Regulations on Joint Operation with Foreign Company

PERTANYAAN

Please explain, are there any rules regarding the establishment of a Joint Operation (JO), if the JO is conducted with a foreign company?

INTISARI JAWABAN

In essence, based on the Decree of the Minister of Finance 740/1989, a joint operation or in Bahasa Indonesia known as Kerja Sama Operasi ("KSO") is a cooperation between two or more parties to jointly carry out a business activity to achieve a certain goal.

So, are there any specific regulations regarding joint operations with foreign parties?

Please read the review below for a further explanation.

ULASAN LENGKAP

This article is an English translation of Aturan Joint Operation dengan Perusahaan Asing, written by Dian Dwi Jayanti, S.H., and was published on Wednesday, 17 May 2023.

This article below is an update of the article entitled with the same title, written by Saufa Ata Taqiyya, S.H., and was first published on Thursday, 28 October 2021.

All legal information available on Klinik hukumonline.com has been prepared for educational purposes only and is general in nature (read the complete Disclaimer). In order to obtain legal advice specific to your case, please consult with Justika Partner Consultant.

What is Joint Operation?

Joint Operation in Indonesian is known as Kerja Sama Operasi ("KSO") in Bahasa Indonesia, which is regulated in Article 1 number 14 Decree of the Minister of Finance 740/1989, which is a cooperation between two or more parties to jointly carry out a business activity in order to achieve a certain goal.

In addition, the definition of joint operation can also be found in Article 1 number 56 Government Regulation 14/2021 which reads:

Joint Operation (Kerja Sama Operasi), from this point onward, is referred to as KSO, which is business cooperation between business actors, each of which has clear rights, obligations, and responsibilities based on a written agreement.

Quoted from the article How to Sue a Consortium?, a joint operation is known as a consortium, which is an agreement between legal subjects to carry out financing, or a joint agreement between legal subjects to carry out work together with the portions of work that have been determined in the joint operation agreement. Furthermore, KSO/joint operation/consortium in trade law is known as a civil partnership or civil company (maatschap).

Civil partnership is specifically regulated in Article 1618 Civil Code as follows:

A civil company is an agreement between two or more people, who promise to put something into the company with the intention that the profits obtained from the company will be divided between them.

You can read the complete legal provisions regarding civil partnership in Article 1618 to Article 1652 Civil Code.

Joint Operation with Foreign Company

Furthermore, to answer your question, according to our research, there are no laws and regulations that specifically regulate the establishment of joint operations with foreign companies. However, in general, the practice of joint operation is widely practiced in construction services business activities. In this business field, there are a number of regulations governing foreign Construction Service Business Entities (Badan Usaha Jasa Konstruksi/ "BUJK") and the obligation to establish joint operations.

In Article 32 Government Regulation 2/2017, it is regulated that any Foreign Construction Service Business Entities or Foreign Construction Service Individual Businesses that are going to conduct construction service business within Indonesian territory must establish:

1. a representative office; and/or
2. a business entity that is incorporated in Indonesia through capital cooperation with a national Construction Service business entity.

If the choice is to establish a representative office in Indonesia, the representative office of the foreign Construction Service Business Entity or Foreign Construction Service Individual Business must:[1]

1. be in the form of a business entity having a qualification equivalent to large-qualification
2. fulfill the Business Licensing;
3. form joint operation with a national large-qualification Construction Service business entity that fulfills the Business Licensing;
4. employ more Indonesian workers rather than foreign workers;
5. place Indonesian citizen as the highest leader of the representative office;
6. prioritize the use of domestic material and construction technology;
7. have a high, sophisticated, efficient, and environmentally sound technology, as well as taking local wisdom into consideration;
8. perform the technology transfer process; and
9. perform other obligations in accordance with provisions of laws and regulations.

The joint operation as referred to above shall be conducted with the principles of equal qualification, similar services, and joint and several liabilities (tanggung renteng).[2]

Furthermore, Annex II of the Public Works and Public Housing Sector Government Regulation 5/2021 (p. II.8.A.68) explains the requirements further, where the representative office of a foreign Construction Service Business Entity must, among others:

1. Establish a KSO with a national Construction Service Business Entity that meets the KSO technical criteria:

1. To be a limited liability company;
2. Have a Construction Business Entity Certificate (Sertifikat Badan Usaha/ “SBU”) of large qualification and subclassification similarity with the foreign Construction Service Business Entity representative office;
3. In the form of a state-owned enterprise, regional-owned enterprise, or privately owned business entity.

 

2. KSO for the implementation of construction work or integrated construction work is carried out with the following provisions:

1. At least 50% of the cost value of construction work is carried out in the country; and
2. At least 30% of the value of the cost of implementing construction work is carried out by the National Construction Service Business Entity of the KSO partner.

 

3. KSO for the implementation of construction consulting services is implemented with the following provisions:

1. All construction consulting services are performed in the country; and
2. At least 50% of the value of construction consulting services work is carried out by the National Construction Service Business Entity of KSO partners.

Meanwhile, if the Foreign Construction Service Business Entity chooses to establish a business entity that is incorporated in Indonesia through capital cooperation with a national Construction Service business entity, then the provisions related to capital cooperation are carried out in accordance with the provisions of laws and regulations.[3]

Thus, it is necessary to re-examine the rules of each business sector related to the provisions for the establishment of joint operations or KSOs with foreign companies. If it is related to the construction services business sector, the provisions are as we have explained above.

Also read: Position of Business Entities Establishing Joint Operation under Bankruptcy

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These are the answers we can provide, we hope you will find them useful.

Legal Basis:

1. Indonesian Civil Code;
2. Law Number 2 of 2017 on Construction Services;
3. Regulation of the Government in Lieu of Law Number 2 of 2022 on Job Creation which has been passed into law under Law Number 6 of 2023;
4. Regulation of the Government Number 5 of 2021 on the Organization of Risk-Based Business Licensing;
5. Regulation of the Government Number 14 of 2021 on Amendment to Regulation of the Government Number 22 of 2020 on Implementing Regulation to Law Number 2 of 2017 on Construction Services;
6. Decree of the Minister of Finance Number 740/KMK.00/1989 of 1989 on Improving the Efficiency and Productivity of State-Owned Enterprises as amended by Decree of the Minister of Finance Number 826/KMK.013/1992 of 1992 on the Amendment to Decree of the Minister of Finance Number 740/KMK.00/1989 on 28 June 1989.

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[1] Article 52 number 14 Regulation of the Government in Lieu of Law Number 2 of 2022 on Job Creation (“Perppu Cipta Kerja”) which amended Article 33 section (1) Law Number 2 of 2017 on Construction Services (“Law 2/2017”).

[2] Article 52 number 14 Perppu Cipta Kerja which amended Article 33 section (3) Law 2/2017.

[3] Article 52 number 15 Perppu Cipta Kerja which amended Article 34 section (1) Law 2/2017.