The development of Special Economic Zones (“SEZ”) has become one of the strategies implemented by the Government of the Republic of Indonesia to promote national economic growth. This policy opens up investment opportunities for both local and international investors in the territory of the Republic of Indonesia. In addition to the objective of national economic growth, the establishment of SEZ is also intended to showcase the potential of natural and human resources owned by the Republic of Indonesia.
Legal Basis of Special Economic Zones
Article 31 of Law No. 25 of 2007 concerning Capital Investment is the initial provision that introduces the term SEZ, which later becomes the foundation for the establishment of regulations regarding SEZ within the legal framework of the Republic of Indonesia. Until now, the Government of the Republic of Indonesia has established and enforced Law No. 39 of 2009 concerning Special Economic Zones, as partially amended by Law No. 6 of 2023 concerning the Ratification of Government Regulation in Lieu of Law No. 2 of 2022 concerning Job Creation Law (“Law 39/2009”), and Government Regulation No. 40 of 2021 concerning the Implementation of Special Economic Zones (“GR 40/2021”) as the legal basis for SEZ.
The Definition of Special Economic Zones
The explanation provided above is indeed the definition of SEZ based on Article 1, Clause 1 of Law 39/2009. Basically, the Government of the Republic of Indonesia has introduced several terms of “Special Zones” within the territory of Indonesia from time to time. Among them are Free Trade Zone and Free Port Zone (Kawasan Perdagangan Bebas dan Pelabuhan Bebas or “KPBPB”) in 1970, Bonded Zone (Kawasan Berikat) in 1972, Industrial Zone (Kawasan Industri) in 1989, and Economic Development Zone (Kawasan Pengembangan Ekonomi or “KAPET”) in 1996.
Criteria for Areas and Business Activities in Special Economic Zones
Law 39/2009 and GR 40/2021 regulate the criteria for locations that can be proposed as SEZ, which are as follows:
- In accordance with the Spatial Planning (Rencana Tata Ruang Wilayah) and does not disturb the Protected Areas;
- Having clear boundaries; and
- Owning at least 50% (fifty percent) of the planned land proposed to be designated as an SEZ.
SEZ proposals can be made for locations that include:
- New areas;
- Expansion of existing; or
- All or part of the locations within Free Trade Zones and Free Ports.
The types of business activities that are regulated and can be implemented within SEZ are varied and tailored to the zoning plans of each SEZ location. Here are the types of business activities that can be proposed within an SEZ:
| · Production & Processing | · Logistic & Distribution | · Tourism |
| · IT Development | · Energy | · Education |
| · Healthcare | · Sports | · Digital Economy |
| · Financial Services | · Creative Industries | · Other Economic Sectors |
The Procedure for Proposing Special Economic Zones
The location proposed to become an SEZ can be submitted by Business Entities (State-Owned Enterprises (Badan Usaha Milik Negara or “BUMN”), Regional-Owned Enterprises (Badan Usaha Milik Daerah or “BUMD”), Private Companies in the form of PT, Cooperatives, or Consortia), as well as by Regional Governments, including Provincial Government (Pemerintah Daerah Provinsi or “Pemprov”), District Government (Pemerintah Daerah Kabupaten or “Pemkab”), or City Government (Pemerintah Daerah Kota or “Pemkot”) to the National SEZ Council by completing specific documents for further review.[1] If the National SEZ Council approves the proposed SEZ submitted by the applicant, then National SEZ Council will provide a recommendation to the President to designate the intended location as an SEZ.
At any time and when necessary, the Central Government can also designate a location as an SEZ and directly coordinate with the National SEZ Council and the local government.
The Development of Special Economic Zones
The SEZ location that has been approved by the National SEZ Council can be managed and developed by the Management and Development Business Entity (Badan Usaha Pengelola dan Pengembang or “BUPP”).[2] However, the management of SEZ is subject to the party that submits the SEZ proposal. If an SEZ is proposed by a Business Entity, then the development and management of the SEZ are carried out by the Business Entity that proposed the SEZ. In addition, if an SEZ is proposed by a Pemprov and/or Pemkab/Pemkot, the respective Pemprov, Pemkab, and/or Pemkot will appoint or collaborate with 1 (one) BUPP to carry out the development and management of the SEZ.
The BUPP has a period of 3 (three) years to manage and develop the SEZ until it is declared ready for operation. During the period of 3 (three) years, the BUPP is required to submit reports in the 12th, 24th, and 36th months to be evaluated by the National SEZ Council. If the BUPP fails to develop and manage the SEZ within the given timeframe, the National SEZ Council has the right to make changes to the SEZ area, replace the designated BUPP, or even recommend the revocation of the SEZ status to the Government.
Facilities and Incentives of Special Economic Zones
The granting of fiscal and non-fiscal facilities within the scope of SEZ is one of the attractions for potential investors to invest in the Republic of Indonesia. The provision of facilities and incentives in the SEZ locations includes fiscal and non-fiscal facilities such as taxation (implementation of Tax Holiday/Tax Allowance), customs and excise (exemption/deferment of import duties and taxes), goods traffic, employment, immigration, land and spatial planning, business licensing, and other facilities and conveniences.
Please contact us for further legal consultation regarding SEZ, business models, or relevant investment opportunities for your business.
The information provided in this article is not intended as legal advice. All information, content, and materials contained herein are for general knowledge purposes only.
[1] The document requirements include 1) a Location map of the proposed development area and its size; 2) SEZ Spatial Planning and Zoning Arrangements; 3) Financing plan and sources; 4) Environmental approval from the local government; 4) Economic and financial feasibility study results; 5) SEZ duration and strategic plan; 6) Proof of land ownership; and 7) Deed of Establishment & approval from the local government.
[2] The BUPP can be in the form of a State-Owned Enterprise (BUMN), Regional-Owned Enterprise (BUMD), Private Company (PT), Cooperative, Joint Venture (JV), or Public Service Agency.
