How to Establish a Representative Office (KPPA) in Indonesia in 2021?

Even before 2021, foreigners have long set their eyes on Indonesia’s archipelagic market. To do so, starting a business in Indonesia as a foreigner usually means doing your homework to study this market and the opportunities that entail.

If you’re planning to explore investment opportunities to start a business in Indonesia, a simpler and relatively inexpensive way to start would be through a general representative office or Kantor Perwakilan Perusahaan Asing (KPPA) in Bahasa.

This is one of the most popular options among foreign businesses. It is because it gives foreign companies the space to explore their prospects, if they are not planning on any direct business activities, and catch a glimpse of what is needed to fully expand successfully into this market. All these while still being considered a legal entity in Indonesia. What a win-win situation!

Below, we’ll discuss all the basics of how Indonesian KPPAs work, the legal benefits, and what you’ll need to establish one.

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What exactly is a representative office in Indonesia (KPPA)?

According to the Indonesian Investment Coordinating Board (BKPM), a KPPA is a local branch of a foreign parent company that has two main responsibilities:

  • Represent the parent company’s interests in Indonesia, and/or
  • Prepare the founding of a Foreign Investment Company (PT PMA) in the future.

Setting up a representative office appears appealing to foreigners and their company because they are able to better understand the market better without the need for a minimum capital requirement. It is also one of the fastest and easiest ways to establish a legal entity and presence in Indonesia.

What are the different types of Indonesian KPPA?

There is more than one type of representative office in Indonesia such as KP3A, BUJKA, and KPPA Migas which are for different industry types.

In short,

  • KPPA is a general representative office for foreign companies
  • KP3A is for trading companies
  • BUJKA is for foreign construction companiesKPPA Migas is for oil and gas companies

Who uses KPPAs?

Businesses that set up representative offices in Indonesia usually fit one of four personas:

  • They’re new to Indonesia’s market,
  • Still evaluating the prospects of their product, service, or project,
  • Want to limit their financial expenses, or
  • Not planning to generate profit from the beginning.

Some companies use KPPAs in Indonesia to explore the market, promote their products, find business partners, and get to know Indonesia’s consumers and culture. As mentioned before, they usually move on to setting up a PT PMA once they’re more confident about their prospects and have gained enough connections in their desired market.

Also read: How to incorporate a business in Indonesia in 2021

However, representative offices aren’t just stepping stones towards PT PMAs. It’s also a viable option for companies who don’t plan on handling direct business transactions in Indonesia, since there are no financial requirements.

What activities are allowed when opening a representative office?

According to the Indonesian Investment Coordinating Board, the activities of a general KPPA are limited to:

  • Taking care of the interests of the foreign parent company or its affiliated companies
  • Preparing the establishment and development of a foreign investment company (PT PMA) in Indonesia
  • Engaging only in promotional activities, market research activities, and corporate communication with Indonesian stakeholdersA strategy often used by foreign companies is using the Indonesian KPPA to promote the parent company’s products to Indonesian clients. After which, the actual transactions are handled by the parent company abroad. Although do always check with your tax advisors whether withholding tax is allowed in your case. After a strong client portfolio has been established, the foreign company would eventually open a PT PMA in Indonesia.

What are the limitations of a KPPA?

Representative offices are only supposed to act in the interests of the foreign parent company, hence there are activities that they cannot conduct.

Regulations in Indonesia state that KPPAs are not allowed to:

  • Generate revenue
  • Do anything related to selling goods or services
  • Participate in any form in the management of another company, a subsidiary, or branch office in Indonesia

In short, this means that representative offices in Indonesia cannot engage in commercial activities or transactions that directly generate revenue. This is also why KPPAs are needed to be located in a registered office building with a specified address.

To be able to actually sell products and services, you’re going to need to register your company as a PT PMA, which has its own requirements like a minimum capital investment.

Does the representative office have to pay taxes?

Since KPPAs are not allowed to sell anything, it doesn’t have to pay corporate income or value-added taxes.

