Bali Business Blueprint: Expert Advice from Legal Indonesia

What does PT stand for? How can one obtain a company work license? Can the owner of the company hire themselves as an employee? And what are the costs associated with processing all the necessary documents?
If you're considering starting a business in Bali, this article offers answers to the most pressing questions. It provides guidance to help you avoid mistakes that could waste time and investments.
In the following sections, Satya Pramana Putra, the director of Legal Indonesia, a company offering services for visa applications and business establishment, will delve into the types of companies that foreign citizens can establish in Indonesia. He will outline their differences, registration procedures, and other key aspects of starting a business in Bali.

Entering Bali's entrepreneurial ecosystem

The initial step involves arriving on the island and actively immersing oneself in its community. Many entrepreneurial ideas encounter hurdles upon direct exposure to Bali. This is because there could be a disconnect between concepts that appear promising elsewhere and their compatibility with the local culture on the island, as well as in Indonesia as a whole.
Bali in real life is quite different from what social media presents. This is because the island's unique atmosphere and character can't fully come across through photos or videos alone. There's a distinct vibe, rhythm, and lifestyle here. Even if you're certain about who you are and what you want from life, your perspectives can quickly shift here.
Numerous entrepreneurs residing on the island and operating businesses here have highlighted that they began their journey with a tranquil introduction to Bali, attributing much of their success to this approach. With an abundance of opportunities available on the island, experiencing firsthand everything it has to offer is essential for selecting your niche and understanding how to bring your ideas to fruition.
Image: Satya Pramana Putra, the director of Legal Indonesia

What types of companies can a foreigner establish in Indonesia and how do they differ?

Perseroan Terbatas (PT) is a Limited Liability Company (a legal entity whose capital is divided into shares). In Indonesia, there are two types of Perseroan Terbatas: PT PMDN (local company) and PT PMA (foreign investment company).
Typically, foreign citizens establish these two types of companies.
PT PMDN (Penanaman Modal Dalam Negeri) or local company
This type of company can only be fully owned by Indonesian citizens.
To establish a local PT PMDN company, you'll need:
  • Two local shareholders
  • One local director
  • One local commissioner
In this setup, the company is registered under two Indonesian citizens (the director and the commissioner). The director oversees the company's management, deals with transactions, organizes operations, and bears legal responsibility to the government. The commissioner serves a supervisory function, overseeing the director's activities, reviewing reports, and approving annual financial statements. These individuals usually receive a monthly salary (around $500-700) in addition to a contractual payment for registering the company under their name.
As a foreigner, you can act as the business sponsor, but in practice, you have no legal rights within the company.
However, there can be a protection mechanism in place: typically, a loan agreement is drafted to ensure that nominal owners have no claim to the company's profits.
If, for any reason, you encounter internal disagreements with your director and/or commissioner, or if the company faces financial difficulties, you can easily terminate the agreement and find new collaborators. Moreover, changing ownership does not require dissolving the entire company.
You also have the option to participate in the company not only as a sponsor but also as an employee, such as a general manager. This grants you eligibility for a working KITAS (limited stay permit), which is tied to a particular company and position, restricting you from working in other organizations or holding multiple roles. However, this type of company does not qualify for an investor KITAS.
Unlike PT PMA, which will be discussed below, PT PMDN does not have restricted business activities (those that are not available for foreign investment businesses). Therefore, this type of company can be very convenient for those looking to open a business that falls within the restricted business remit, such as beauty salons and cafes.
The only crucial step before starting this type of business is drafting internal agreements and contracts within the company. These agreements are discussed individually for each business with the help of legal specialists. At Legal Indonesia, we provide these services to our clients.
PT PMA (Penanaman Modal Asing) or foreign investment company
In a PT PMA, the company's founders may consist of two or more foreigners, whether they are legal entities or individuals. Together, they must hold 100% ownership of the shares, and foreign capital involvement is obligatory.
The company's shares can be divided among the owners in almost any percentage ratio: 50/50, 30/70, 10/90, 1/99. It's important to note that an investor KITAS can be obtained by a company founder with a share of no less than 1,125,000,000 IDR, which equals 11.25% of the company's shares.
Please note that the requirement for a shareholder of PT PMA to be an Indonesian citizen or a local company (PT PMDN) may arise if the intended business activities are listed in the Negative Investment List (DNI, Daftar Negatif Investasi – a document which regulates industries with restricted access).
For example, for architectural and construction activities, a local co-founder company (PT PMDN) must hold a minimum of 33% of shares, while the remaining 67% can be owned by foreign founders.
On the other hand, "Beauty Salon" business is completely off-limits to PT PMA companies. This type of business is only available to local companies owned solely by Indonesian citizens. So, even if there are local co-founders in addition to foreign co-founders, this won't qualify the company as "local".
The list of activities restricted to PT PMA frequently changes. For the latest information, refer to the OSS department's website.
For a company with foreign capital, the following are required:
  • Two foreign individuals or legal entities
  • One local or foreign director
  • One local or foreign commissioner
If two people establish a company, one of them can assume the role of the company director, and the other of the commissioner.

