Public-Private Partnerships (PPP)

Mergers & Acquisitions (M&A)

Foreign Investment in Capital Markets

Franchise and Licensing Arrangements

Special Economic Zones (SEZs) and Industrial Parks