Indonesia uses a civil law system inherited from the Dutch colonial administration. It has two primary forms of not-for-profit, nongovernmental organizations (NPOs):
The Indonesian legal system is somewhat complex because it is the convergence of two distinct systems--namely, Dutch-inherited laws and Indonesia’s modern law. Since independence, there has been a general trend toward replacing outdated Dutch laws with those enacted by the Indonesian legislative body.
Yet many Dutch laws remain in place. Associations, for example, are still governed by a Dutch law enacted in 1870.
Foundations, by contrast, are governed by Indonesian statutes. Law No. 16 of 2001 on Foundations was subjected to strong criticism even before it took effect in August 2002, and it was ultimately amended in October 2004, by Law No. 28 of 2004. Because most NPOs in Indonesia are foundations, this Note concentrates principally on the two foundation laws, Law No. 16 of 2001 and Law No. 28 of 2004.
This Note will not discuss several other forms of NPOs because of their limited interaction with U.S. grantmakers, including cooperatives and political parties (regulated by separate laws); organizations that operate under specific laws, such as Educational Legal Entity (Badan Hukum Pendidikan) (Article 53 Law on National Education System (Law No. 20 of 2003)); and NPOs structured as for-profit entities. [2]
B. Tax laws
Indonesian NPOs are generally subject to income tax, though donations and grants are exempt.
Tax deductions for charitable contributions are currently available only for Zakat (Islamic-obligated charitable giving).[3] Additional tax incentives have been created on an ad hoc basis – in response to natural disasters, for example. Indonesia subjects the sale of most goods and services to a Value Added Tax (VAT), with some exemptions pertinent to NPOs. Certain relevant goods are exempt from customs duties as well.
II. Applicable Laws
The prevailing constitution of Indonesia is the 1945 Constitution XE ("the 1945 Constitution"), which was enacted a day after the proclamation of independence. There were also the Constitutions of 1949 and of 1950. However, the 1945 Constitution was reenacted in 1959 and has been in effect since. It was amended only after the fall of Suharto’s administration, in October 1999, August 2000, November 2001, and August 2002.
The second amendment to the 1945 Constitution guarantees the freedom of association (Article 28) and freedom of expression (Article 28E section (3)). The Constitution also, however, states that those rights can be limited for “satisfying just demands based upon considerations of morality, religious values, security and public order in a democratic society” (Article 28J section (2)).
Staatsblad 1870-64 (State Gazette) on Associations with Legal Person Status.
March 28 th 1870
6
Law No. 17 of 2000 on Third Amendment of Income Tax Law 1984
August 2 nd 2000
7
Law No. 16 of 2000 on Amendment of General Rule of Taxation Procedure
August 2 nd 2000
8
Law No. 18 of 2000 on Second Amendment of Value Added Tax 1984
August 2 nd 2000
9
Law No. 10 of 1995 on Custom
December 30 th 1995
10
Government Regulation No. 18 of 1986 on the Implementation of Law No. 8 of 1985 regarding Social Organizations
April 4 th 1986
11
Ministry of Internal Affairs Regulation No. 5 of 1986 on the Scope and Notification Procedure to the Government and the Sign and Logo of the Social Organizations.
October 1 st 1986
12
Instruction from the Minister of Internal Affair No. 8 of 1990 on Non-Governmental Organization Supervision
March 19 th 1990
III. Relevant Legal Forms
A. General Legal Forms
Foundation (Yayasan)
Law No. 16 of 2001 on Foundations came into effect on the 6 th of August 2002 and was amended by Law No. 28 of 2004, which came into effect on October 6 th, 2004. Law No. 28 of 2004 changed 19 provisions and deleted 2 provisions from Law No. 16 of 2001, mostly provisions addressing administrative procedures and financial aspects.
In Law No. 16 of 2001, a foundation is defined as a non-membership legal entity, established based on the separation of assets, and intended as a vehicle for attaining certain purposes in the social, religious, or humanitarian fields. (Article 1 section (1) Law on Foundations (2001)). It should be highlighted that the broad term “social” in this definition might cause a problem in practice, because it is applicable to any not-for-profit activity. Consequently, there is no overall rule that a foundation must provide a public benefit, as opposed to serving only its stakeholders. It depends on the foundation’s statutory purposes.