How much capital is required to establish PT PMA, and what documentation is necessary to provide evidence of it?

The start-up capital for PT PMA currently stands at a minimum of 10 billion IDR (approximately $700,000). The OSS department, operating under the Ministry of Investment, oversees this process and licenses PT PMA activities.
The injection of start-up capital following company registration is an internal company matter. Founders can choose to deposit the start-up capital into the company's bank account immediately or gradually within the company's operational term. The start-up capital is intended to cover various business needs, including investments. These funds should be in the company's bank account and directly tied to its operations. Expenses categorized as investments include:
1. Land acquisition (applicable only to specific business activities).
2. Building purchase (applicable only to specific business activities).
3. Internal procurement: office equipment and consumables such as furniture, computers, software, vehicles (motorcycles, cars), etc.
4. Overseas procurement: purchase of machinery including taxes, freight, and installation.
5. Other investments: legal fees, professional consultations, document licensing, architectural design, transportation costs, employee salaries, utilities (electricity, water, internet), tax obligations, office rent.
6. Operational funds (for 3 months): raw materials, office supplies, salaries.
Demonstrating the deposit of the start-up capital is done through a notarized statement. This document is signed by all members of the Board of Directors, founders, and members of the Board of Commissioners of PT. In this statement, they confirm their investment of this amount in the Indonesian economy.
All financial transactions of the company, supported by official documentation, must be regularly reported. Typically, financial reports must be submitted every three months. Failure to report for a given period means it needs to be included during the subsequent reporting period.
It's recommended to consult specialists regarding financial reporting for your company, as they can offer tailored solutions suited to your specific situation.

What if I'm unable to deposit the entire amount of start-up capital?

The most severe consequence for not depositing start-up capital is revocation of the company's main business activity license.
However, if you consistently submit your financial reports on time, the OSS won't have grounds to initiate an audit. Yet, it's important to note that they may still conduct an investigation if any deficiencies are found in your reports.

What do I need to know about activity codes and licenses? Are there any limitations associated with them?

In Indonesia, there's a system of codes for business activities (KBLI - Klasifikasi Baku Lapangan Usaha Indonesia). Therefore, prior to establishing a company, it's crucial to identify the primary line of business. You can select the main activity and several supplementary ones. While changing them during operations is allowed, it's important to note that any alterations to company documentation after establishment can be quite costly (starting from 10 million IDR).
Importantly, the business activities you list when opening a company should fall within the same field rather than being entirely different. This is monitored by the OSS department. If you plan to establish a multifunctional company, it's better to create several different ones.
Most activities in Indonesia require either a special premit or license. Licences can be either free or paid. Paid licences range from 5 to 100 million IDR. While most permits and licenses can be obtained through the OSS system, some require application to the relevant government agency. For example, activities related to education require approval from the Ministry of Education. Similarly, activities related to finance require special approvals from the Ministry of Finance or the central bank of Indonesia. Without this document, you cannot open a bank account or start operating. This permission must be obtained within three months of opening the company.

