Understanding the Legal Framework for Foreign Direct Investment (FDI)
Foreign citizens planning to establish a business in Indonesia must understand the fundamental terms and conditions set by the Indonesian government. This article briefly reviews Foreign Direct Investment (FDI) in Indonesia, outlining its definition, regulatory basis, and investors’ obligations under Indonesian law.
Definition of Foreign Direct Investment (FDI)
Foreign Direct Investors (PMA) refer to foreign individuals, foreign business entities, and/or foreign governments investing in the territory of the Republic of Indonesia.
Foreign Capital is defined as capital owned by:
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Foreign states,
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Foreign individuals,
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Foreign business or legal entities, and/or
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Indonesian legal entities whose shares are wholly or partially owned by foreign parties.
Foreign Direct Investment (FDI), therefore, is the activity of investing capital to conduct business in Indonesia by foreign investors, either through 100% foreign ownership or partnership with domestic investors.
Legal Basis and Establishment Requirements
All terms, conditions, and procedures for foreign investment in Indonesia are governed by applicable laws and regulations. Compliance with these regulations is essential to ensure the continuity and legal certainty of business operations and to avoid potential legal disputes or sanctions.
Under Indonesian law, foreign investment must be established as a Limited Liability Company (LLC / Perseroan Terbatas – PT), domiciled within the territory of the Republic of Indonesia.
Foreign investors may participate by:
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Subscribing to shares during company establishment,
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Purchasing existing shares, and/or
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Conducting other investment activities as permitted by law.
The main regulatory frameworks governing FDI include:
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Law No. 25 of 2007 on Investment, as amended by the Job Creation Law (Law No. 6 of 2023),
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Law No. 40 of 2007 on Limited Liability Companies,
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BKPM (Indonesia Investment Coordinating Board) Regulation No. 4 of 2021 on Risk-Based Business Licensing Guidelines,
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And other implementing regulations.
Business Sector Classifications
In principle, all business sectors in Indonesia are open to investment, except those that are explicitly closed or restricted with certain conditions.
Examples of closed sectors for foreign investment include:
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Production of weapons, ammunition, explosives, and war equipment,
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Sectors otherwise prohibited by specific laws or regulations.
Other sectors may be partially open or subject to maximum foreign ownership limits, depending on the Positive Investment List (Daftar Prioritas Investasi) issued by the government.
Investment Incentives and Facilities
Foreign investors in Indonesia can enjoy a variety of fiscal and non-fiscal incentives, such as:
💰 Fiscal Incentives
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Reduction of income tax based on the amount and duration of investment;
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Exemption or reduction of import duties on capital goods, machinery, or production equipment not yet produced domestically;
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Exemption or reduction of import duties on raw materials or auxiliary materials for production purposes under certain conditions;
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Exemption or deferral of Value Added Tax (VAT) on capital goods or production equipment;
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Accelerated depreciation or amortization;
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Land and Building Tax relief, especially for certain sectors or regions.
🏢 Non-Fiscal Facilities
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Assistance in obtaining land rights;
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Immigration service facilitation for foreign directors or employees;
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Simplified import licensing procedures;
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Guidance and support from BKPM (Investment Coordinating Board) for compliance and expansion.
Business Opportunities
Indonesia offers wide-ranging and promising opportunities for foreign investors across various sectors — from manufacturing, digital technology, and renewable energy, to real estate and infrastructure. With a growing economy, strategic location, and a large consumer base, Indonesia remains one of the most attractive investment destinations in Southeast Asia.
To ensure smooth establishment and operation, investors are strongly advised to consult with a qualified Legal Counsel or Legal Consultant who understands Indonesia’s investment, corporate, and licensing frameworks.
Conclusion
Foreign investors who invest in Indonesia are required to comply with Indonesian laws and regulations. In return, they are entitled to a wide range of government incentives and protections designed to foster sustainable business growth and legal certainty.
Written by:
Heri Wicaksono, S.H., M.H.
HWA & Associates
Legal Adviser | Legal Counsel | Licensing Attorney