Indonesia’s Omnibus Law on Job Creation significantly boosts foreign investment (FDI) by simplifying licensing via the Online Single Submission (OSS) system, easing foreign ownership restrictions, and reducing bureaucracy.
It introduces a risk-based approach to permits, offers tax incentives, and opens previously restricted sectors (e.g., energy,, plantations) to 100% foreign ownership.
Omnibus Law Current Legal Status
Law No. 6 of 2023, also known as the Job Creation Law, governs various business and investment-related regulations in Indonesia. This law covers investment, licensing, labor, taxation, and environmental rules.
However, in October and November 2024, the Constitutional Court ruled that some labor-related provisions of the law were partially unconstitutional. These provisions were declared conditionally invalid, and the government was directed to create a separate Employment Law within two years.
The court’s rulings specifically addressed issues related to foreign worker employment, fixed-term contracts, outsourcing, leave, wages, layoffs, and severance payments.
What Remains in Effect
- The investment framework
- Business licensing procedures
- Capital requirements
- Tax provisions
- Sector access regulations
These aspects of the law remain valid and unaffected during the corrective period, ensuring that the Job Creation Law continues to guide investment regulations in Indonesia.
What Faces Change
- Labour and employment provisions will be revised.
- The government must draft new labor legislation to address the concerns raised by the Constitutional Court.
- Companies operating in Indonesia should stay updated on these forthcoming labor law revisions.
Key Impacts on Foreign Investors
The Omnibus Law on Job Creation introduces several significant changes that benefit foreign investors, while also bringing certain challenges. Below are the key impacts:
- Liberalized Investment List (Positive Investment List)
A range of sectors that were previously closed or restricted to foreign ownership are now open to 100% foreign investment. This includes sectors like wholesale/distribution, certain power plants, and agriculture, offering new opportunities for foreign participation in Indonesia’s economy.
- Streamlined Licensing (OSS System)
The Online Single Submission (OSS) system, managed by the Investment Coordinating Board (BKPM), simplifies the process for obtaining business permits. This reduces the need to navigate through multiple government ministries, making it easier and faster for foreign investors to establish businesses in Indonesia.
- Risk-Based Licensing
Businesses are now categorized by risk level under the OSS system. Low-risk businesses require only a Business Identification Number (NIB), while medium and high-risk businesses face more targeted requirements, streamlining the licensing process further based on business activity type and location.
- Fiscal Incentives
The law introduces tax holidays, tax allowances, and customs exemptions, particularly for businesses in strategic or priority sectors. These incentives aim to support investment in key industries and reduce the financial burden on investors.
- Labor and Regulatory Changes
The Omnibus Law also brings changes to employment contracts, outsourcing, and severance pay. While these changes are intended to increase flexibility in labor markets and business operations, they have also drawn scrutiny, especially concerning worker protections.
- Legal Certainty
One of the law’s primary objectives is to provide greater legal certainty by reducing bureaucratic red tape. However, harmonizing regulations between central and regional governments remains an ongoing challenge, which foreign investors should be mindful of when operating in different regions.
- Compliance with Minimum Capital Requirements
Foreign investors must still meet minimum capital requirements under the Omnibus Law, generally set at IDR 10 billion. However, there are exceptions for specific cases, such as for startups located in Special Economic Zones (SEZs), where lower capital requirements may apply, offering more flexibility for innovative ventures.
Read more: Classification of Companies Based on Capital in Indonesia
Labour Law Changes
The Constitutional Court (MK) made important changes to the Job Creation Law that impact companies in Indonesia. These changes affect how businesses manage employees, especially when it comes to hiring, contracts, wages, severance pay, and outsourcing. Here’s a breakdown of the changes in simple terms:
- Foreign Workers:
- Indonesian law now says companies must give priority to hiring local workers over foreign workers.
- Foreign workers can still be hired, but the company needs to follow certain rules set by the Ministry of Manpower, like having certain job positions available and meeting the right ratio of foreign-to-local employees.
- Fixed-Term Employment Contracts:
- Companies can hire employees on temporary contracts for specific projects or tasks, but these contracts can’t last more than five years in total, including any extensions.
- These contracts must be in writing and must be written in Indonesian.
- Wage Requirements:
- The court reinstated sectoral minimum wages. This means companies must follow the wage standards set for their industry and location, considering things like the cost of living and local economic conditions.
- Companies are expected to create wage scales that take into account the employee’s experience and qualifications.
- Severance Payments:
- If a company goes bankrupt, employee severance pay (money paid when someone loses their job) must be paid before any other debts, meaning employees are prioritized over creditors (people the company owes money to).
- Outsourcing Regulations:
- The government now decides which types of jobs can be outsourced (outsourcing means hiring another company to handle certain jobs instead of employing someone directly).
- If a company outsources jobs, they must have a written agreement detailing the work being outsourced. Companies need to check their outsourcing agreements to make sure they meet these new rules.
- New Labour Laws Coming:
- The Constitutional Court has asked the government to create a separate Labour Law within the next two years to address issues related to employment. This means businesses will need to pay attention to upcoming changes in how workers are treated in Indonesia.
Why Should Companies Care?
These changes affect how companies hire and manage employees, and businesses need to adjust to these rules. Companies should pay close attention to these changes to avoid any legal problems, especially with hiring foreign workears, contracts, wages, and outsourcing.
Key Considerations for Foreign Investors
- Mandatory Knowledge Transfer: While hiring is easier, foreign investors are still required to appoint Indonesian counterparts for training and knowledge transfer.
- Improved Investment Access: The Law coincides with an open “positive list” of investment, allowing 100% foreign ownership in more sectors, including plantations, pharmaceuticals, and e-commerce.
- Compliance with Sub-regulations: Although the overarching law provides flexibility, foreign entities must still adhere to implementing government regulations, such as GR 34/2021 regarding foreign worker usage.
Read more: Investment Limitation in Indonesia for Foreign Investors
How Visa BaliEasy Can Help
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