Typical due diligence issues

In Indonesia, regulatory non-compliance is very common and access to public information is limited. Many Indonesian companies do not maintain adequate records from a legal perspective, or indeed books of account from a financial perspective. Often, information sought in a pre-acquisition review cannot be found readily or simply does not exist. For example, many companies do not maintain share registers, although this is required by law. These would often mean additional costs for rectification post-closing.

In some jurisdictions, asking the seller to clean up before closing is the norm. Although there has been development towards this best practice, this is not necessarily the case for every situation in Indonesia. Coming up with an appropriate solution requires detailed due diligence and a deep understanding of the local practice and practical risks involved. Seeking protection via a reduction in the purchase price or a holdback of the purchase price is possible.

Legal documentation for an asset acquisition tends to be more complicated than documentation for a share acquisition since the former involves the transfer of different categories of property. Different categories of property will often require different transfer documentation.

Pricing and payment

Mandatory use of Rupiah

All domestic transactions should be in Indonesian Rupiah, unless those transactions are done in specific business sectors and for specific purposes and/or areas as stipulated by Bank Indonesia. Rupiah is not readily obtained offshore. As such, transactions in Rupiah usually require the buyer to have expensive swaps, or alternatively the transaction documents can have an exchange rate mechanism.

Foreign exchange control

Bank Indonesia has the authority to require information and data in respect of any flow of foreign exchange and has introduced regulations requiring the reporting of transactions over a certain value and limiting the remittance of foreign currency, unless there is an underlying transaction justifying the remittance of the foreign currency abroad.

Subject to stipulation by the government, Bank Indonesia sets out references for foreign exchange conversion mechanism (e.g., JISDOR). In transactions, the parties may agree on the mechanism applicable to their transaction.

Signing/closing

Share sale

Considering the current licensing system in Indonesia which focuses more on post audits (known as the online single submission (OSS) system), prior government approval is usually no longer required for a direct transfer (i.e., onshore acquisition) of shares in an Indonesian company to a foreign buyer. However, prior approval for certain transactions is still required, e.g., for companies under the supervision of Bank Indonesia or the Indonesia Financial Services Authoritiy, Otoritas Jasa Keuangan, (OJK).

Between the signing and the closing of acquisitions, mergers, consolidations or separations of an Indonesian limited liability company (perseroan terbatas), the parties will be required to fulfill certain procedures as stipulated under Law No. 40 of 2007 on Limited Liability Company, as amended (Company Law), e.g., announcement of transaction plan in at least one newspaper, announcement of transaction plan to employees, settlement with creditors, conducting an extraordinary general meeting of shareholders to approve the transaction. For simpler transactions such as minority shares transfer, signing and closing can be conducted simultaneously.

Where the Indonesian company is owned by a special purpose vehicle (SPV) outside Indonesia, it is quite common for the deal to be transacted as a transfer of shares in the SPV. Apart from Indonesian merger control filing (which may apply if the statutory thresholds and definition are met), a transfer of shares in an SPV outside Indonesia is not subject to Indonesian government approval, and simultaneous signing and closing is also possible.

Asset sale

Unless the foreign buyer already has existing entities with the requisite business scope in Indonesia to acquire the assets, there will normally be a gap between signing and closing.

Foreign investment restrictions

Indonesia has a mandatory foreign investment screening procedure targeted at foreign direct investments in all sectors. Screening is required post-closing, except for a minority of sectors (e.g. in the financial services and payment services sectors) where the screening is suspensory (which means that transactions that meet the relevant criteria need to be notified to the relevant authority and cleared before they can be completed). For further information, see the more detailed section on "Foreign investment restrictions".

Antitrust/merger control

Under Indonesia's merger control regime, post-closing filing is mandatory when certain thresholds are met, but parties may also file pre-closing on a voluntary basis. Once the notification is received, the competition authority enters a substantive review period for a maximum of 90 working days post-closing. For further information, see the more detailed section on "Antitrust/merger control".

Language

Transaction documents are required to be made in a bilingual format (or any other format the parties choose so long as there is a corresponding version in Indonesian language). The stipulation on the use of English language and/or foreign language, as well as the ability to choose English as the governing language, applies only when there is a foreign party (interpreted as a non-Indonesian entity or a non-Indonesian citizen) involved in the transaction documents.

Share sale

Employees have the right to choose not to continue their employment with their company due to the acquisition of the company where the acquisition results in changes to the employment terms that are detrimental to the employees. As such, a discussion with the target company's human resources department on how employees may be dealt with to ensure a smooth transaction is needed. Typically in an acquisition transaction that results in changes to the employment terms that are detrimental to employees, the employees will be asked to elect before closing whether they will exercise their rights to be terminated post-closing so that the manpower position is known, or key employees must agree to continue working, or a certain percentage of staff at certain levels within the target company must elect not to be terminated.

Asset sale

Under Indonesian law, there is no automatic transfer of employment from seller to buyer in an asset sale. If employees of the seller will be moved to buyer in an asset sale, then the employees' consent is required. If an employee does not agree to be moved, the employee will remain employed by the current employer (i.e., the seller) until the employment relationship terminates for other reasons.

There are two main options available to move employees, being:  (i) transfer; or (ii) termination and rehire. The main difference between the two options is that in respect of the "termination and rehire" option, the seller needs to pay a termination payment to the impacted employees; while in respect of the "transfer" method the impacted employees are not entitled to a termination payment, however, their years of service must be recognized by the new employer (i.e., the buyer).

Share sale

Generally, unlisted shares sold by non-resident taxpayers are subject to a 5% final withholding tax (20% of estimated net income of 25% of the sale price). Non-resident taxpayers may be protected from tax by the provisions of any applicable tax treaties subject to fulfilment of certain administrative requirements stipulated under Indonesian local regulations.

Listed shares sold on the exchange by both non-resident and resident taxpayers are subject to a withholding tax of 0.1% of the transaction amount (and an additional 0.5% for founder shares of the share value at prescribed times if the tax for the founder shares has not been previously paid on an initial public offering).

Asset sale

Sellers are required to pay an income tax of 2.5% on the transfer of land and/or buildings, which is a final tax. Generally, buyers are required to pay a 5% duty on the transfer of land and buildings.

Gains, based on the difference between the sale proceeds and book value, on assets sold by an entity are subject to corporate income tax at the rate of 22% for fiscal year 2022 onwards.

In general, VAT of 11% (or 12% from 1 January 2025) is also chargeable on assets that are classified as taxable goods sold to an entity/individuals and is incurred by the buyer provided that the seller is a registered taxable entrepreneur.

If a company has obtained special duty-exemption facilities on certain imports (commonly known as a master list), the transfer of assets within a certain period will result in the initial exemption from duty being revoked and the duty becoming payable, unless approval is obtained and the buyer itself has a master list covering the assets to be purchased.

Stamp duty

The nominal amount of stamp duty is IDR 10,000 and is affixed by a duty stamp at the time of signing documents.

OECD's Two Pillar Solution

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.

Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.

For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.