M&A transactions in Indonesia: A challenging market in transition


published on 24 February 2021 | reading time approx. 6 minutes

Since his first office term, President Joko Widodo has been initiating various regula­tory reforms and deregulation policies targeting legal complexities and bureaucratic hurdles, which showed some positive impact on the M&A market in Indonesia.

One important measure with relevance for corporate proceedings has been the introduction of the online single submission system as main reference for business licensing, and gateway for government services at various ministerial, agency and regional levels. This was followed by a new Investment Coordinating Board (Badan Koordinasi Penanaman Modal or BKPM) Regulation No. 6 of 2018 as amended by BKPM Regulation No. 5 of 2019 on the implementation of capital investment licensing and facilities, and BKPM Regulation No. 1 of 2020 on integrated electronic business licensing, which i.a. eases the process for merger approval.

Further efforts to simplify business licensing mechanisms have been made with the enactment of an omnibus legislation amending a broad range of specific laws and regulations. In general, non-public M&A transactions still appear to dominate the market; reasons for this could be the complex regulatory framework and procedures for public M&A, which often lead to more time-consuming and costly transactions. In terms of deal volume, fintech currently appears to be the most active sector, particularly the peer-to-peer lending business. In terms of deal value, however, M&A on industry and energy sectors still lead most of the transactions.

What are the common deal structures in Indonesia?

The most common type of acquisition in Indonesia is the purchase of shares in a company, either from a selling shareholder or from the company itself. A foreign entity may either acquire all shares or, depending on equity restrictions, enter into a joint venture in an Indonesian company with a local partner. Foreign investors may not create a legal partnership.

Asset acquisitions are also quite common for the transfer of business units. Other methods include mergers or amalgamations, where the target company is dissolved into the surviving company and therefore ceases to exist.

How is a share transaction structured in Indonesia?

The statutory framework for the combination of businesses through a limited liability company is generally provided in Law No. 40 of 2007 on the Limited Liability Company, and several implementing regulations, such as Government Regulation No. 27 of 1998 on Mergers, Consolidation and Acquisition of Limited Liability Companies. Under this framework, the requirements pertaining to M&A in Indonesia commonly follow a certain deal protocol.

The first step is the acquisition/merger announcement published by the acquirer and the target company or the merging companies, as the case may be, in newspapers. If the acquisition is conducted through the company itself, i.e. acquisition by subscribing newly issued shares instead of purchasing the existing shareholder's shares, then the parties must prepare an acquisition plan (“rancangan pengambilalihan”) which will be part of the announcement. A valuation of the merger shares is conducted to determine their fair market value. Then an extraordinary general meeting of shareholders of the target company or each of the merging companies is held, in which a quorum of at least three-quarter of the total number of shares with voting rights is present (unless otherwise stipulated in the articles of association or a specific regulation), and in which approval needs to be obtained from shareholders holding at least 75 per cent of the number of votes cast.

Further the approval of creditors, or other third parties if required by law or pursuant to agreements, in respect of the proposed transaction and a waiver of their rights for claims to be settled prior to the effectiveness of the merger or acquisition is required. From administrative side, the approval of the relevant agencies having competence over the merging or acquired company or companies (such the Financial Services Authority or the Ministry of Law and Human Rights which oversees all limited liability companies, no matter the sector) and the consent of any relevant industry regulator, depending on the target company's business, needs to be obtained.

What are the main tax drivers to be considered?

In a share-deal from a buyer’s perspective, there is no tax on an entity that acquires shares. Shares acquired from unrelated parties are booked at purchase price. Shares acquired from a related party must be booked at market price. In a share acquisition, the buyer usually takes over the target with all related liabilities and unpaid taxes. The Directorate General of Taxes (DGT) is mainly responsible for enforcing taxes on corporate transactions. Under Indonesian tax legislation, the Tax Office may conduct an audit within 5 years from the filing date of any tax return. The tax authorities may also re-open a closed tax audit in case new documentation or information is obtained. Therefore, beyond a proper tax due diligence, the buyer requires extensive indemnities and warranties to mitigate hidden risks.

In a share deal from a seller’s perspective, capital gain received by a resident entity in a share deal is combined with the company’s taxable profit from its main business. The combined net profit is subject to 22 per cent Corporate Income Tax for 2020 and 2021, whilst the 20 per cent corporate income tax applies for 2022 onwards. For the individual, capital gain is subject to a maximum of 30 per cent Income Tax rate.

The sale of unlisted shares by a foreign company is subject to a final tax of 5 per cent of the gross proceeds unless provided differently in a tax treaty. Consequently, the seller is liable for the tax even where the shares are sold at a loss.