The law stipulates that the organizational structure of a foundation consists of three organs: the Governing Board (Pembina), Supervisory Board (Pengawas), and Executive Board (Pengurus). The Governing Board delegates some functions, powers, and duties to the other organs. The aims of this scheme are to create a good-governance mechanism within the organization and to avoid internal conflict. [5]
Associations (Perkumpulan)
There are two types of associations in Indonesia: incorporated associations, which possess legal personality, and ordinary associations, which do not. Both are membership-based organizations. Associations can be public-benefit organizations or mutual-benefit ones.
Incorporated associations in Indonesia are based on the Staatsblad 1870-64 (Dutch Colonial State Gazette) on Associations with Legal Person Status. [6] Persons wishing to create an incorporated association submit the Articles of Association containing the statutory purposes to the Minister of Justice. Approval by the Minister confers legal personality.
As for the ordinary association, Staatsblad 1870-64 acknowledges the existence of an association without legal personality (articles 8 and 9). The ordinary association is commonly known by various titles such as Perhimpunan, Ikatan, and Paguyuban. An ordinary association is prohibited from conducting civil action as a legal entity, and any action taken will be considered the action of an individual member of the association. Even though such associations are not considered legal entities, they are still regulated by Articles 1663 and 1664 of the Indonesian Civil Code. [7]
At present, there are initiatives from various parties, including the government, NGOs, and scholars, to draft a new law concerning associations. However, as of the date of this report, the Parliament has not put it on the schedule.
B. Public Benefit Status
Foundations may be public-benefit organizations, though as noted above, "social" foundations might operate to benefit only their stakeholders, which would be inconsistent with public benefit status. Associations can be public-benefit or mutual-benefit organizations.
Public benefit status does not entail any tax or other benefits.
IV. Specific Questions Regarding Local Law
A. Inurement
1. Foundation
A foundation’s assets (cash, goods or other types of assets) must not be transferred or distributed directly or indirectly among the members of the Governing Board, Supervisory Board, or Executive Board, the foundation's employees, or any other parties having an interest in the foundation. (Article 5 Law on Foundations (2001)). A foundation must not divide the income of its commercial enterprises among the members of Governing Board, Supervisory Board, or Executive Board. (Article 3 Law on Foundations (2001)).
Moreover, the elucidation of the law states that a member of the Governing Board, Supervisory Board, or Executive Board must be a volunteer who does not receive a salary, wage, or honorarium (beyond reimbursement for expenses). Law No. 28 of 2004 introduces an exception to this prohibition: members of the Executive Board can be compensated if they work directly and full-time for the foundation, are not the founders of the foundation, and are not affiliated with the founders, the Governing Board, or the Supervisory Board.
The Executive Board is also prohibited from “self-dealing” transactions. (Article 38 Law on Foundations (2001)). It may not enter into agreements with any organization affiliated with the foundation, the members of the Governing Board, Supervisory Board, or Executive Board of the foundation, or an employee of the foundation. However, the prohibition does not apply where the agreement seeks to help the foundation attain its objectives.
2. Association
Nothing restricts a member from receiving a direct or indirect benefit from an association.
B. Proprietary Interest
1. Foundation
The Governing Board, Supervisory Board, and Executive Board are all prohibited from receiving a direct or indirect benefit from a foundation. No party is allowed to receive a proprietary interest in the assets or income of a foundation. No party (including founders and donors) is allowed to revoke a contribution and receive property back.
2. Association
Staatsblad 1870-64 does not regulate proprietary interests in the assets or income of associations. However, members are allowed to receive their contributions back from remaining assets after the association's liquidation. (Article 7 Staatsblad 1870-64.)
C. Dissolution
1. Foundation
Law No. 16 of 2001 stipulates that the remaining assets after liquidation shall be given to other foundations that share the same objectives, as selected by the Governing Board (Article 68). Law No. 28 of 2004 adds that the remaining assets can also be given to other legal entities pursuing the same objectives, if the laws regulating those legal entities allow such transfers. If neither of these is possible, then the remaining assets shall be given to the State and used in accordance with the activities of the foundation.
