Home Blog How to Set Up A Joint Venture Company in Indonesia Business Setup | Company Registration | Indonesia How to Set Up A Joint Venture Company in Indonesia InCorp Editorial Team 28 August 2024 8 reading time Table of Contents What is a Joint Venture Indonesia? Regulation of Joint Venture Indonesia Types of Joint Ventures Indonesia Requirements to Start Joint Venture Indonesia Advantages and Disadvantages of Joint Venture Indonesia Common Issues Happen in Joint Venture Indonesia Considerations Before Establishing a Joint Venture in Indonesia Establish A Joint Venture Company with InCorp There are countless reasons for individuals or businesses to set up a Joint Venture Indonesia. Most of the time, however, it comes down to business strategic factors to achieve business goals, compliance with requirements and regulations, development of new products, and expansion into new markets, particularly in a new foreign country. What is a Joint Venture Indonesia? A joint venture (JV) in Indonesia involves two or more businesses combining their expertise and resources to reach particular goals or pursue specific projects. It is a commercial enterprise that combines different resources and shares its rewards and risks. Regulation of Joint Venture Indonesia Understanding the joint venture law is important in Indonesia’s foreign investment context. Article 1, Number 3 of the Investment Law defines foreign investment as business activities conducted within the Republic of Indonesia by foreign investors, which can be carried out with entire foreign capital or a mix of foreign and domestic capital. Additional details are outlined in Article 2 of Government Regulation Number 20 of 1994, amended by Government Regulation 83 of 2001. This regulation addresses share ownership in companies established under foreign investment. This regulation outlines two forms of foreign investment: A joint venture, which involves a partnership between foreign capital and capital held by Indonesian citizens and/or Indonesian legal entities and, A direct investment in which the capital is entirely owned by foreign individuals and/or foreign legal entities. Types of Joint Ventures Indonesia In Indonesia, joint ventures (JVs) are categorized into two types: corporate JVs and contractual JVs. Corporate JVs Corporate JVs are further divided into incorporated JVs and partnerships. Incorporated JVs are legal entities with limited liability status, commonly known as limited liability companies (Perseroan Terbatas or “PT”). PTs are regulated under Company Law. Partnerships: These are business entities without limited liability status. Common types include: A Firm (Firma or Venootschap Onder Firma): A traditional partnership without distinct liability categories among partners. A Komanditer Partnership/Association (Commanditaire Vennootschap or “CV” ): In this structure, there are two types of partners: active partners who manage the business and passive partners who only contribute capital. The liability of passive partners in a CV is limited to their capital contributions, unlike in a firm where all partners share equal liability. Contractual JVs Contractual JVs are established through joint venture agreements between the partners and do not require forming a separate legal entity. Key documents for establishing a corporate JV include: Deed of Establishment: This document outlines the entity’s articles of association and lists the members of the board of directors and commissioners for a PT or the partners for a partnership. JV/Shareholders’ Agreement: A private document detailing the JV partners’ relationship. A PT’s deed of establishment must be notarized and approved by a Ministry of Law and Human Rights (MOLHR) decree, which grants the PT its limited liability status. Requirements to Start Joint Venture Indonesia Foreign investors seeking to establish joint ventures in Indonesia must know specific regulatory requirements to ensure compliance and optimize investment opportunities. The following points outline the key requirements and considerations: Positive Investment List Indonesia maintains a Positive Investment List, categorizing business sectors as open, conditionally open, or closed to foreign investment. Some sectors have restrictions on foreign capital ownership. For example: Telecommunications Network Services Companies can have up to 67% foreign capital. Venture Capital companies can be up to 85% foreign-owned. Joint Venture Structure A joint venture with a local Indonesian business may be the optimal solution to navigate these restrictions. Capital Ownership Requirements For joint ventures structured as PT PMA (Foreign Investment Limited Liability Company): Domestic capital must constitute at least 51% of the total capital. The percentage can vary depending on the business sector, which specifies the maximum allowable foreign capital in different sectors. Some sectors are closed to foreign investment, so investors should review the latest Positive Investment List. Licensing Requirements Joint venture companies in the form of PT PMA must: Apply for a principal and permanent business license (IUT) from the Investment Coordinating Board (BKPM). Submit periodic Investment Activity Reports (LKPM) to the BKPM. Business License Duration The business license for PT PMA companies is initially granted for 30 years from the start of commercial production. The Minister of Investment/BKPM Chairman can extend this license beyond 30 years, provided the company continues contributing to export, employment, tax revenue, environmental protection, and national development. Advantages and Disadvantages of Joint Venture Indonesia The benefits of setting up a joint venture in Indonesia include greater capacity, more resources, increased expertise, and gaining access to