Joint ventures in Indonesia: overview

A Q&A guide to joint ventures law in Indonesia.

The Q&A gives a high level overview of joint ventures law, including regulation of joint ventures, types of joint ventures permitted in the jurisdiction, whether corporate joint ventures are subject to the corporate law, formalities for formation and registration of joint ventures, statutory limits on duration, anti-trust rules, termination, rules relating to joint ventures with foreign members, and incentives.

This Q&A is part of the Joint Ventures Law Global Guide.

Contents

Domestic company joint ventures (JVs)

Regulation

1. Are JVs expressly regulated?

There are no laws in Indonesia that expressly and exclusively regulate JVs.

Types

 
2. Which types of JV are allowed?

There are two types of JVs in Indonesia:

  • Corporate JV, which involves the setting up of a legal entity by the parties to the joint venture.

  • Contractual JV, a form of co-operation that is governed by an agreement and does not involve the establishment of a legal entity.

Types of business organisations on Indonesia

Partnership. There are three types of partnerships:

  • Persekutuan perdata (maatschap or private association) has the following characteristics:

    • there is an agreement between two or more people;

    • all of the partners must provide contributions to the partnership;

    • any profits made by the arrangement must be shared by the partners;

    • each of the partners is severally liable; and

    • there is no registration requirement.

  • Persekutuan firma (venootschap onder firma) has the following characteristics:

    • there is an agreement between two or more people made in the form of a notarial deed;

    • the partnership holds a business name which is generally used by commercial partnerships such as trading and service enterprises;

    • each partner must actively manage the firm;

    • each partner has the right to act in the name of the firm, within the scope of its activities and bind the partnership to third persons unless he has been expressly denied that right;

    • any profits made by the arrangement must be shared to the partners;

    • each of the partners is jointly liable; and

    • there is a registration requirement to the relevant district court.

  • Persekutuan komanditer (commanditaire vennotschap) has the following characteristics:

    • there is an agreement entered into between two or more people and such agreement is made in the form of a notarial deed;

    • the partnership holds a business name which is generally used by commercial partnerships such as trading and service enterprises;

    • unlike a persekutuan firma, in a persekutuan komanditer not all partners are required to actively manage the firm. There are partners that can simply provide contributions and not be involved in the day-to-day operation of the firm;

    • each partner has the right to act in the name of the firm within the scope of its activities and bind the partnership to third persons unless he has been expressly denied that right;

    • any profits made by the arrangement must be shared with the partners;

    • each of the active partners is jointly liable, while each of the inactive partners is only liable to its investment in the partnership; and

    • there is a registration requirement with the relevant district court.

Limited liability company. This is the most common form of legal entity in Indonesia. It constitutes an alliance of capital (all of which is divided into shares) established under a contract in order to carry out business activities, and must be established by at least two shareholders.

 
3. Are corporate JVs subject to the corporate law?

JVs are generally governed by various sources of Indonesian law. The applicability of these laws and regulations depends on the type of the JV.

If the JV is in the form of a limited liability company, then the provisions under Law on Limited Liability Companies (Law No. 40 of 2007) (Companies Law) apply.

For contractual JVs, the general contract law provisions in the Indonesian Civil Code (Kitab Undang-Undang Hukum Perdata) apply.

Formation and registration

 
4. Is the use of foreign language in a JV's founding documents (both corporate and contractual) restricted?

Law on the Indonesian National, Flag, Language, Emblem and Anthem (Law No.24 of 2009) provides certain restrictions on the use of foreign languages in Indonesia. The law requires that the Indonesian language, Bahasa Indonesia, must be used for the public administration service in the government agencies, in the official documents issued by the state, and in the agreements involving the Indonesian government, private companies or individuals.

For corporate JVs in the form of a limited liability company, the required founding documents which must be prepared in Bahasa Indonesia are:

  • The deed of establishment (in the form of a deed prepared by a notary public), which contains the articles of association of the company.

  • The approval letter issued by the Minister of Law and Human Rights (MOLHR).

For contractual JVs, the founding documents are typically in the form of an agreement(s). For domestic contractual JVs, where the parties are Indonesian (wholly owned) entities or individuals, the agreements must be in Bahasa Indonesia.

 
5. Are public officers (for example, public notaries) involved in a JV's formation procedure?

In the formation of a corporate JV that takes the form of a limited liability company, the involvement of an Indonesian public notary is required, specifically for preparing the deed of establishment which is in a notarial deed form and submitting it for the approval of the Minister of Law and Human Rights.

