Indonesia’s Capital Idea: New Regulation Encourages Investment in Nusantara

As Indonesia moves toward formally relocating its capital from Jakarta to Nusantara, in Kalimantan, the government recently issued a regulation meant to ease the process of doing business in the new capital and encourage companies to invest in Nusantara.

Government Regulation No. 12 of 2023 regarding Business Licensing, Ease of Doing Business, and Capital Investment Facilities for Business Actors in the Capital City of Nusantara (IKN) (“GR 12/2023”) is seen as another step toward developing the new capital into a global sustainable city, a driving force for Indonesia’s future economy, and a symbol of national identity.

GR 12/2023 clarifies the business licensing process for IKN and sets forth various easements and facilities available for business actors. We highlight some of GR 12/2023’s most notable provisions below.

Exemption from Foreign Ownership Limitations

GR 12/2023 introduces the term “partner areas,” which are basically areas in Kalimantan that support the establishment and development of IKN as an economic superhub. These partner areas must be officially designated as such through a decree issued by the Head of the IKN Authority.

GR 12/2023 provides an exemption from foreign ownership limitations for businesses in IKN and its partner areas. However, it requires a partnership with micro, small or medium enterprises or cooperatives to be eligible for the exemption.

To further attract investors, GR 12/2023 provides that business actors doing business in the new capital and partner areas will be able to invest in IKN without first having to confirm their Indonesian taxpayer status with the relevant authority.

Foreign Worker Utilization

Business actors in IKN that employ foreign workers are granted certain conveniences under GR 12/2023, such as the possibility of obtaining a work permit, formally known as a Foreign Worker Utilization Plan (Pengesahan RPTKA), that is valid for 10 years and is extendable. Generally, work permits are granted for a maximum of two years (extendable), or five years (extendable) for foreign workers at companies doing business in a Special Economic Zone.

Companies that employ foreign workers for national strategic projects in IKN are exempted from the obligation to pay mandatory compensation funds for the utilization of foreign workers (Dana Kompensasi Penggunaan Tenaga Kerja Asing or “DKP-TKA”). This exemption will be for a certain period of time to be further determined in a regulation to be issued by the Head of the IKN Authority.

GR 12/2023 further provides that foreign workers in IKN can be granted stay permits that are valid for up to 10 years and can be extended. Immigration regulations provide that a Limited Stay Permit (ITAS) is normally granted for a maximum period of five years and is extendable as long as the entirety of the foreign worker’s stay under the ITAS does not exceed 10 years.

Land Rights

Business actors in IKN can be granted the following land rights:

• Right to Cultivate (HGU) over the Right to Manage (HPL) of the IKN Authority: 95 years in the first cycle, extendable for another cycle of 95 years.
• Right to Build (HGB) over the HPL of the IKN Authority: 80 years in the first cycle, extendable for another cycle.
• Right to Use (Hak Pakai) over the HPL of the IKN Authority: 80 years in the first cycle, extendable for another cycle.

All of the above extensions are subject to an agreement between the IKN Authority and the business actor holding the land right, the fulfilment of certain criteria, and a joint evaluation by the IKN Authority and the Ministry of Agrarian Affairs and Spatial Planning.

Tax and Customs Incentives

1. Income Tax (PPh)

• • PPh deduction in the amount of 100% of total payable corporate income tax;
  • PPh facilities for financial sector activities in financial centers;
  • Corporate PPh deductions for the establishment and/or transfer of head offices and/or regional offices;
  • Reductions in gross income for the implementation of work practices, apprenticeships and learning activities aimed at fostering and developing certain competency-based human resources;
  • Reductions in gross income for certain research and development activities;
  • Reductions in gross income for donations to or the construction of public facilities, social facilities and other non-profit facilities;
  • Article 21 PPh is to be borne by the government and is final;
  • 0% final PPh on income from the gross turnover of certain micro, small and medium-scale enterprises; and
  • Reductions in PPh for the transfer of rights over land and buildings.

2. Value Added Tax (PPN) / Luxury Goods Sales Tax (PPnBM)

• • PPN will not be collected; and
  • PPnBM exemptions for the delivery of taxable goods.

3. Customs

• • Import tax facilities and exemptions from import duty for imports of goods by the central government or regional governments for the public interest in IKN and partner areas;
  • Import tax facilities and exemptions from import duty for imports of capital goods for the construction and development of industries in IKN and partner areas; and
  • Exemptions from import duty for imports of goods and materials required for the construction and development of industries within IKN and partner areas.

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