What documents are necessary to start the company registration process?

To register a company, founders need to provide photos or scans of their passports.
They must also choose a company name. The name must consist of three English or Indonesian words, with each word containing at least three letters. Punctuation marks and ligatures are not allowed, and terms like "company," "corporation," or "club" cannot be used in the name.
If the company has a physical location for registration, you must provide the land certificate, (IMB Izin Mendirikan Bangunan - building construction permit), and the commercial lease agreement.

What about office space?

Every company in Indonesia requires a legal address. During registration, you can choose to use your own address or rent one. However, there are restrictions to note. Certain businesses like cafes, children's centers, water tourism, and manufacturing must have a physical address. Conversely, for trading, IT, consulting, tourist services provision, and tour booking, a virtual address will do.
You can opt to provide either a physical or virtual address yourself. In such instances, three documents are necessary:
  • Commercial lease agreement
  • Land certificate
  • Building Permit (IMB)
You can also opt to rent a virtual address. For example, we frequently offer these services to our clients, taking the burden of handling necessary documentation off your shoulders. It's important to note, however, that there are certain restrictions involved. For instance, you won't be able to use the address for loan applications or bank transactions.
It's crucial to understand that virtual offices differ significantly from PO Boxes. While virtual offices are only virtual in relation to your company - it's registered there but doesn't physically occupy the premises - they must still be associated with physical spaces. Regulatory agencies often visit these locations, especially when important procedures like opening a company account are involved. They may need to visit to photograph the building and the space itself. Additionally, all official correspondence will be sent to this address.
Another important detail to note is that all areas in Bali are divided into zones based on the types of permissible activities. The OSS system regulates the activities allowed in each zone. For instance, Seminyak imposes numerous restrictions on activities conducted by businesses registered there, whereas Denpasar has almost none.
There are also designated tourist zones and industrial zones. So if, for example, you plan to engage in any kind of production, such as clothing or cosmetics, your premises must be located in the allocated zone.
If at the time of company registration, you input an activity type that isn't permitted in the area you specified under the company address, you'll be denied the business license (NIB). Therefore, when selecting premises for your business, it's essential to ensure beforehand that the chosen area permits the intended activities.
When we assist our clients with opening a virtual or physical address, we discuss all these details individually during consultations, as each case has its own unique aspects.

How long does it take to open a company and what are the associated costs?

The company registration process concludes with obtaining the business license (NIB), which currently takes around 2-3 months from application. The duration depends on the number of business activities you intend to conduct. Additionally, your business license is subject to approval, and denials are rather frequent.
Prior to the introduction of legislative changes in September 2022, company registration approvals took around 2-3 weeks regardless of the number of specified business activities. Currently, it is only possible to register a company within this timeframe if it has no more than two types of specified activities.
Legal Indonesia's company registration services fee is 20 million IDR. This fee includes registration for two types of activities and issuance of the business license within 2-3 weeks. However, if you plan to include more than two types of activities, the cost and timeframe will be calculated individually.

What should I know about taxation in Indonesia?

In Indonesia, there are two taxation systems:
1. Simplified system: This system entails a 0.5% monthly tax on the total turnover of the company. It applies to companies with low expenses that mainly generate profits. The simplified system is in effect for the initial three years or until the company's turnover reaches 4.8 billion IDR (approximately $250,000). After this period or upon reaching the turnover threshold, the tax automatically switches to 22% of the company's net profit.
2. General system: This system involves a 22% annual tax on the net profit. It is suitable for companies with expenses, such as equipment purchases. Additionally, there are taxes on salaries, services, rent, dividends, and other income sources.
With regard to company expenses, it's crucial to highlight a common pitfall. Often, company founders use the corporate account for personal expenses, such as paying for the director's accommodation. We advise against such actions and recommend using company funds exclusively for growing your business. This is because such payments could attract unwanted attention from tax authorities.

How complex is the accounting reporting system?

