Formerly, investment law was regulated in two different regulations. The Law No. 1 of 1967 on Foreign Capital Investment as amended by Law No. 11 of 1970 on the Amendment and Supplement to the Foreign Capital Investment Law No. 1 of 1967, and Law No. 6 of 1968 on Domestic Capital Investment as amended by Law No. 12 of 1970 on the Amendment and Supplement to the Domestic Capital Investment Law No. 6 of 1968. The old regulations need to be replaced because they are no longer suitable for the needs of speeding up economic growth and developments in national law, particularly in the capital investment area.
For the reasons mentioned above, the new law for Capital Investment was issued on 26 April 2007 which is Law Number. 25 of 2007 on Capital Investment (the “Investment Law”). Unlike the two former investment regulations, this Investment Law covers all sectors of capital investment in Indonesia.
Capital investment means all forms of domestic and foreign investors’ activity of investing capital to do business in the territory of the Republic of Indonesia. Capital means any asset in the form of money or other, non-monetary, forms owned by an investor and having economic value.
There are differences between domestic capital investment and foreign capital investment in term of the business entity form. Domestic capital investment may take the form of business entities in the form of legal entities e.g. limited liability companies, non legal entities or sole traders, in accordance with the provisions of regulations. Meanwhile, foreign capital investment must be in the form of a limited liability company in accordance with Indonesian law and domiciled in the territory of the Republic of Indonesia unless specified otherwise by the law.
Domestic and foreign investors who are investing capital in the form of limited liability company can do through the following alternatives:
a. subscribing shares upon the establishment of a limited liability company;
b. buying shares; and
c. using other means in accordance with the provisions of regulations.
All business sectors or types of business are open for capital investment activities except for business sectors or types of business declared to be closed or conditionally open. Business sectors closed to foreign investors are:
a. production of weapons, gunpowder, explosives, and military equipment; and
b. business sectors explicitly declared to be closed by law.
The criteria and conditions for closed business sectors and conditionally open business sectors and a list of closed and conditionally open business sectors each will be stipulated in presidential regulation.
Unlike the old capital investment law which state that a company can be established for up to 30 years, the Capital Investment Law does not limit the investment period for a company. The Capital Investment Law also provided investment facilities and incentives in the form of tax and financial incentives and employment or immigration matters.
Restriction, Dispute Settlement and Sanctions
The Capital Investment Law regulates that investors that undertake capital investment in the form of an Indonesian limited liability company are prohibited from entering into any agreement/arrangement/ and/or providing a statement which confirms that their share ownership is for and on behalf of another party. Any such agreement/arrangement/statement will be considered null and void. This is what we know as nominee arrangement.
In the event of a dispute in the field of capital investment sector between the Government and a domestic investor, the parties may resolve the dispute via arbitration pursuant to an agreement between the parties and if resolution of the dispute via arbitration is not agreed upon, the dispute shall be resolved through the courts. While for foreign investors, the parties shall resolve the dispute via international arbitration, which must be agreed upon by the parties.
The Capital Investment Law provides certain administrative sanctions which can be imposed by the Government if the investor or business entity does not meet the obligations specified in the Capital Investment Law, which are as follows:
a. apply good corporate governance principles;
b. undertake corporate social responsibility;
c. submit periodical investment reports;
d. uphold the traditional culture of the community surrounding its business location; and
e. comply with the regulations.
The administrative sanctions could be in the form of:
a. warning letters;
b. restriction on business;
c. temporary suspension of business and/or investment facilities; and
d. revocation of investment approval or license.