Indonesia: Omnibus Law - Positive Reforms to Indonesia's Negative List

In brief

The government has enacted Presidential Regulation No. 10 of 2021 on Investment Business Lines (commonly known as the "Priority List"), as one of the implementing regulations of the job creation law (commonly known as the "Omnibus Law"). The Priority List will become effective on 4 March.

The Priority List replaces the current negative list (under Presidential Regulation No. 76 of 2007 and Presidential Regulation No. 44 of 2016) and represents a major development in the opening up of Indonesia's economy to foreign investment.

Although the Priority List has significantly liberalized many business lines from foreign investment limitations, a number of restrictions remain in place, including in relation to cooperatives and micro, small and medium scale Indonesian business actors ("C-MSME").


Contents

Key provisions of the Priority List

Some of the key provisions of the Priority List are as follows:

  • Big step forward. 

The Priority List still adopts the same concept as the negative list that all business lines are open for foreign investment, except those that are determined closed or conditionally open for foreign investment.

The key change introduced by the Priority List is a significant reduction in the number of business lines that remain subject to foreign investment limitations. Some of those removed from the negative list include business lines that have been subject to foreign investment limitations since the negative list was first introduced, e.g., telecommunications. Further details of some of the key business lines (grouped by sector) now open for foreign investment are set out in Schedule 1.

  • Limitations that remain and certain exceptions.

Below are limitations for foreign investment in a number of business lines under the Priority List:    

  1. The following business lines are closed for both foreign and domestic investors: (i) narcotics, (ii) gambling (in any form), (iii) fishing for prohibited species under CITES, (iv) coral/reef extraction, (v) manufacturing of chemical weapons, and (vi) manufacturing of chemicals and materials that are hazardous to the ozone layer. These business lines have also been significantly reduced from 20 business lines under the negative list.  
  2. Certain business lines are allocated for C-MSME, or are only open for foreign investors and domestic large scale business actors in cooperation with C-MSME. In total there are 89 business lines in this category, down from 145 under the negative list.
  3. Certain business lines that are subject to certain conditions:
    1. those that are open for domestic investors only
    2. those that remain subject to foreign ownership limitations - the key business lines under this category are listed in Schedule 2
    3. those that are subject to special permits

This category has seen the most significant change in numbers of business lines under the Priority List. It contains only 46 business lines, down from 350 under the negative list.

The conditions imposed on certain business lines that are set out in point (c) above do not apply if the foreign investors carrying out the relevant businesses are located in special economic zones.

The exceptions to the foreign ownership limitations imposed on certain businesses are as follows:

  1. Grandfathering policy. For investment certainty, it is crucial that changes of law do not result in divestment obligations for structures that were permitted under the previous regime. The Priority List provides for this by continuing to apply a grandfathering policy.
  2. Bilateral Agreements. The Priority List recognizes a scenario where foreign shareholders may be eligible for preferential treatment if that preferential treatment is regulated under bilateral agreements between Indonesia and the home jurisdiction of those foreign shareholders (e.g., under which a foreign shareholder enjoys less strict foreign investment limitations).
  3. Indirect/Portfolio investments. The foreign ownership limitations do not apply to indirect/portfolio investments made through the domestic capital market. This exception is retained from the negative list.
  • Business lines that are reserved for, or require cooperation with, C-MSME. The Priority List sets out 89 business lines that are allocated for C-MSME. Those are business lines that do not involve the use of technology (or only use simple technology), have a cultural heritage element, and/or have investment of IDR 10 billion or less (excluding land and buildings).

The Priority List also provides that business lines that are conducted mostly by C-MSME, or business lines that are part of supply chains for goods, require cooperation with a C-MSME. The Priority List does not specify the types of cooperation possible, but the Omnibus Law does provide examples, e.g., plasma cooperation, subcontracting, distributorship, agency and outsourcing. The Omnibus Law also specifies that a joint shareholding (e.g., a joint venture) between a foreign shareholder and an Indonesian shareholder does not qualify as cooperation with a C-MSME.

