Indonesia will have over 100 million internet users in 2015, growing 22% compared to the previous year (Markplus Insights, 2014). Driven by such massive numbers, more and more businesses and investors are looking at starting an ecommerce business in Indonesia.
Straits Partners itself has been very actively involved with the internet companies, incorporating or setting up representative offices of companies such as Tiket2, Eztable , Jongla, migme and many others.
While ecommerce players are rapidly getting users and investments, many of the early players did not do it in a proper legal way. The key loophole used was the classification of “web portal” which allowed for 100% foreign ownership and got very little trouble from the Investment Coordinating Board.
However, since last year internet companies are under much closer surveillance and the internet companies must apply for a correct business classification (KBLI) if they wish to get investment application approval.
Ecommerce is a channel, not a business classification
This is the key thing to understand – you won’t find business classification “ecommerce” from the Negative Investment List. The reason is that Indonesian doesn’t’ differentiate businesses based on whether they conduct business in brick and mortar stores or online.
Let’s look at some of the common scenarios and which classification those companies should apply for.
Websites that provide reservation services, such as making bookings for restaurants, renting cars etc. 100% foreign ownership is allowed.
Websites which publish content (e.g. articles, videos) that are generated by the company itself. An example is hipwee.com (full disclosure – author is an investor)
Content publishing platform
Websites where the content is not generated by the company but by the website users. An example is Kompasiana. Such businesses are classified under web portals and 100% foreign ownership is allowed.
Websites that sell and own stock are classified as retail businesses – such as Lazada or Rakuten. Both ecommerce and physical stores follow the same classifications and are also required to have a certain amount of physical retail space depending on the type of retail store.
Website that facilitate the selling and buying of products but do not hold the stock. Such businesses go under the web portals and can be owned 100% by foreign investors.
Websites that provide sellers the opportunity to advertise their product or service. Those websites are classified under advertising and are closed to foreign investments unless the investor is from ASEAN (then 49% maximum foreign ownership).
Websites that provide the service of delivering products or goods. Such as Food Panda or klikeat.com. Those companies go under ‘courier services’ classification and can be owned 49% by foreigners.
But this large ecommerce player XYZ is a “web portal”…
Since internet companies are often run by foreign nationals or they look for overseas investors, there is a constant temptation for registering the businesses under classifications that don’t restrict foreign ownership.
“Web portal” classification was used so often that BKPM started to investigate whether all of those portals actually meet the requirements and found a lot of misuses. This means that this loophole has been closed and future investors are required to give a much more detailed investment plans in order for BKPM to determine the correct business classification.
If you plan to have this business in Indonesia for a long term, complying with the local laws and regulations is your best bet to avoid future problems from the government. Straits Partners will be there for your company to help you find the right classification and set up your (ecommerce) business in Indonesia.
Many of the internet companies also hire a big number of foreign nationals. If that’s the case for your business, we strongly advise you to get them proper work permits. Unless you want those employees to be constantly alert in case an immigration officer would show up to the office.
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