Indonesian Business Law

Indonesia is Southeast Asia's largest economy with massive market potential. However, its legal landscape is complex. Business law in Indonesia is rooted in colonial-era codes like the Commercial Code (KUHD) and the Civil Code (KUHPer), as well as modern laws that have significantly evolved following the Job Creation Law (Omnibus Law). Understanding this framework is key to risk mitigation and operational sustainability.

1. Legal Foundations and Business Entity Forms

The choice of business entity in Indonesia is governed by specific regulations that dictate establishment procedures, capital requirements, and legal liability.

A. Legal Entities (Badan Hukum)

These forms have assets that are legally separated from the owners' personal wealth.

• Limited Liability Company (PT): Primarily governed by Law No. 40 of 2007 on Limited Liability Companies, as significantly amended by Law No. 6 of 2023 (Job Creation Law). It provides shareholders with limited liability protection.
• Sole Proprietorship PT: Introduced by the Job Creation Law for Micro and Small Enterprises (MSEs), allowing a single individual to incorporate a legal entity without a notarial deed.
• Foundations & Cooperatives: Foundations are governed by Law No. 16 of 2001, while Cooperatives are under Law No. 25 of 1992.

B. Non-Legal Entities (Non-Badan Hukum)

In these forms, there is no absolute separation between company assets and the personal wealth of the partners/managers.

• CV (Commanditaire Vennootschap), Firms, and Civil Partnerships: The legal basis remains the Commercial Code (KUHD) and the Civil Code (KUHPer). Administrative registration is now managed through Minister of Law and Human Rights Regulation No. 17 of 2018.

2. Foreign Direct Investment (PMA)

For foreign investors, establishing a PT PMA is the primary route, based on Law No. 25 of 2007 on Investment. Investors must consult the Positive Investment List (DPI), regulated by Presidential Decree (e.g., Perpres 10/2021), which determines sectors open for investment.

4. Contract Law and Obligations

Contracts fall under Book III of the Indonesian Civil Code (KUHPer). Article 1320 sets four validity requirements: consent, capacity, specific object, and legal cause. Furthermore, Law No. 24 of 2009 mandates the use of the Indonesian language in contracts involving local parties to avoid the risk of annulment.

5. Labor Law and Industrial Relations

Labor regulations are centered on Law No. 13 of 2003, as amended by the Job Creation Law. Key points include contract types (PKWT/PKWTT), minimum wage, and severance pay, with technical details provided in Government Regulation No. 35 of 2021.

6. Intellectual Property Rights (IPR)

IPR protection is governed by specific laws:

• Trademarks: Law No. 20 of 2016.
• Patents: Law No. 13 of 2016.
• Copyright: Law No. 28 of 2014.

7. Agrarian and Land Law

Land ownership is based on Law No. 5 of 1960 (UUPA). PT PMAs cannot hold Freehold (Hak Milik); they are restricted to Right to Build (HGB), Right to Cultivate (HGU), or Right to Use (Hak Pakai).

8. Business Taxation Law

The Indonesian tax system operates on a self-assessment basis. Primary taxes for businesses include:

• Corporate Income Tax (CIT).
• Value Added Tax (VAT) on the supply of goods/services.
• Regional Taxes and Levies (PDRD).
• Transfer Pricing regulations for multinational corporations.

9. Bankruptcy and PKPU

Procedures are governed by Law No. 37 of 2004 on Bankruptcy and Suspension of Debt Payment Obligations (PKPU). PKPU often serves as a debt restructuring tool to prevent total bankruptcy.

10. Dispute Resolution: Litigation and Arbitration

Out-of-court settlements are governed by Law No. 30 of 1999 on Arbitration and Alternative Dispute Resolution. Using institutions like BANI is a common preference in commercial contracts.

Conclusion

Indonesia's business law structure has become more centralized and efficient since the Job Creation Law. By understanding the legal basis for each entity and its operations, businesses can operate with higher legal certainty.