Requirements for Transferring Company Shares from Indonesian to Foreigner

PERTANYAAN

A Limited Liability Company/LLC has been authorized and announced in the State Gazette. Currently, all of its shares are owned by Indonesian citizens. Is it permissible for the shareholders to sell all the shares to foreigners? If allowed, what are the conditions that must be met by the LLC?

INTISARI JAWABAN

Foreign citizens ("foreigners") are allowed to own shares in a company. If there is foreign capital in a company, the company is categorized as a Foreign Investment company. In practice, there are several conditions that must be met in the transfer of shares owned by Indonesian citizens to foreigners, which are regulated in the LLC Law, the Investment Law and its amendments, and Minister of Trade Regulation 76/2018.

What is the legal basis?

Please read the review below for a further explanation.

ULASAN LENGKAP

This article is an English translation of Syarat Pengalihan Saham PT dari WNI ke WNA, written by Michella Theofany, S.H. from Shinta Sriwijaya & Co. and was published on Monday, 9 October 2023.

This article below is an update of the article entitled Requirements and Procedures for Transferring Company Shares from Indonesian to Foreigner, written by Letezia Tobing, S.H., M.Kn., and was published on Thursday, 28 November 2013.

All legal information available on Klinik hukumonline.com has been prepared for educational purposes only and is general in nature (read the complete Disclaimer). In order to obtain legal advice specific to your case, please consult with Justika Partner Consultant.

Foreign Investment Provisions

Before answering your question, we should first understand the definition and types of investment in Indonesia. Quoting from the article How Far is the Authority of Foreign Directors in a Foreign Investment Company?, based on Article 1 number 1 Investment Law, penanaman modal or investment is any form of investing activity, either by domestic investors (penanam modal dalam negeri) or foreign investors (penanam modal asing) to conduct business within the territory of the Republic of Indonesia.

Based on the above definition, there are two types of investment activities, namely Domestic Investment (Penanaman Modal Dalam Negeri/"PMDN") and Foreign Investment (Penanaman Modal Asing/"PMA").

Furthermore, Article 1 number 4 Investment Law regulates that investment activities both PMDN and PMA are carried out by individuals or business entities. Moreover, according to Article 5 section (2) Investment Law, foreign investment must be in the form of a Limited Liability Company (“LLC”) under Indonesian law and domiciled within the territory of the Republic of Indonesia, unless stipulated otherwise by the law. Then, an LLC is a legal entity that is a capital partnership, established based upon an agreement, carrying out business activities with an authorized capital wholly divided into shares or Individual Legal Entities that meet the criteria of Micro-and Small-Scale Businesses as regulated under laws and regulations on Micro-and Small-Scale Businesses.[1]

Furthermore, the enactment of the Job Creation Law facilitates the access of foreign citizens ("foreigners") to enter the economic sector in Indonesia. Historically, the regulation of whether or not shareholders are allowed to transfer all of their shares to foreigners is regulated in Article 12 section (1) Investment Law which states that all business sectors or types of business shall be open to investment activities, except for business sectors or types of business that are declared to be closed and open with conditions. This regulation is amended by Article 77 number Perppu Job Creation, which states:

All business sectors shall be open to investment activities, except for business sectors that are declared to be closed to investment or activities that can only be carried out by the Central Government.

Then, the business sectors that are closed to investment include:[2]

1. cultivation and industry of category I narcotics;
2. all forms of gambling and/or casino activities;
3. capture of fish species listed under Appendix I of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (“CITES”);
4. utilization or taking of corals  and utilization or taking of reefs from nature which are used for building materials/lime/calcium, aquariums, and souvenirs/accessories, as well as live coral or recent death coral from nature;
5. chemical weapon manufacturing industry; and
6. chemical industry and ozone-depleting substance industry.

Thus, Indonesian citizen shareholders who wish to transfer all their shares to foreigners need to pay attention to whether the line of business in the LLC is an open line of business for investment or closed in accordance with applicable investment procedures.

By definition according to Article 1 number 3 Investment Law, Foreign Investment is an investing activity to do business within the territory of the Republic of Indonesia which is undertaken by foreign investors, either by fully using foreign capital or in the form of joint venture with domestic investors.