  • Investment requirements in specific business sectors are still subject to sectoral regulations. The Priority List is not meant to be the sole legal basis for foreign investment restrictions applicable to all business sectors in Indonesia. Business players should assess the relevant sectoral regulations to see if those sectoral regulations provide for specific investment requirements. For example:
  1. The Priority List mentions that investment requirements for the financial sector are not subject to the Priority List, and are subject to the sectoral regulations applicable to the financial sector.
  2. The hospital business is now open for 100% foreign investment, but certain bed capacity requirements need to be fulfilled, e.g., foreign investment in general hospitals is restricted to hospitals with a minimum capacity of 200 beds.
  3. While the Priority List no longer expressly limits foreign ownership in a construction PMA, the Construction Services Law (as amended by the Omnibus Law) still requires foreign construction companies seeking to set up a PMA in Indonesia to perform construction activities to enter into a joint venture with a local construction services company. The requirement under the Construction Services Law that a construction PMA can only perform construction activities using advanced technology, with a high degree of risk and/or with a certain work value, remains.
  4. Likewise, upstream mining companies will still need to divest shares starting from the fifth year of commercial production. 
  5. Some retail operation businesses are now open for 100% foreign investment, but they are still subject to the requirements under the trading regulations. For example, supermarkets were closed for foreign ownership if the sales floor area was less than 1,200 sqm. The Priority List opens supermarkets for 100% foreign investment without any minimum sales floor area, but they need to comply with the supermarket requirements under the trading regulations.
  • Certain key principles of the negative list are retained. It is important to note that the following key principles of the current regime will not be changed by the Priority List:
  1. Minimum investment. Foreign investment must be made through PMA companies and the minimum investment must be in excess of IDR 10 billion (excluding investment for land and buildings). 

However, foreign investment in technology-based start-ups that are located in special economic zones will be allowed to have investments of IDR 10 billion or less.  

  1. Fiscal incentives. Please see below.
  • Fiscal incentives. The Government continues to provide tax holidays and tax allowances for 245 prioritized business lines as listed in the Priority List. This is not stipulated in the negative list but rather in separate regulations. Those prioritized business lines are determined to fall under the categories of national strategic projects, labor intensive businesses, capital intensive businesses, hi-tech businesses, pioneer industries, export-oriented businesses and research and innovation-oriented businesses. The business lines not listed as prioritized sectors under the Priority List may still be entitled to fiscal and/or non-fiscal incentives under sectoral laws and regulations. Below is a brief summary of these incentives:
  1. Tax holidays:
  • 50% corporate income tax reduction for investments of between IDR 100 billion and IDR 500 billion for a period of 5 years
  • 100% corporate income tax reduction for investments of more than IDR 500 billion for a period of between 5 and 20 years, depending on the investment value

Applications must be submitted in or before October 2024. The application must state that the investment plan has already been realized or will be realized no later than one year after the investment approval is issued.

  1. Tax allowance:
  • a reduction of taxable income of 30% of the investment for a period of six years (so 5% per year)
  • accelerated depreciation
  • tax losses carried forward for up to 10 years
  • withholding tax on dividends of 10%

Eligible investments are investments that: (a) have a high investment value, or whose business is carried out in Indonesia for export purposes, (b) require a lot of Indonesian manpower, or (c) have high local content.

  1. Customs incentives: The Priority List provides import duty exemptions on the import of machinery, goods and materials for the construction and development of industry. It appears to us this provision may be similar to the current "masterlist" regulations.

Schedule 1 - Liberalized business lines 

The following are examples of key liberalized business lines:

Technology, media and telecommunication

Business line

Previous investment restriction

Changes introduced by the Priority List

Web portal and/or digital platforms with commercial purposes

 

Open for 100% foreign investment if the investment value (interpreted as issued and paid-up capital) exceeds IDR 100 billion, otherwise capped at 49% foreign investment

Open for 100% foreign investment without any specific criteria

All telecommunication network and service activities, which include telecommunication activities with or without cable, satellite telecommunication activities, premium call services, premium SMS content services and other multimedia services 