2. Association
As a membership-based organization, an association is governed substantially by the agreement among its members. An association can be voluntarily dissolved if it reaches its expiration date, accomplishes its objectives, or its members agree to dissolve it (as long as doing so is not prohibited by law).Under Article 7 of Staatsblad 1870-64, assets remaining after liquidation can be owned by the members or divided based on their contributions.
An association can be involuntarily dissolved if the Ministry of Justice revokes its legal entity status for a violation against public order. If an association violates its statutory purposes, a District Attorney can file a case in civil court seeking to revoke the association’s legal entity status. The judge hearing the case also settles the association’s assets. Members of the association are allowed to receive their contributions back from remaining assets after the State Receiver ( Balai Harta Peninggalan) completes the liquidation process.
D. Activities
1. General Activities
In general, a foundation or an association can undertake any lawful, not-for-profit activities. A foundation or an incorporated association becomes a legal entity, with all the attendant rights and responsibilities, upon the approval of the Ministry of Law and Human Rights.
2. Public Benefit Activities
Both foundations and associations may undertake public benefit activities but are not required to do so.
3. Economic activities
A foundation can engage in commercial activities to support the attainment of its objectives through:
setting up commercial enterprises (badan usaha); and/or
participating as a shareholder in other commercial enterprises.
If the foundation sets up its own commercial enterprise, the activities of the enterprise must relate to the foundation’s statutory purposes. These activities are defined broadly, including the fields of human rights, art, sport, consumer protection, education, environment, health, and the pursuit of knowledge. (See Elucidation of Article 8, Law on Foundations (2001)).
Apart from setting up its own commercial enterprise, a foundation may participate as a shareholder in other (unrelated) commercial enterprises that are deemed to be prospective, provided that such shareholding does not exceed 25 percent of the total value of the foundation’s assets. (Article 7 (2) Law on Foundations (2001)). Dividends received by the foundation from investment in its commercial enterprise are not subject to income tax.
In order to maintain good corporate governance, no member of the governing, supervisory, or executive board of the foundation can simultaneously serve as a manager, supervisor, member of the Board of Directors, or member of the Board of Commissioners of any commercial enterprise that a foundation establishes or invests in.
The law does not clearly restrict associations from engaging in commercial activities.
E. Political Activities
Nothing in Indonesian law restricts an NPO from participating in the political process by lobbying officials, endorsing or opposing candidates, or otherwise.
F. Discrimination
Law No. 20 of 2003 concerning the National Education System, in Article 11 section (1), requires the government to help provide an excellent education for every citizen without any discrimination. The anti-discrimination regulation also applies to nongovernmental educational institutions. (“Principles on Conducting Education” (Prinsip Penyelenggaraan Pendidikan), Article 4 section (1), Law No. 20 of 2003).
G. Control of Organization
No law bars a third party from forming or controlling an NPO. Foreign parties and for-profit entities are allowed to form NPOs in Indonesia, though it is not easy for overseas entities to do so in practice. The Law on Foundations states that foreign parties may form a foundation under requirements and procedures to be set forth in a government regulation. To date, however, no government regulation has been ratified for that particular provision. It is thus possible that an Indonesian NPO may be controlled by a for-profit entity (which will lead to additional IRS scrutiny) or by an American grantor charity (which requires that the charity specifically so provide in the affidavit).
V. Tax Laws
A. Tax Exemptions
NPOs are generally subject to income tax on the same basis as other legal entities. (Article 2 section (1) (b) Law No. 17 of 2000 on Income Tax) Donations and grants, however, are not taxed so long as there is no business or ownership relationship between the parties. (Article 4 section (3) Law No.17/2000 on Income Tax.) [8]
B. Deductibility of Charitable Contributions
A tax deduction for contributions is currently available only for Zakat (Islamic-obligated charitable giving). Article 14 Law No. 38 of 1999 concerning Zakat Management states that Zakat paid to a state-formed Zakat management body ( Badan/Lembaga Amil Zakat) will be deducted from the income tax ( laba/pendapatan sisa kena pajak). [9]
Additional tax incentives have been created on an ad hoc basis, most recently the regulation issued by the Minister of Finance concerning the tax deductibility of donations for the Tsunami disaster in Aceh (Regulation Number 609/04).