 
6. Are JVs registered with any local registries? Are public sector bodies' authorisations required for a JV's establishment?

Local registries

A domestic corporate JV set up as a newly established limited liability company must be registered with two government authorities:

  • The Company Registry (Daftar Perseroan) that is maintained by the Minister of Law and Human Rights.

  • The Company Registration (Daftar Perusahaan) that is maintained by the Ministry of Trade.

Public sector bodies

For a limited liability company to be considered duly established, it must obtain the approval of the Minister of Law and Human Rights.

 
7. What other formal requirements must be complied with to validly constitute a JV?

Domestic corporate JVs in the form of a limited liability company must comply with several key requirements prior to applying for the approval of the Minister of Law and Human Rights:

  • Minimum shareholders. A limited liability company must have at least two shareholders.

  • Board of directors. A limited liability company must have at least one member of the board, the organ responsible for the day-to-day management of a company (subject to the restrictions provided for in the Companies Law and the articles of association of the company).

  • Board of commissioners. A limited liability company must have at least one member of the board of commissioners, the organ responsible for supervising the management of the company by the board of directors.

  • Capital contribution. The capital structure of a company consists of:

    • the authorised capital, being the maximum amount of share capital that the company can issue to its shareholders, as authorised by the Minister of Law and Human Rights to be issued by a company;

    • issued capital, being the amount of share capital that has actually been issued to the shareholders, and

    • paid up capital, being the amount of issued share capital that has actually been paid up by the shareholders of the company.

The minimum authorised capital requirement in Indonesia is IDR50 million, of which 25% must be paid up. Subsequently, any issuance of new shares must be fully paid up and the amount of the paid up capital remains at least 25% of the authorised capital.

Permitted markets

 
8. Can the JV instrument be used in every market? Are there any restrictions to be considered and carefully assessed before investing?

In the context of a domestic corporate JV (that is, both parties to the joint venture are private Indonesian entities or individuals), there are certain industry sectors in which it is not permitted to establish a business. These sectors are listed in Attachment I to Presidential Regulation No. 39 of 2014 on the List of Business Fields Closed to Investment and Business Fields Conditionally Open to Investment or usually known as the Negative Investment List. The list includes, among others:

  • Marijuana plantations.

  • Fishing of fishes considered as endangered species under the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES).

  • Manufacturing chemical materials considered as chemical weapons in Law No. 9 of 2008.

  • Casinos.

Purpose

 
9. Can a JV be established with any purpose?

Indonesia law adopts the principle of freedom of contracts, which means that if the contract has fulfilled the basic statutory requirements set out in Article 1320 of the Indonesian Civil Code, it will be deemed as binding law for the contracting parties and the parties must comply. Such basic statutory requirements are:

  • The required consent from the contracting parties.

  • The capacity of the contracting parties to enter into a contract.

  • The contract must have a particular object.

  • A legal/permissible cause, for example, the provisions of the contract do not contravene the prevailing regulations, and principles of public order.

A domestic corporate JV can be established with any purpose that is agreed between or among the parties involved, provided that the company's purpose is not one of the restricted businesses in the Attachment I to the Negative Investment List.

A contractual JV can be formed with any purpose as agreed by the contracting parties, provided that it is not designated to engage in any of the restricted line of business or for any other unlawful purposes.

Share capital and participation

 
10. What possible forms of participation are there in a JV's share capital? How can a JV member contribute and are there statutory limits on the possibility to make contributions in kind?

Forms of participation

Participation in the capital of corporate JVs in the form of limited liability companies is only by way of share participation.

Contributions

In the context of a corporate JV that is set up as a limited liability company, the shareholders' contribution is typically in cash. It is used as payment for the shares issued by the JV company and which will be subscribed by the shareholders. However, the Companies Law also allows payment for the shares issued by the JV company by way of in-kind contribution using tangible or intangible assets, such as land, buildings, machinery, equipment, intellectual property rights, and so on.

If a shareholder intends to pay for the subscribed shares by a contribution in kind, the shareholder must:

  • Obtain approval from the general meeting of shareholders or parties to the JV company.

  • Have the assets used as the contribution in kind assessed by an independent valuer (unrelated to the company and/or the prospective investor) to determine the fair value of such assets.

  • Announce such contribution in kind in one daily newspaper no later than 14 days after the signing of the deed of establishment or the date of the general meeting approval.