Next, foreign capital is capital owned by foreign countries, foreign individuals, foreign enterprises, foreign legal entities, and/or Indonesian legal entities whose capital is partially or wholly owned by a foreign party.[3] Therefore, through the definition of these things, if a foreigner takes over the shares of an Indonesian citizen in a Domestic Investment Company, then the company becomes a Foreign Investment Company.

Requirements for Transferring Indonesian Shares to Foreigners

Answering your question, based on our practice, the first requirement that must be met in the case of transferring all shares owned by an Indonesian citizen to a foreigner is the adjustment of the amendment to the articles of association realized through the General Meeting of Shareholders ("GMS"). The amendment of the articles of association must be approved by the Minister of Law and Human Rights.[4] The second condition, as already explained, needs to be noted that Foreign Investment must be in the form of an LLC based on Indonesian law and domiciled within the territory of Indonesia unless otherwise provided by law. Then the third requirement, companies also need to pay attention to changes in company data and management data in the company through Online Single Submission, as stipulated in Article 7 Minister of Trade 76/2018.

Then, quoting the article What Foreigners Should Consider if Buying Shares of Domestic Investment LLC, after the company reports changes to the company's articles of association and is approved by the Ministry of Law and Human Rights, it can then adjust the Business Identification Number and other licenses related to business activities.

With the change in the status of Domestic Investment companies to Foreign Investment, it is also possible that there will be changes in the management of the company, so it is necessary to adjust the data of the management and the person in charge after the change in company status.

Furthermore, the investor and/or foreign investor as the potential acquirer of the company's shares needs to carry out the obligations under Article 15 Investment Law as follows:

1. apply the principles of good corporate governance;
2. implement corporate social responsibility;
3. generate a report on the investment activities and submit it to the Investment Coordinating Board;
4. respect the cultural traditions of the communities around the location of the investment business activities; and
5. comply with all the provisions of the laws and regulations.

Investor ITAS

Then, foreigners who wish to conduct Foreign Investment must fulfill the requirements for a Limited Stay Permit (Izin Tinggal Terbatas/ "ITAS") application, in the form of an Investor ITAS. What is Investor ITAS? Summarized from the article Investor ITAS, Here's the Definition and How to Apply for it, Investor ITAS is known as 'ITAS in the context of Foreign Investment'. Investor ITAS is a temporary stay permit granted to foreigners who wish to conduct Foreign Investment activities in Indonesian territory.[5]

Furthermore, foreigners holding Investor ITAS in Indonesia have limitations on the activities and time period allowed by law, as follows:[6]

1. stay for a maximum period of 2 years;
2. stay for a maximum period of 5 years, including:
   1. Foreigners as individual investors intending to establish a company in Indonesia;
   2. Foreigners as individual investors who do not intend to establish a company in Indonesia; and
   3. Foreigners who will serve as members of the board of directors or members of the board of commissioners in a company to be established in Indonesia which is a branch or subsidiary of a company outside Indonesian Territory.
      
3. stay for a maximum period of 10 years, including:
   1. Foreigners as individual investors intending to establish a company in Indonesia;
   2. Foreigners as individual investors who do not intend to establish a company in Indonesia; and
   3. Foreigners who will serve as members of the board of directors or members of the board of commissioners in a company to be established in Indonesia which is a branch or subsidiary of a company outside the Indonesian Territory

ITAS is granted to foreigners who enter Indonesian territory with a Limited Stay Visa (Visa Tinggal Terbatas/ "VITAS").[7] An application for VITAS for foreigners who conduct activities as foreign investors for a stay of no longer than 2 years shall be submitted by the foreigner or sponsors through the app to the Immigration Official appointed at the Directorate General of Immigration by enclosing:[8]

1. National Passports which are legal and still valid for at least 6 months;
2. proof of guarantee from the sponsor;
3. proof of having living expenses for themselves and/or their family while in Indonesian Territory;
4. recent colored passport photo; and
5. other documents explaining the intention/purpose of the arrival of Foreign Citizens.