established markets and distribution channels. Aspect Advantages Disadvantages Risk and Cost Sharing Distributes liability and expenses between partners, reducing individual financial burden. Conflicts may arise if partners have unclear objectives or differing expectations. Expertise and Knowledge Provides specialized knowledge and skills from partners, including expert staff. Communication between partners can lead to better understanding and inefficiencies. Resources Offers access to advanced technology and financial resources. Discrepancies in expertise and investment levels may cause imbalances and friction. Growth Opportunities Facilitates business growth without the need for additional borrowing or external investors. An imbalance in the distribution of work and resources can lead to dissatisfaction and operational problems. Marketing and Collaboration Utilizes partner’s customer base for marketing and offers partner’s products or services to existing clients. Diverse cultures and management styles may hinder cooperation and efficiency. Flexibility It can be restricted in scope and duration, reducing commitment and exposure for both parties. Lack of strong leadership and support during the early stages can affect the venture’s success. Joint Efforts Allows collaborative efforts in purchasing, research, and development. Contractual restrictions may impact a partner’s core business operations and flexibility. Entering into a joint venture is a big decision that involves many considerations. InCorp Indonesia provides this guide on how to set up a joint venture in Indonesia so that you can assess whether you are ready to start one. Common Issues Happen in Joint Venture Indonesia Entering a joint venture can be a valuable strategy for expanding your business and leveraging new opportunities. However, the complexity of these partnerships can lead to common pitfalls if not managed carefully. To help you navigate this process successfully, here are ten common mistakes to avoid: Lack of Joint Venture Experience If this is your first joint venture, seek advice from someone experienced in this area to save time and money. Competing Against Your JV Partners Consider potential conflicts if you and your JV partner compete on other projects. Plan for how to handle these situations. No Joint Control of Finances To avoid disputes, use a joint checking account requiring signatures from both partners for all transactions. This helps ensure fairness in financial matters. Assuming Your JV Partner is a Good Business Person Be cautious—your partner might not manage finances well. Assess their business practices before committing. Unequal Contribution Recognize that one partner might contribute more effort than the other. Before starting the project, discuss and agree on the effort and fee distribution level. Conflict of Interest If your partner has a strong client relationship, they might prioritize it over the JV. Address potential conflicts early on. Expecting Your JV Partner to Advocate for Your Interests Do not assume your partner will always look out for your interests. Be proactive and ensure your problems are addressed. Forgetting the Partner Role Remember that you now have a partner. Establish clear decision-making rules and consult with your partner as needed. Lack of Regular Financial Updates Ensure monthly financial statements, invoices, and bank statements are provided automatically. Don’t wait to be asked for this information. No Exit Strategy Just like a marriage, a joint venture needs a clear exit strategy. Outline how to end the venture in advance to avoid complications later. Considerations Before Establishing a Joint Venture in Indonesia Starting a new joint venture company in Indonesia is more accessible than buying shares in an existing one. Other important things you need to consider while setting up a joint venture in Indonesia are stated below: Determine the Business Sector First, it’s vital to determine the business sector of your Indonesian joint venture. Not all sectors in Indonesia are open to foreign ownership. Therefore, you need to know whether your JV’s sector is open to foreign ownership and what business activities are allowed under the JV. Positive Investment List and Foreign Ownership Check the maximum foreign ownership percentage under the Positive Investment List. This list can change occasionally, so ensure you have the latest version. Determine the Locations Once you have determined your business sector and foreign ownership of your joint venture company, you need to know where your JV will operate. This is because specific business sectors don’t allow a joint venture to operate in certain Indonesian regions or only in particular areas of Indonesia. Taxation The significant taxation matters for a joint venture company are the withholding and income tax payable. In most cases, foreign shareholders are responsible for 20% of the final dividend withholding tax from an Indonesian joint venture company. Once your JV is established, it is always advisable to outsource your taxation matters to the expert to ensure compliance and seamless operations in Indonesia. Establish A Joint Venture Company with InCorp InCorp, as a leading consulting company in Indonesia, can help you establish a joint venture company with our business setup services. We also provide services to support your business growth in Indonesia, including business license applications and business process outsourcing. Get in touch with our incorporation specialists by filling out the form below. Read Full Bio Daris Salam COO Indonesia at InCorp Indonesia With more than 10 years of expertise in accounting and finance, Daris Salam dedicates his knowledge to consistently improving the performance of InCorp Indonesia and maintaining clients and partnerships.