Indonesia Special Economic Zones

• Indonesia operates a network of 15 Special Economic Zones (SEZs) across the country. These zones seek to attract investments in sectors such as i) manufacturing ii) agriculture iii) natural resources and iv) tourism.
• Indonesia introduced the SEZ concept in the mid-2000s. Previously, there was just one Free Trade Zone (FTZ) in the entire country, located in Batam, near Singapore.
• Companies investing at least IDR100 billion (US$6.9 million) over a period of 10 years pay zero corporate income tax in an SEZ. Investments exceeding IDR20 trillion (US$1.41 billion) are eligible for a 20-year corporate tax break. All other SEZ companies who are not eligible for tax breaks pay 25% corporation tax.
• An SEZ company is ideal for manufacturing because:
  • It is exempt from paying duty on machinery and raw materials for the first two years.
  • manual labour costs in Indonesia are low compared to Singapore.
  • average land prices are low, for example compared to Singapore.
• Though SEZs have a minimum investment threshold of IDR10 billion (US$690,000), excluding land and buildings, tech start-ups are exempt from this commitment.
• Fortunately, the SEZ company structure allows for 100% foreign ownership. A local Indonesian shareholder is not needed.
• An Indonesian SEZ company can access a network of double tax treaties. Indonesia has signed with 72 countries including Australia, USA, United Kingdom, Germany, Vietnam, Philippines, Singapore, and Malaysia.
• Because SEZs are located across Indonesia, investors have a wide choice of locations according to their target market. Most SEZs in Indonesia are located on the coast, facilitating sea transport. That said, transport infrastructure in Indonesia is notoriously poor, especially outside Jakarta. Poor transport infrastructure cancels out the benefits of lower set up and operating costs.
• Unfortunately, despite the tax breaks enjoyed by SEZs in Indonesia, these zones suffer from power cuts and poor transport infrastructure just like the rest of Indonesia.
• Although setting up a business in Indonesia is complicated and time consuming, the process of setting up an SEZ company is more straightforward than a traditional ‘onshore’ Indonesian company. All applications are made through each individual SEZ, not an inefficient Indonesian government department.