In an asset deal from a buyer’s perspective, for income tax purposes, acquired assets can be treated deductible through depreciation. Goodwill having a useful life exceeding one year may be treated as deductible expenses through amortisation.

Regarding Land & Building taxation, a company acquiring the asset is subject to 5 per cent duty on land & building acquisition.

In an asset deal from a seller’s perspective, VAT of 10 per cent is imposed in general. However, this does not apply to transfer of assets,

  • which are non VAT-able,
  • which do not relate to the company’s business or
  • between dissolving and surviving entities which both are respectively registered as VAT-able entrepreneurs.

Capital gain arising from a company transferring assets is subject to corporate income tax. However, such transfer may be done based on book value, provided that DGT approval is obtained (tax neutral merger, consolidation or expansion). Certain conditions need to be met.

Generally, tax losses may be carried forward for up to 5 years or, for certain business sectors, up to 10 years. Under the current tax regulations for business mergers, consolidations and expansions, however, carried forward losses of an Indonesian target cannot be offset against future losses of the acquiring company or merged entity. Such losses would expire at the time of acquisition.

Regarding Land & Building taxation, a company transferring assets is subject to 2.5 per cent income tax on the value of transferred assets.

Are there restrictions for foreign direct investment?

Foreign investment in Indonesia is generally regulated under specific investment laws and regulations, which are currently revised by an omnibus law. If a foreign buyer intends to acquire shares in an Indonesian company, a certain ownership limitation or specific licensing requirements will be applicable and monitored by the Investment Coordinating Board (BKPM) for a range of industries.

Other industries under specific regulation, such as banking, finance and telecommunications, are subject to the authority of specific government agencies, e.g. the Financial Services Authority (“Otoritas Jasa Keuangan” or OJK), Bank Indonesia or the Ministry of Communication and Informatics.

Common risks and opportunities when entering the Indonesian market via M&A

Sudden change of government policies and regulations may influence M&A deals, especially when impacting financing strategies or deal structuring. Indonesia also has a quite complex regulatory and government monitoring system, hence the administrative requirements should not be underestimated by the parties. Respective challenges in many sectors include, among others, considerable inconsistencies between national and provincial regulations as well as variant interpretations of regulatory requirements, which have been addressed in the omnibus law of 2020.

However, these challenges will continue to exist at least until the implementing regulations of the omnibus law are issued, and a certain administrative practice has developed. But these efforts can eventually be rewarded with the opportunity of tapping into one of the biggest markets in the region, especially if investment plans come with a broad time horizon.

Which valuation methods are commonly utilised in the market?

There is no mandatory rule as to share valuation in Indonesia. However, it can be said that the DCF (Discounted Cash Flow) approach is regarded as widely accepted with regard to share valuation. Generally this is based on a best assumption taken by the valuation firms, which may differ from one to another as to their parameters. These include company growth rate, interest/discounted rate, internal rate of return, industry expectation, etc.

Challenges are seen in the valuation of specific industries such as start-ups in the internet/digital technology sectors as these appear quite different from conventional knowledge such as the aforementioned DCF.

Have any M&A related investment or tax facilitations been enacted in your jurisdiction in light of the current pandemic?

One major hurdle in attracting investors to Indonesia is the contradictory legislation, at the central government level as well as regionally, which has caused certain confusion and delays in the implementation of foreign investment projects. Taking this into account, the Indonesian government has enacted the so called omnibus law which entered into force on 2 November 2020, with various implementing legislation to be issued subsequently. This legal instrument aims at attracting investment and stimulating the economy, particularly amid a current decline caused by the global pandemic, through i.a. simplifying the licensing process and harmonizing various business related laws and regulations that are deemed to be obstructive to foreign investments. On the other hand, the omnibus law on Taxation offers specific tax incentives and tax exemption on qualified dividends. Such incentives aim at reducing tax expenses of investors and encouraging them to reinvest the extra gains in Indonesia.

Previously, some Corporate Income Tax (CIT) rate changes have also been issued in 2020, which, however, were not a direct part of the omnibus law, though standing in context with it. The reduction was introduced in an earlier Law, i.e. Law Number 2/2020 of 16 May 2020. The Law was passed in anticipation of the economic slow-down caused by the ongoing pandemic. Accordingly, for the financial year 2020 and 2021, the CIT rate amounts to 22 per cent. Qualifying listed companies, which means a minimum of 40 per cent of shares are traded in the Indonesia stock exchange, are entitled to a 3 per cent extra reduction, i.e. a CIT rate of 19 per cent. For the financial years 2022 and onwards, the CIT rate will be 20 per cent. Qualifying listed companies are again entitled to a 3 per cent lower rate, i.e. of 17 per cent.

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