One aspect involves maintaining monthly financial reports, which form the foundation for the company's annual report submission.
Additionally, there's a monthly tax report. For instance, if a company has employees, their taxes are paid monthly, necessitating the submission of a corresponding report.
Moreover, there are investment reports outlining the company's expenditures, including salaries, equipment purchases, legal fees, etc.
At Legal Indonesia, we have tax specialists and accountants who oversee the entire organization of this process for our clients.

How is profit repatriation works, and what are the taxes on it?

Just as in any jurisdiction around the world, repatriating money from an Indonesian company is quite challenging. The only way to repatriate officially is through dividends at the end of the financial year. In other words, a portion of the profit can be repatriated as dividends, subject to a tax of 10% (if the shareholder has a personal tax number) or 20% (if no personal tax number is available).
An alternative approach is withdrawing funds via the salaries of the director and commissioner, though this incurs a progressive income tax. This method may not be ideal for those aiming to withdraw substantial sums from a company. For instance, withdrawals of up to 500 million IDR incur a 25% tax, making this option less attractive.

What are the specifics of hiring employees? Can PT PMDN and PT PMA companies hire foreign nationals?

When hiring employees, there's a specified ratio between local residents and foreigners, allowing one foreign employee for every five Indonesian employees. In this scenario, a work permit, known as a KITAS, is issued to the foreigner.
The process for hiring a foreigner under this arrangement is as follows: first, an employment contract is drafted, then the foreigner obtains a work permit (IMTA), and only after that, they can apply for a KITAS visa.
Legal Indonesia can assist with KITAS processing. The cost for these services is 15 million IDR, though the fee may vary based on the package of documents provided.
There is a fixed mandatory tax for foreign employees, amounting to $1200 per year. This tax is paid upon obtaining the IMTA work permit, which then allows for the issuance of a KITAS work visa. Additionally, there is a progressive income tax, ranging from 5% to 30%. The higher the salary, the higher the tax rate.
However, it is important to know that certain jobs are out of reach for foreign nationals. For instance, it's not possible for a foreigner to work as a nail technician in a beauty salon. In such cases, foreign individuals may need to consider related positions, such as a beauty specialist, which typically involves hairstyling. The list of positions available for foreign employees is periodically updated, so it's important to check the availability of your desired position before applying for a work KITAS.

What about dummy investors, also known as companies opened solely to obtain visas? How is this activity tracked, and what are the consequences of engaging in such practices?

First, let me explain the principle behind opening such companies: a company registers under a dummy director, and the founders list anyone they please. This is done in order to obtain KITAS visas for residency purposes.
Initially, everything seems fine, but after about six months or a year, the status of such company as a dummy becomes evident during inspections conducted by the authorities. This is because it is impossible to maintain the appearance of a legitimate business when, for example, the director and comissioner are unfamiliar with each other or lack the necessary statutory documents.
The owners of these companies often face severe consequences, ranging from hefty fines to deportation, with no right to re-enter Indonesia.
Investor KITAS is another popular attraction for dummy purposes. But, whilst it is relatively easy to obtain an investor KITAS, it carries significant obligations, such as a requirement to invest foreign capital and conduct business in Indonesia.
Obtaining a work or investment KITAS for leisure or residency purposes is quite reckless. These matters are closely monitored by the OSS agency, in coordination with the immigration office, and, as mentioned earlier, the consequences of breaking the rules can be quite unpleasant.
Legal Indonesia strongly advises against obtaining a KITAS without genuine intentions of operating a legitimate business in Indonesia. Agencies offering such services expose their clients to significant risks.
In a nutshell, starting and running a business in Indonesia can feel overwhelming. The paperwork is packed with jargon and details, making it easy to feel swamped.
But don't be discouraged! Many foreigners have built thriving businesses here, from wedding planners to tech start-ups and even laundry services.
The key? Trusting experienced legal and financial advisors to assist you through the process.
At Legal Indonesia, we offer the guidance you need to navigate each step with confidence, bringing you closer to achieving your business objectives.
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