Other documents shall include:[9]

1. proof of share ownership of at least IDR 10 billion or equivalent as stated in the data of the ministry or agency in the capital investment sector;
2. Decree of the Minister on the approval of the establishment of an incorporated limited liability company; and
3. company’s current account for the last 2 months.

Meanwhile, an application for VITAS for foreigners who conduct the activities as foreign investors for a stay of no longer than 5 years shall be submitted by the foreigner through the app to the Immigration Official appointed at the Directorate General Immigration by enclosing:[10]

1. National Passports which are legal and still valid for at least 6 months;
2. proof of Immigration Guarantee;
3. proof of having living expenses for themselves and/or their family while in Indonesian Territory;
4. recent colored passport photo; and
5. other documents explaining the intention/purpose of the arrival of Foreign Citizen.

Proof of Immigration Guarantee for Foreign Nationals/Foreign Citizens as individual investors intending to establish a company in Indonesia shall be in the form of a statement of commitment that the Foreign Citizen will establish a company in Indonesia with issued capital (shares) or investment value of at least US$2,500,000.[11]

Then, proof of Immigration Guarantee for Foreign Nationals as individual investors who do not intend to establish a company in Indonesia shall include:[12]

1. a statement of commitment to purchase Indonesian government bonds of at least US$350,000;
2. a statement of commitment to purchase shares of a publicly-listed company in Indonesia of at least US$350,000; or
3. a statement of commitment to purchase mutual funds from a publicly-listed company in Indonesia of at least US$350,000.

You can read more about VITAS applications for foreigners who carry out Foreign Investment activities in Article 38 to Article 40 of Minister of Law and Human Rights Regulation 22/2023.

Then for example, based on the page of the Director General of Immigration, Ministry of Law and Human Rights of the Republic of Indonesia regarding Republic of Indonesia Visa Application for Investors, Investor ITAS have the following period:

1. Limited Stay Visa for Investment of 1 year (index C-313); and
2. Limited Stay Visa for Investment of 2 years (index C-314).

These types of ITAS allow foreign investors to enter and leave Indonesia while the license is still valid.

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These are the answers we can provide, we hope you will find them useful.

Legal Basis:

1. Law Number 25 of 2007 on Investment;
2. Law Number 40 of 2007 on Limited-Liability Companies;
3. Regulation of the Government in Lieu of Law Number 2 of 2022 on Job Creation which has been enacted into law under Law Number 6 of 2023;
4. Regulation of the Minister of Trade Number 76 of 2018 on the Organization of Company Registrations;
5. Regulation of the Minister of Law and Human Rights Number 22 of 2023 on Visa and Stay Permits.

Reference:

1. Online Single Submission, accessed on Monday, 9 October 2023, at 14.21 Western Indonesian Time (zone);
2. Permohonan Visa Republik Indonesia Untuk Investor (Republic of Indonesia Visa Application for Investors), accessed on Monday, 9 October 2023, at 15.44 Western Indonesian Time (zone).

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[1] Article 109 number 1 Regulation of the Government in Lieu of Law Number 2 of 2022 on Job Creation (“Perppu Job Creation”) which amended Article 1 number 1 Law Number 40 of 2007 on Limited-Liability Companies (“LLC Law”).

[2] Article 77 number 2 Perppu Job Creation which amended Article 12 section (2) Law Number 25 of 2007 on Investment (“Investment Law”).

[3] Article 1 number 8 Investment Law.

[4] Article 21 LLC Law.

[5] Article 101 section (4) letter e Regulation of the Minister of Law and Human Rights Number 22 of 2023 on Visa and Stay Permits (“Minister of Law and Human Rights Regulation 22/2023”).

[6] Article 101 section (4) letter Minister of Law and Human Rights Regulation 22/2023.

[7] Article 101 section (1) Minister of Law and Human Rights Regulation 22/2023.

[8] Article 38 section (1) Minister of Law and Human Rights Regulation 22/2023.

[9] Article 38 section (2) Minister of Law and Human Rights Regulation 22/2023.

[10] Article 39 section (1) Minister of Law and Human Rights Regulation 22/2023.

[11] Article 39 section (2) Minister of Law and Human Rights Regulation 22/2023.

[12] Article 39 section (3) Minister of Law and Human Rights Regulation 22/2023.