How to Establish a Representative Office (KPPA) in Indonesia

Indonesia is a lucrative market for foreign entrepreneurs due to the country’s huge consumer force, low minimum wages, and abundant natural resources. When a foreign company decides to engage in market surveillance, networking, exploring business opportunities, or providing other managerial support in this country, it needs to establish a representative office, the “Kantor Perwakilan Perusahaan Asing (KPPA)”, often simply called Rep Office.

This office is the local representative of the foreign parent company, however, it is strictly forbidden from engaging in commercial activities and generating revenue, sending invoices, etc. These kinds of business activities need a Foreign Investment Company (PT PMA), which has more requirements, like having a large capital investment.

A common practice of foreign investors to get to know the market is to open a representative office in Indonesia first. If the findings are promising, the next step is to open a PT PMA. The advantage of this approach is that it is a relatively easy and quick way to establish a legal entity in Indonesia. Contrary to the PT PMA, a representative office can be established in most – but not all – industry sectors. A law firm, for example, cannot open a representative office in Indonesia.

To sum it up, it is a good idea to establish a representative office when you are:

  1. New to Indonesia’s market
  2. In doubt, whether your product, service or project can be successful
  3. Limited in your financial resources
  4. Not planning to generate profit or engage in direct business activities in the beginning

So, use this legal entity to explore the market, promote your products, find business partners, and become acquainted with Indonesia’s business culture.

The advantage of a KPPA is that you have 100 percent control over this legal entity and there are no director or shareholder requirements. However, as this is sometimes misunderstood, that there has to be a parent company abroad before you can open a Rep Office in Indonesia. A strategy that is often used by foreign companies is that the Rep Office promotes and offers the parent company’s products to Indonesian retailers/client as invoices to the Indonesian client are sent by the parent company abroad. After a strong client portfolio has been established, the foreign company would then open a PT PMA in Indonesia.

What are the Allowed and Restricted Activities of a Representative Office in Indonesia?

Based on the BKPM Regulations, the activities of a general foreign representative office are limited to:

  1. Taking care of the interests of the foreign parent company or its affiliated companies
  2. Preparing the establishment and development of a foreign investment company (PT PMA) in Indonesia.

It also explicitly regulates that the general foreign representative office is not allowed to:

  1. Search for income from sources inside Indonesia, including doing anything related to sales and purchases of goods or services with a company or individual
  2. Participate in any form in the management of a company, a subsidiary or branch office in Indonesia

The Chief Representative of the representative office is allowed to employ foreign employees as long as they possess the relevant expertise. All foreigners working in Indonesia need a permit called non-permanent stay permit (KITAS) and a work permit (IMTA).

However, KITAS sponsorships are restricted by the rule that for each foreign national working at the Rep Office there need to be at least three Indonesian employees. Hence, if you want two expats to work at your Rep Office in Indonesia, then you need to hire at least six Indonesian staff-members (either experts or administrative). This regulation was made in order to combat Indonesia’s unemployment rate. Authorities will check whether this foreign/local worker ratio is being respected and therefore you need employment contracts, payment salary slips, and copies of the staff-members’ identification papers as evidence.

How to Choose a Chief Representative Officer of the Rep Office

The Chief Representative Officer needs to be appointed by the director of the parent company abroad. It is important to know that both positions cannot be filled by the same person; the foreign director needs to appoint someone else as Chief Representative in Indonesia or the director of the parent company abroad needs to step down from his position first, appoint a new director for the foreign parent company, and then can become the Rep Office Head in Indonesia. Regarding the nationality of the position of Rep Office Head, this can be filled by an expat or an Indonesian individual. General guidelines are that the person holds at least a Bachelor degree and three years of working experience in the related field.

What Taxes Should the Representative Office Pay?

Income tax is zero. (Yay?)

Even though the representative office in Indonesia is not engaged in direct sales and therefore cannot generate revenue or profit, it is a taxable entity and therefore it is mandatory to report and pay tax every month as well as the monthly social security report.

Each month you will have to report withholding tax amount of an employee’s pay withheld by the employer.

There is also a specific regulation for those representative offices that seemingly facilitate the generation of profit for their parent company abroad as a result of the Rep Office’s activities in Indonesia. Despite revenues being paid directly from Indonesian client to the parent company abroad, a tax liability can be imposed by authorities. This is why social media platforms like Facebook and Twitter encountered problems in Indonesia.

Although earnings from an advertisement originating from the Indonesian audience through doing business in Indonesia – were booked at the regional office in Singapore, tax officials found these companies to be liable for corporate income tax as well as value added tax related to service delivery in Indonesia.

If the Rep Office is indeed guiding indirect profits for the parent company abroad from Indonesia – generated through the Rep Office’s activities in Indonesia then it must apply the “special metric of gross export value when calculating corporate income tax”. In this case, income tax will be 0,44 percent. However, in the case of a tax treaty between Indonesia and the country abroad, the corporate income tax rate follows the branch profit tax rates as set in the tax treaty.

Opening a Bank Account by a Rep Office or Expat

Being a legal entity incorporated in Indonesia, your Rep Office can open a bank account at a local bank. Usually, Rep Offices open an Indonesian account for administrative matters, including the transfer of wages for the employees. From bank to bank, the exact requirements may differ, but in general, you will need to show the Rep Office’s copy of company registration (TDP), business license, and tax number (NPWP). Usually, a minimum deposit is required (for example IDR 1 million or approx. USD $100). Also, an expat working for the Rep Office in Indonesia can open a personal bank account. Generally, the expat simply needs to show his passport and KITAS, and place a minimum deposit. Based on our experience the process takes less than one hour provided you bring all the necessary documents.

Also Read: Unwritten Rules of Doing Business in Indonesia

Required Documents and Steps for the Setting Up of a Rep Office in Indonesia

The following documents are required for the establishment of a general foreign representative office in Indonesia:

  1. A Letter of Appointment from the foreign parent company
  2. Articles of Association of the foreign parent company including amendments in English
  3. Copy of registration at the Chamber of Commerce of parent company
  4. Power of Attorney to sign the application if being represented by another party
  5. For Foreigners: a copy of a valid passport
  6. For Indonesians: a copy of the identification card number and tax number (NPWP)
  7. Letter of Intent and Letter of Statement concerning the commitment to stay and only work in the position as a Representative Office Executive without conducting other business in Indonesia

Please note that the Letter of Appointment (LOA), Letter of Intent (LOI), Letter of Statement (LOS), Power of Attorney (POA), copy of registration at the Chamber of Commerce, and Articles of Association (including amendments) need to be legalized by a public notary and an Indonesian Embassy in the country of the foreign parent company.

The following steps are required to set up a general foreign representative office in Indonesia:

The license of a general representative office (KPPA) lasts for three years and can be extended twice, each for a period of one year, to a total of five years. Hereafter it cannot be extended unless the representative office can prove that its activities are different from its earlier activities. Generally, after five years, you have the choice between setting up a PT PMA or exit Indonesia.

For foreigners who are not familiar with Indonesian bureaucracy, the establishment of a Rep Office can be a complex and time-consuming affair. Therefore, in many cases, it is better to appoint a local business consultancy or agent to set up the office for you.

Check out Greenhouse‘s Market Entry Services if you’d like some help on establishing your representative office in Indonesia.