 
11. Can a corporate JV's share capital be indicated by making reference to a foreign currency?

The share capital of a corporate JV set up as a limited liability company must state the share capital value denominated in rupiah in its articles of association.

Duration and limits on membership

 
12. Are there statutory limits on a JV's duration?

There are no statutory limits on duration of a corporate JV that is established as a limited liability company. The JV company can remain in existence until it is dissolved by the shareholders or by a court order. The duration of a contractual JV is typically subject to the agreement of the contracting parties under the JV agreement.

 
13. Are there statutory limits on the number of members participating in a JV?

A corporate JV that is set up as a limited liability company must have at least two members or shareholders participating in such JV company.

Public sector bodies

 
14. Can a public sector body enter into a JV agreement? Subject to what conditions? In particular, do public private partnerships (PPP) laws and regulations apply?

Corporate JVs

The Indonesian government can set up a state-owned company (Badan Usaha Milik Negara) jointly with a private entity. By law, the government must own at least 51% shares of the state-owned company and there must be a Government Regulation (Peraturan Pemerintah) issued by the government to establish the state-owned company.

Subject to its corporate documents and articles of association, a state-owned company can set up a JV company. In this context, it is a common practice that a JV agreement or other documents such as a shareholders' agreement is entered into by parties to the JV.

The laws and regulations relating to PPP will not apply to the above arrangement.

Contractual JVs

In the case of a contractual JV between the Indonesian government and private entities for infrastructure projects, the PPP laws and regulations apply only in the context of infrastructure projects where it involves both the public and private sector. PPP schemes usually involve a "build, operate and transfer concession" agreement in which the private party assumes responsibility to construct, operate and fund the project, while the government provides certain financial assurances and acquires the project at the end of the concession term. In some cases, the agreement also grants a licence to a private entity to take over, operate and develop the project.

Non-competition and anti-trust clauses

15. Are there statutory constraints on the use of non-competition or anti-trust clauses in a JV agreement?

The Law on the Prohibition of Monopolistic Practices and Unfair Business Competition (Law No. 5 of 1999) (Competition Law) and its implementing regulations or guidelines do not specifically regulate non-competition clauses in a JV agreement. Further, there are no precedents that can be referred to as a significant reference. Accordingly, it is difficult to understand as to how the Business Competition Supervisory Commission's (Komisi Pengawas Persaingan Usaha) (KPPU) views the legality of such clauses.

However, the general rules of prohibition of horizontal restrictions and abuse of dominance will apply. If the KPPU finds that a non-competition clause significantly restricts competition among competitors or potential competitors when carrying out an investigation for cartel or abuse of dominance framework, it can declare the clause null and void and/or impose a fine of up to IDR25 billion for each party to the JV agreement.

During period of effectiveness

Non-competition clauses agreed by the parties to a JV agreement and implemented during the period of effectiveness of the JV agreement cannot raise competition concern if they are essential for the implementation of the JV agreement. However, as a general rule, the restriction must be proportional or not exceeding what is needed. If it is a common practice in the industry where the JV company operates, it may be used as a justification to convince the KPPU that the clauses are necessary to be put in place in the JV agreement.

Following termination

If a non-competition clause remains valid even until the JV agreement has been terminated, it can be problematic, in particular if the validity of the clause is considered valid for an unusually long period of time, as this can significantly restrict competition. However, currently there is no guidance as to how long a non-competition clause can remain valid following termination of the JV agreement.

De facto company/partnership

16. Must the contractual JV satisfy any conditions to avoid falling within the definition of de facto company/partnership?

To avoid being considered to be a partnership, a contractual JV must avoid satisfying the common characteristics of the three types of partnership described in Question 2.

Limiting member liability

17. Can a JV agreement provide that a JV member can participate without incurring any risk, loss or reward?

Parties to the JV agreement can mutually agree on any terms on the basis of the freedom of contract principle, provided that there are no terms in the agreement that violate any laws or regulations applicable in Indonesia. For example, in the corporate JV, the liabilities of a shareholder cannot be diverted to the other shareholder by virtue of the JV agreement because the Companies Law provides that a shareholder in a limited liability company is liable for the value of its investment in the JV company.

Anti-trust

18. Do any anti-trust rules, guidelines or policies apply to a JV agreement?

The Competition Law and its implementing regulations can apply to a JV agreement, specifically concerning the rules on horizontal restrictions/cartels, abuses of dominance, and merger control (see Question 15).