Open for 67% foreign investment

Open for 100% foreign investment

Retail via media

Closed for foreign investment

Open for 100% foreign investment

Newspaper, magazine and bulletin publishing

Closed for foreign investment

100% domestic investment, but subsequently for business expansion up to 49% foreign investment through capital markets

Telecommunication tower provision, operation and maintenance services

Closed for foreign investment

Open for 100% foreign investment (excluding construction services using simple/medium technology)

 

Healthcare

Business line

Previous investment restriction

Changes introduced by the Priority List

Hospitals

 

Open for 67% foreign investment, or capped at 70% for ASEAN investors

Open for 100% foreign investment, subject to the minimum beds requirement

Pharmaceutical industry

Open for 85% foreign investment

Open for 100% foreign investment

Pharmaceutical wholesale 

Closed for foreign investment

Open for 100% foreign investment

Medical device distribution

Open for 49% foreign investment

Open for 100% foreign investment

 

Power

Business line

Current investment restriction

Changes introduced by the Priority List

Power generation 1 - 10 MW

Open for 49% foreign investment

Open for 100% foreign investment

Geothermal power plant ≤ 10 MW

Open for 67% foreign investment

Open for 100% foreign investment

Power generation > 10 MW

Open for 95% foreign investment (or 100% foreign investment in public-private partnership)

Open for 100% foreign investment

Power plant operation and maintenance

Open for 95% foreign investment

Open for 100% foreign investment

 

Infrastructure

Business line

Previous investment restriction

Changes introduced by the Priority List

Drinking Water Business

Open for 95% foreign investment

Open for 100% foreign investment (with certain tax allowances)

 

Agriculture

Business line

Previous investment restriction

Changes introduced by the Priority List

Staple food agriculture (i.e., rice, corn, sweet potato, and beans)

Open for 49% foreign investment

Open for 100% foreign investment, subject to technical regulations being amended

Plantation (e.g., sugar cane, tobacco, beverage plants (e.g., coffee, cocoa), rubber plants, coconut and palm oil plantation)

Open for 95% foreign investment with a 20% plasma requirement

Open for 100 foreign investment (above 25 Ha), subject to technical regulations being amended

 

Horticulture (fruit and vegetable cultivation)

Open for 30% foreign investment

Open for 100% foreign investment, subject to technical regulations being amended.

 

Logistics

Business line

Previous investment restriction

Changes introduced by the Priority List

Freight forwarding (expedition)

Open for 67% foreign investment

Open for 100% foreign investment

Airport services

Open for 49% foreign investment

Open for 100% foreign investment, subject to the concession agreement terms and conditions set out by the government (on a project basis)

 

Retail and trading

Business line

Previous investment restriction

Changes introduced by the Priority List

Several retail business lines (e.g., retail of cars, motorcycles and commercial vehicles including car parts and accessories)

Closed for foreign investment (100% domestic investment)

Open for 100% foreign investment.

 

Supermarkets with a sales floor area of less than 1,200 sqm

Closed for foreign investment (100% domestic investment)

Open for 100% foreign investment, subject to the minimum sales floor area requirement.

 

Hospitality and tourism

Business line

Previous investment restriction

Changes introduced by the Priority List

Property or real estate broker business

 

Closed for foreign investment (100% local investment)

Open for 100% foreign investment without any specific criteria

Travel agencies

Closed for foreign investment (100% local investment) and reserved for domestic small and medium enterprises

Open for 100% foreign investment without any specific criteria

Ecotourism

Open for 51% foreign investment (70% for ASEAN investors)

Open for 100% foreign investment without any specific criteria (e.g., being required to have cooperation with C-MSME)

 

Schedule 2 - Business lines that remain subject to foreign ownership limitation

Several key business lines that remain subject to foreign ownership limitations are as follows:

  • Postal services remain subject to a 49% foreign ownership limitation
  • Transportation activities (including commercial scheduled air transportation and sea/water transportation) remain subject to a 49% foreign ownership limitation.
  • Broadcasting services remain subject to a 20% foreign ownership limitation (limited to business expansion only).
  • Traditional medicine business remains subject to a 100% domestic investment requirement.

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