The Legal System of Indonesia and Constitutional Court

The legal system of Indonesia is based on civil law, with a court system consisting of District Courts, High Courts and the Supreme Court. Indonesia also has a Constitutional Court with an equal legal standing as the Supreme Court. The main purpose of the Constitutional Court is aimed at reviewing constitutionality of legislation as well as conduct judicial review, alongside the Supreme Court. The commercial code in Indonesia has also been updated to include provisions on bankruptcy, intellectual property rights, incorporation and dissolution of businesses, banking and commercial markets.

In Indonesia, foreign investors possess strong legal protection through domestic or international mechanisms. Since Indonesia is a member of the World Bank’s International Centre for Investment Disputes and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘the New York Convention’), international investors receive assurance in the protection of their assets, as courts of signatory members are required to recognise and enforce arbitration awards made in other member states. This advancement renders the investment environment of Indonesia to stability, as domestic courts in countries which are not members are only required to enforce foreign arbitration awards if there is local legislation required. Therefore, international investors are not required to resort to international arbitration or alternative dispute resolution mechanisms, when contract problems or disagreements with the Indonesian government arise.

Legal Risks

An existing legal risk in Indonesia is the insufficient protection for intellectual property (IP). Despite ongoing efforts to increase the number of laws and measures to protect IP rights, it is evident that the state’s enforcement capacity does not suffice. As such, potential business intending to venture into the Indonesian market should be wary of IP being stolen with minute recourse towards the slow and costly process of settling through international courts. Businesses should also be careful of counterfeiting and pirating and are advised to ensure that all business dealings are adequate and legitimate to prevent any reputational damage.

Another risk involved with using courts to resolve contract disputes is corruption. The predominance of corruption results in an unfair and unjust court system. Foreign investors are disfavoured when settling disputes with local businesses, which tend to possess wider connections and knowledge of the system. This has proved to be a significant barrier of entry for businesses looking to enter the Indonesian market, despite efforts by the Indonesian government to curtail corruption. With prevailing corruption, local businesses get away with the extortion for permits and licenses as well as preferential treatment towards certain businesses. Corrupt practices are also used to entrench certain business positions and illicit gifts or payments are often given in exchange for services. Thus, potential businesses should be aware of the widespread corruption and administer transparency in dealings with the state or officials. However, the legal environment of Indonesia is steadily progressing with increased laws safeguarding anti-counterfeiting, alongside a well established e-government readiness.

Political Environment

The political environment of Indonesia has been enhanced since the recent improvement of several bureaucratic procedures. Starting a business in Indonesia is made easier through the reduction of notarisation fees in major cities such as Jakarta and Surabaya. The property registration process has also been streamlined by shortening the time taken to solve land disputes at the District Courts, with an increased transparency of the land registry. This benefits foreign businesses as these efforts makes it easier to enter the Indonesian market. However, over the past years, Indonesia has been striving to increase the influx of foreign businesses by enhancing bureaucratic standards and requirements. Additionally, President Joko Widodo was elected in 2014 on a business-friendly platform and promised to deliver reforms to improve the regulatory environment, with eradicating corruption and tackling graft being a key target. Therefore, the existing trend in Indonesia benefits foreign investors and businesses significantly, resulting in an increased competitiveness for Indonesia in the region.

Political Risks

Despite Joko’s election, the business environment of Indonesia has not shown signs of significant improvement. High risks arise from the costly and lengthy processes of business registration and obtaining construction permits. The costs for property registration and terminating insolvent properties are also extremely high as compared to within the region

Existing efforts made by the current president to combat corruption are met with difficulty as there are doubts regarding the legality of judgements made by the government body responsible for corruption. Furthermore, the prevalence of graft results in complications for businesses using local courts to settle commercial disputes, and hinders the adequate protection of intellectual property rights. Hence, these underlying factors contribute to a significant bureaucratic red tape to starting a business in Indonesia.

Foreign shareholders in Indonesia are met with restrictions stated in the Negative Investment List (Daftar Negatif Investasi) (DNI) incorporated in Presidential Regulation No.39 of 2014 (PR 39). PR 39 specifies the lists of business fields in which investments by Indonesians and foreigners are open or restricted. Laws and regulations are also constantly reviewed, depending on the field of business, to determine whether the area is open to foreign investment. Thus, deducing whether the limited liability company with foreign ownership conducting the business can be partially or wholly foreign owned.

When a field of business is not listed in the PR 39, it is open to 100% foreign investment unconditionally. The DNI also determines foreign ownership restrictions such as the maximum foreign shareholding and whether partnership with a small or medium scale enterprise is required.

Other regulatory issues include protectionist policies, tax systems as well as the degree of involvement from the government in the economic and regulatory environment. Protectionist policies such as quotas and tariffs fluctuate frequently, reflecting the high degree of government involvement in the economic and regulatory sector. Additionally, Indonesia charges an income tax rate of 25% which is payable for both local and foreign companies.