Governance and limits on directors

19. Can the parties to a JV freely regulate the JV or are they subject to certain restrictions?

On the basis of the principle of freedom of contract, parties to an agreement are free to agree on any provisions, subject to mandatory provisions of Indonesian laws and regulations.

In the context of a corporate JV set up as a limited liability company, the JV is subject to the provisions of the Companies Law, particularly the provisions regarding meeting quorum, voting rights, pre-emptive rights, transfer of shares, appointment of the board of directors and board of commissioners, and so on.

The Companies Law generally provides a minimum set of requirements. Therefore, parties to the JV may agree terms that are more demanding or extensive than those set out in the Companies Law to the extent that these changes still comply with the minimum terms under the Companies Law.

 
20. Are there limits or restrictions on the eligibility of an individual as a member of the board of directors/statutory auditor?

The Companies Law generally requires that a member of the board of directors, within the period of five years prior to his or her appointment:

  • Has not been declared bankrupt.

  • Has not been a member of a board of directors or commissioners in a company which has been declared bankrupt.

  • Has not been charged with criminal charges.

Further, all members of the board of directors must reside in Indonesia as they are responsible for the day-to-day management of a company.

Termination

21. What legal regime applies to a JV's termination? Can a JV be terminated for just cause on request of one party?

Parties to the JV agreement can mutually agree on the terms of the JV's termination.

Under Indonesian law a default can trigger termination of the agreement, even though the Civil Code provides that a non-defaulting party cannot terminate the agreement unilaterally because the other party is already in default and the agreement provides for automatic termination. Under Article 1266 of the Civil Code the termination of an agreement must be subject to a court order. If a party to the JV agreement intends to unilaterally terminate the agreement, a request must be made to the court, unless the parties to the JV agreement have agreed to waive the requirement of the judicial dissolution of the agreement.

 
22. Is the termination of a JV agreement subject to any public sector body's approval?

Termination of a JV agreement is not subject to any public sector body's approval.

Choice of law and jurisdiction

23. Are there constraints on the choice of the law and the jurisdiction applicable to a JV?

Under the principle of the freedom of contract, parties to a JV agreement are free to determine the choice of law and the jurisdiction applicable to the JV agreement. However, for domestic corporate JVs it is not common to elect a foreign law as the governing law, as there are no foreign elements in the structure. 

The freedom of contract principle also applies as the basis for the parties to determine the dispute settlement forum in the JV agreement. While it is common for two Indonesian parties to a commercial agreement in Indonesia to choose arbitration to resolve their dispute, the parties can determine to choose a court or arbitration as the dispute settlement forum under the JV agreement. The arbitration processes in Indonesia are subject to the rules of the Indonesian National Board of Arbitration (Badan Arbitrase Nasional Indonesia).

 

JVs with foreign members

Validity and authorisation

24. What are the rules relating to validity and authorisation of JVs with foreign parties?

Validity

JVs (whether corporate or contractual) with foreign parties are allowed in Indonesia. Generally, the laws and regulations governing the establishment of a JV company involving a foreign party are the same as those governing the incorporation of a wholly or partly foreign-owned Indonesian limited liability company. Such companies are usually called a foreign direct investment company (perusahaan penanaman modal asing) (FDI company) and are regulated under the Law on Investment (Law No. 25 of 2007) (Investment Law) and the Companies Law. In the case of a contractual JV with foreign parties, the governing law is the Indonesian Civil Code.

Limits

The Indonesian government sets out certain business activities that are closed or conditionally open to foreign investment. These are primarily stated in Attachment II to the Negative Investment List, which gives a list of fully or partially restricted business sectors and fields and the applicable foreign ownership requirements. Foreign investors are encouraged to check the Negative Investment List to ascertain whether or not a proposed business activity is open to foreign investment.

Authorisation

To incorporate a foreign direct investment company, the founders must apply for and obtain approval from the Investment Co-ordinating Board (Badan Koordinasi Penanaman Modal) prior to applying for the approval of the Minister of Law and Human Rights. For contractual JVs with foreign parties, no approval from the regulatory authority is necessary.

Effect of foreign membership

25. Are any of the rules relating to domestic company JVs (see Question 1 to 23) different for JVs with members incorporated under, or governed by, the laws of a foreign country?

Regulation

See Question 24, Validity.