C. Value Added Tax
Indonesia imposes a Value Added Tax (VAT). The applicable rates are 10 percent on most goods and services, and between 10 and 50 percent for goods and services covered by the Luxury Sales Tax. Certain goods and services are exempt from VAT, including basic food supplies such as rice, salt, corn, and the like; and medical, social (public benefit), religious, education, and art services.
Foreign grants to private NPOs are exempt from VAT upon the approval of the Director General of Tax in the Ministry of Finance. However, this procedure is conducted on an ad hoc basis, and NPOs often are unfamiliar with it. [10] Grants related to government projects are clearly exempted from VAT under Article 2 Government Regulation No. 42 of 1995.
Every legal entity, including an NPO, conducting business activities that produce taxable income above a certain threshold is called a Taxable Entrepreneur, and must require its buyers/clients to pay VAT. These thresholds are quite high, so most NPOs in Indonesia are not affected. The thresholds are generally between 180 and 360 million rupiah, depending on the nature of the activities conducted by the NPO.
D. Customs Duties
Certain items are exempted from customs duties on import under Article 25 section (1) Law No. 10 of 1995 on Customs and Article 9 section (1) Law No. 11 of 1995 on Duties. Those items include the following: goods belonging to a registered International institution and its officers on duty in Indonesia, except for those holding Indonesian passports; science books, upon recommendation of the relevant Ministry/Department; grants for religious, charity, social, or cultural activities; goods for museums, zoos, or other public places; goods for scientific research and development; and goods for the use of disabled people.
To receive such an exemption, the importer must submit a proposal to the Minister of Finance through the Director of Customs and Duties. The proposal must include details of the imported goods, a gift certificate or letter of donation, and a recommendation letter from the related Ministry. If the proposal is approved, the Director of Customs and Duties in the name of the Minister of Finance will issue a decree for the exemption. [11]
E. Other Taxes
NPOs are subject to Land and Building Tax, Stamp Duty, and Real Property Acquisition Fee.
F. Double Tax Treaties
A double taxation treaty exists between the United States and Indonesia, but it does not specifically address the deductibility of contributions to NGOs. ( http://www.irs.gov/pub/irs-trty/indo.pdf)
VI. Knowledgeable Contacts
Eryanto Nugroho, PSHK (Pusat Studi Hukum dan Kebijakan Indonesia) or Centre for Indonesian Law & Policy Studies, www.pshk.org): ery@pshk.org
1) foreign citizens together with Indonesians or otherwise to establish a foundation under Indonesian law, and
2) foreign foundations, i.e. foundations establish under foreign laws, to operate in Indonesian territory, provided that their activities do not prejudice the interest of society and the state. The Law on Foundations delegates a government regulation to further address this issue.
The Law on Foundations delegates a government regulation to further address this issue. The government has been preparing such a regulation for some time, and a draft was released for discussion in August 2002. But because the Law on Foundations was being revised, completion of the regulation was put on hold until recently.
The draft government regulation provides detailed requirements and procedures for foreign foundations to open a branch or a representative office in Indonesia (note that it does not distinguish a branch from a representative office, such as that of the business sector). The draft regulation requires the foundation management (presumably the principal or designated management of the Indonesian branch) to submit a written application to the Ministry of Justice together with a notarial deed stipulating the opening of the branch. (Article 25 (1) Draft Government Regulation.)
The application should contain:
name of the foundation,
principal’s domicile,
country or origin and head office,
name of the managers/directors,
objectives and purposes, and
details of activities that the branch will carry out.
The Minister must then coordinate with agencies relevant to the branch’s activities and obtain recommendations from them within 30 days, otherwise they are deemed to consent. Within 30 days of date of the recommendations, the Ministry of Law and Human Rights should decide whether to approve or reject the application. Rejection must specify the reason. (Article 26 Draft Government Regulation.)
It is important to note that in February 2005 the Ministry of Home Affairs presented before the Parliament a Draft Law on Mass Organizations. This Draft Law provides that Mass Organizations, including foundations, cannot be founded by foreign parties. This Draft Law contains many flaws and overlaps with other laws concerning NPOs. It has not been formally submitted to the Parliament.