However, you’re still going to face income taxes for individual employees. You’ll have to report the amount of income tax deducted from each employee’s salary every month along with any insurance or social security.

There’s also a specific regulation for representative offices in Indonesia that generate indirect profit for their parent company abroad. Even if the Indonesian representative office doesn’t accept any money in the process, authorities can still impose a tax liability.

If the KPPA is guiding profits for the parent company through their Indonesian activities, then it must apply the special metric of gross export value when calculating corporate income tax. We recommend consulting a professional service provider to assist in processing this.

What is a Chief Representative Officer?

The Chief Representative Officer is the head of the KPPA in Indonesia. They can be either an Indonesian national or an expat, and they need to be appointed by the director of the parent company abroad.

Note that the same person can’t fill both positions; the foreign director needs to appoint someone else as the Chief Representative for their KPPA office.
Alternatively, the director of the parent company abroad needs to step down from their position first, appoint a new director for the foreign parent company, and then can become the representative office head in Indonesia.

What documents do I need to open a KPPA?

You’ll need the following documents to establish a KPPA in Indonesia:

  • Articles of Association of the foreign parent company including amendments in English
  • Power of Attorney to sign the application
  • Letter of Appointment (LoA) from the foreign parent company
  • Letter of Reference from the Indonesian embassy in the parent company’s origin country
  • Letter of Intent (LoI) and Letter of Statement (LoS) concerning the willingness of the Chief Representative Officer to stay and only work in the Representative Office without doing any other business in Indonesia
  • Copy of valid passport of the director of the parent company
  • Copy of valid passport (for foreign Chief Representative Officer) or copy of the identification card number and tax ID (for Indonesian Chief Representative Officer)

The Letter of Appointment (LoA), Letter of Intent (LoI), Letter of Statement (LoS), Power of Attorney (PoA), Letter of Reference, 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.

What is the duration and timeline of setting up a KPPA?

Once you have the aforementioned documents, the journey from here is quite simple.

You just have to register your company with BKPM on the Online Single Submission (OSS) portal. Thereafter, submit the required documents and wait for approval.

Since the OSS has quickened the process of business licensing, this whole process could take about one to two weeks, if your business has no extra business licensing to obtain.

Should I set up a KPPA or PT PMA?

Most representative offices have the choice between setting up a PT PMA or exiting Indonesia after a period of time.

Deciding to set up a representative office (KPPA) or a foreign limited company (PT PMA) really depends on your company’s goals.

While a KPPA is unable to engage in profit-making activities, a PT PMA usually takes a longer time to set up and requires more licenses to be approved. Setting up a PT PMA also requires more company leadership who needs to produce an annual report to account for the company.

It is advisable to consider your company’s objectives and engage with service providers on the ground to guide you through the necessary processes.

Final Thoughts: How do I set up a representative office in Indonesia

For a general KPPA, the steps are mainly to:

  1. Select a Chief Representative Officer
  2. Compile the documents stated in the above section
  3. Submit it to the Indonesian Investment Coordinating Board (BKPM) for approval through OSS

Important notes:

  • A KPPA is not allowed to generate profits and is limited to activities mainly for market research purposes
  • A KPPA is regarded as a legal entity, hence registering your business is still required

Establishing a representative office or KPPA is a relatively simpler process than a foreign investment company or PT PMA. If you are looking into establishing either a KP3A, BUJKA, and KPPA Migas, the process may be slightly different. As such, we reckon that it is still better for you to connect with a consultant or service provider on the ground who can help guide and manage all the paperwork for you.

Fortunately, if you’d like help with that, Greenhouse can aid by connecting you to service providers, who will be with you every step of the process to provide legal advice and prepare all the necessary documents to set up a representative office smoothly.

Greenhouse offers an online platform that allows you to book business incorporation services and connect with market entry consultants in your target markets.

We’ll connect you with experienced service providers on the ground who can help answer your questions about doing business in Indonesia.

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