Relaxation of foreign investment restrictions for distribution companies in Indonesia

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The enactment of the Indonesian Job Creation Law (Law No. 11 of 2020) and the new investment list relaxed restrictions on foreign investment for companies in the country’s economy. For distribution companies, the old 67% foreign ownership cap has been removed to allow in principle 100% foreign capital, a relaxation that could lead to increased foreign investment in the sector.

Limitation of foreign ownership of general distribution

Before 2021, the limitations of foreign investments were regulated by the list of negative investments, as contained in Presidential Regulation No.44 of 2016 on Lists of Business Activities Closed to Investment and Open to Investment with Conditions ( “PR 44/2016”). The list of negative investments refers to the lines of business and code numbers defined in the Indonesian Standard Industrial Classification 2015 (the “KBLI”), which provides a list of classifications of business activities and descriptions of companies in Indonesia.

The unaffiliated production distribution, which is covered by KBLI No. 00000, had a maximum foreign ownership of 67%. The minimum investment value for foreign investors engaged in distribution activities was over Rs 10 billion, excluding land and buildings, according to the first two digits of the KBLI code.

Now, with the publication of the new investment list, governed by Presidential Regulation No. 10 of 2021, as amended by Presidential Regulation No. 49 of 2021 (“PR 10/2021 as amended”), the activities wholesalers, which include distribution, import and export, are open to 100% foreign investment, with a minimum total investment of over 10 billion rupees, excluding land and buildings, according to the first four digits of the KBLI code. For example, if a foreign distribution company intends to engage in business activities that fall under KBLI # 46331 (Sugar, Chocolate and Confectionery Wholesale) and KBLI # 46332 (Bread Products Wholesale), its investment total minimum is over 10 billion rupees. However, if this company wants to add KBLI # 46326 (milk and dairy wholesaler), its total minimum investment will be over Rs 20 billion.

Wholesale activities are generally covered by KBLI numbers starting with 46 or, for wholesale vehicle activities, 45. While most distribution activities are now open to 100% foreign investment, KBLI No. 46206 for the distribution of fishery products requires the foreign investor to partner with an Indonesian micro, small or medium enterprise, in accordance with Annex II of PR 10/2021 as amended.

Risk levels in the distribution sector

Distribution activities are categorized according to risk level, which determines business licensing requirements. The three risk levels are (i) Low risk, (ii) Medium risk (which is subdivided into medium-low and medium-high risk) and (iii) High risk. Here are examples of KBLI numbers for each risk level, with associated licensing requirements:

  1. Low risk: the relevant license is a business identification number (Nomor Induk Berusaha or “NIB”) and a registration license. An example of low-risk business activity is KBLI # 45101 (New Car Wholesale), which requires a VIN and proof of warehouse registration (Tanda Daftar Gudang or “TDG”) issued by the Ministry. of Commerce (“CT”). Commercial actors must also obtain a type 1 commercial license for low risk distribution activities, in accordance with MOT Regulation No. 8 of 2020.
  2. Medium risk: In addition to a NIB, medium risk activities (both medium-high and medium-low) require a standard certificate verified by the Single Online Submission System (“OSS”) and a sectoral license issued by the competent ministry. For example, commercial actors carrying out activities under KBLI No. 46442 (wholesale of traditional medicine), classified as medium to high risk commercial activity, need a NIB, a verified standard certificate and ‘an additional administration license in accordance with the regulations of the Ministry of Health. N ° 14 of 2021 concerning business activities and product standards in the implementation of risk-based licenses for the health sector (“Regulation of the Ministry of Health 14/2021”).
  3. High risk: Activities at this risk level require a NIB and a technical license from the relevant ministry. For example, KBLI No. 46441 (Wholesale of Pharmaceuticals) requires a NIB and technical license based on the annex of MOH Reg. 14/2021.

Please note that the above requirements may change from time to time based on the latest regulations issued by relevant government agencies.

For distributors who also act as importers, the NIB will also act as importer identification number (Angka Pengenal Importir or “API”). Under the MOT Regulation No.75 of 2018 regarding the Importer Identification Number, the MOT recognizes two types of API, namely the general API for importing and selling certain goods and the producer API for importing goods. goods for internal use. Goods imported by the holder of a Producer API will be used as capital goods, raw materials and support materials.

Requirements for distributors

Distributors, both foreign and domestic, must fulfill the following requirements in accordance with Article 38 of Government Regulation No. 29 of 2021 on the operation of the commercial sector (“GR 29/2021”:

  1. Commercial license as a distributor;
  2. Permanent address that is a registered business location;
  3. Own or control a registered warehouse with a permanent address. The distributor can lease the warehouse to a third party, which constitutes “control” of the warehouse; and
  4. Agreement with the producer, supplier or importer of the goods to be distributed to consumers.

In addition to the above requirements, foreign distributors must appoint an Indonesian entity to act as their distributor, exclusive distributor, agent or exclusive agent. The relationship between the foreign distributor and the Indonesian side will be formalized in a legalized agreement passed before a notary. The foreign distributor will also need to obtain the written approval of the main producer it represents before entering into the agreement with the Indonesian side. These requirements are governed by article 4 of MOT Regulation No. 24 of 2021 concerning the agreement for the distribution of goods by the distributor or agent. (“MOT Regulation 24/2021”).

Indonesian distributor vs agent

Noting that foreign distributors have the option of appointing either an Indonesian distributor or an Indonesian agent, we summarize the key points that foreign distributors should take into account when deciding between a distributor or an agent to help them carry out their activities :

  1. Indonesian distributor: engagement is based on an agreement or an appointment. The distributor will own or control the goods, will be remunerated on the basis of a price margin as stipulated in the agreement with the foreign distributor and will be subject to value added tax (“VAT”).
  2. Indonesian agent: engagement is based on an agreement or appointment. However, the agent does not own or control the goods, is paid on commission and is not subject to VAT.

Distribution flow

For goods intended for sale to final or individual consumers, the scenario starts with a manufacturer in Indonesia, whether foreign or wholly Indonesian-owned. This manufacturer will then forward its merchandise to a foreign distributor. Noting the requirement under MOT Reg. 24/2021, the foreign distributor will hand over the goods to an Indonesian distributor or agent, who will distribute the goods to the retailers. Once the Indonesian distributor or agent obtains the goods, they can sell the goods to retailers, who will then sell them to end consumers.

For the goods in a business-to-business scenario, the Indonesian distributor or agent can sell the goods directly to their consumers, called intermediate consumers. (November 9, 2021).

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