B. Foreign Grants
No specific rule sets forth the process by which domestic NPOs can receive foreign grants. At present, the Secretary of State through the Overseas Technical Cooperation Bureau tries to coordinate the process. However, procedures vary widely from one donation to another.
Under the Law on Social Organizations, the government may dissolve a social organization for, among other reasons, receiving donations from a foreign institution without the government’s consent (Article 13 Law No. 8 of 1985). The Law on Social Organizations was intended to cover all organizations, including foundations and associations, and the Ministry of Internal Affairs continues to insist that all organizations are "social organizations" subject to the law. Nonetheless, only a few NPOs have acknowledged the law's authority over them.
Footnotes
[1] Philanthropy in Indonesia is increasing in quantity and quality. The number of NPOs has increased rapidly: 3,255 in 1985, 8,720 in 1990, and 13,400 in 2000. Interview with Dr. Kastorius Sinaga, quoted from Info Bisnis Magazine, Edition. 96/Year VI/September 2001, at 20.
[2]
PT Resource Management and Development Consultant (REMDEC Corporation), which works with civil society organizations on capacity-building, is actually an NPO in nature, but the activists who founded it preferred to structure it as a profit-oriented legal entity. All REMDEC shareholders have so far agreed not to distribute the dividends but to reinvest them in the activities.
[3]
The government in August 2005 sent Parliament five draft bills, addressing General Rule of Taxation Procedure, Income Tax, Value Added Tax, Customs, and Duties. The Bill on Income Tax holds particular significance for NPOs, in that it would broaden the tax deduction beyond Zakat. The Parliament is unlikely to vote on the bills before April 2006.
[4]
Article 1653 of Chapter 9 of the Third Book of the Civil Code is generally regarded as the source of Indonesia’s non-profit legal forms -- the foundation and association.
[5]
The law also requires every foundation to publish the abridged version of its annual report on an announcement board in its office. Furthermore, foundations which have received donations from state, overseas parties, or third parties totaling 500 million rupiah or more, or which possess assets other than endowed assets of over 20 billion rupiah, must be audited by a public accountant and have their annual report summaries published in an Indonesian-language daily newspaper. See Article 52 Foundation Law (Law No. 16/2001).
[6]
The word “Perkumpulan” (Association) is “Vereneging” in Dutch and “Verein” in German, which means an opposite of maatschap or vennootschap (company or corporation). See Chidir Ali, Badan Hukum (Bandung: Alumni, 1999), at 119.
[7] Article 1663: “All other corporate bodies shall continue their existence until they are specifically dissolved in accordance with their rulings, agreements and regulations, or until the purpose or the object of the corporate body ceases to exist.”
Article 1664: “If the statutes of the corporate body or its rulings, regulations and agreements do not include any rules on member’s rights, these rights shall be personal, not to pass on to their heirs.”
[8]
The draft tax bill currently being discussed by the Parliament would expand the tax exemption beyond donations and grants to encompass scholarship funds, surplus money (sisa lebih) received by an NPO in the area of formal education or research and development, and financial support paid by the social security institution.
[9]
The Bill on Income Tax now pending before Parliament would broaden tax deductibility beyond Zakat to include donations for victims of disaster and for research and development conducted in Indonesia, among others. The Parliament plans to conduct public consultations on the bill from December 2005 to January 2006, followed by discussion of the draft from February to April 2006. The Parliament expects the legislation to take effect by 2007. (Kompas Daily, 15 November 2005.)
[10] KRD Japan Inc, a Japanese NPO, was forced to pay the VAT tax by the Customs and Duties Authorities in Surabaya ( Direktorat Jenderal Bea dan Cukai Surabaya) for importing 3,700 units of computers. KRD’s General Manager admitted that they did not prepare for the cost, since they considered this import a tax-exempt grant. See KOMPAS Cyber Media, October 2 nd 2002.
[11]
There is no specific provision about the abuse of this exemption through resale, but a general provision states that whoever violates these exemption regulations and causes losses to the country’s income will be fined in the amount of 100 percent of the duty. Article 25 (4) Law on Customs and Duties.