Formation and registration

Prior to seeking the approval of the Minister of Law and Human Rights (MOLHR) and registering with the MOLHR and the Minister of Trade, a corporate JV in the form of a foreign direct investment company must also obtain approval from the Investment Co-ordinating Board (see Question 24, Authorisation).

Capital contribution

With regard to the capital contribution for a corporate JV in the form of foreign direct investment company, see Question 27.

The use of foreign language in founding documents

In a contractual JV, where one or more parties to the agreement is a foreign direct investment company (see Question 24) or a foreign entity or individual, the agreement can also be prepared in English or the language of such foreign party in addition to the use of Bahasa Indonesia.

Permitted markets

As set out in Attachment II to the Negative Investment List, there are businesses that are not permitted to be carried out by a company that is fully or partially owned by foreign parties (see Question 24, Limits). Therefore, before foreign parties agree to enter into a JV arrangement (whether a corporate or contractual JV) with an Indonesian party, they should check whether or not the business that it will engage in is fully or partially open to foreign investment.

In the case of a contractual JV, the restrictions in Attachment II to the Negative Investment List are not applicable if the party engaging in the business is the Indonesian party to the JV.

Economic or financial incentives

26. Are there economic or financial incentives for foreign direct investments in a JV?

Incentives available to JVs in the form of a foreign direct investment company include, among others:

  • Tax incentives, such as acceleration of tax depreciation deductions, extension of tax losses carry forwards for up to ten years, and a reduction of the withholding tax rate on dividends paid to non-residents to 10%.

  • Import duty, such as exemption from import duty for four years on machinery and certain spare parts.

Minimum investments/contributions

27. Are there mandatory minimum equity investments or contributions in kind thresholds for a foreign JV member?

Under the Investment Co-ordinating Board Regulation No. 5 of 2013 on Guidelines and Procedures for Licensing and Non-Licensing Investment, the Investment Co-ordinating Board has set a minimum required investment for foreign direct investment companies in all business sectors in the amount of more than IDR10 billion (or the equivalent in foreign currency). It also requires foreign direct investment companies to have a minimum issues capital and paid up capital of at least 25% of the investment. In the authors' recent experience, the Investment Co-ordinating Board approved a minimum issued capital and paid up capital of IDR3 billion and an investment of IDR11 billion.

 

The regulatory authorities

Minister of Law and Human Rights (MOLHR)

Main activities. The MOLHR is authorised, among others, to approve the establishment of a corporate JV in the form of a limited liability company and record the same in its Company Registry (Daftar Perseroan).

W www.kemenkumham.go.id

Ministry of Trade (MOT)

Main activities. The Ministry of Trade is authorised, amongst others, to record the establishment of a corporate JV in the form of a limited liability company in its Company Registration (Daftar Perusahaan).

W www.kemendag.go.id

Investment Co-ordinating Board

Main activities. The Investment Coordinating Board is authorised, among others, to approve the establishment of a foreign direct investment company.

W http://www4.bkpm.go.id/

Business Competition Supervisory Commission (Komisi Pengawas Persaingan Usaha)

Main activities. The Business Competition Supervisory Commission is authorised to oversee business competition in Indonesia, including but not limited to ensuring the effective implementation of the Competition Law.

W www.kppu.go.id



Online resources

Hukum online

W www.hukumonline.com

Description. This website is maintained by PT Justika Siar Publika, a private company unaffiliated with the government, and is the only web portal in Indonesia providing organised and systematic collection of laws, regulations and court cases. The website provides English translations to some laws and regulations and is generally up-to-date.



Contributor profiles

Eri Budiarti, Partner

Assegaf Hamzah & Partners

T +62 21 25557811
F +62 21 2555 7899
E eri.budiarti@ahp.co.id
W www.ahp.co.id

Professional qualifications. Advocate, Indonesia

Areas of practice. Mergers & Acquisitions

Muhammad Iqsan Sirie, Senior Associate

Assegaf Hamzah & Partners

T +62 21 2555 7805
F +62 21 2555 7899
E iqsan.sirie@ahp.co.id
W www.ahp.co.id

Professional qualifications. Advocate, Indonesia

Areas of practice. Mergers & Acquisitions

Arini Dyah Septiana, Associate

Assegaf Hamzah & Partners

T +62 21 2555 7805
F +62 21 2555 7800
E arini.septiana@ahp.co.id
W www.ahp.co.id

Professional qualifications. Advocate, Indonesia

Areas of practice. Mergers & Acquisitions


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