Representative Office Vs. Agency Agreement: What’s The Difference?

Overall,

A ‘Representative Office’ (“KPPA” or Kantor Perwakilan Perusahaan Asing) is an alternative method for foreign companies to establish their businesses in Indonesia. The functions of a representative office is limited as it cannot engage in commercial activities (profit-generating activities, issue invoices, and enter contracts),  its main purpose is to serve as intermediary between the parent company and its clients. This is because a representative office is not a separate legal entity moreover, it acts as the extension of its parent company.  On the other hand, an ‘Agency Agreement’ governs the rights and obligations between agents and its principals as well as its required documents in order to obtain the ‘Certificate of Registration’ as a way to authorize any action between those subjects. Therefore, how an agency agreement works is through a ‘Principal’ appointing an ‘Agent’ to become either their “Agent’ or ‘Distributor’ to act on their behalf.

Representative Office

According to the the law, a representative office is an establishment led by a person or people who are foreigners or Indonesians assigned to be a representative of a foreign company. The representative office’s main purpose is to manage the company’s interests or its affiliates, and to prepare for the enactment and development of the company to become a Foreign Investment Company here in Indonesia. As such, representative offices are not capable of conducting commercial activities, which include: profit-generating activities, issuing invoices, and entering into contracts. Foreign investors, however, can own 100% of this business entity and don’t have to contribute the same paid-up capital required by PT PMA.

How many types of Representative Offices are there?

According to BKPM Regulation 5/2021 on Guidelines and Procedures For The Supervision Of Risk-Based Business Licensing (“BKPM Regulation 5/2021”), there are eight types of representative offices:

1. Representative Office of Foreign Trading Company (“KP3A” or Kantor Perwakilan Perusahaan Perdagangan Asing);
2. Foreign Company Representative Office (“KPPA” or Kantor Perwakilan Perusahaan Asing);
3. Representative office of Foreign Construction Service Business Entity (“BUJKA” or Badan Usaha Jasa Konstruksi Asing);
4. Representative office of foreign electricity support services;
5. Franchisors from abroad;
6. Foreign futures traders.
7. Organizer of foreign electronic certification; and
8. Permanent establishment

Main Requirements

For representative office to be established, certain requirements must be fulfilled. These are:

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 regulation.

Additional Notes:

• Representative office of a foreign company must be established in one of the capital province in Indonesia.
• All necessary permits regarding the representative office and its foreign workers are issued by the relevant minister and/or Head of the Investment Coordinating Board (BKPM Regulation 5/2021).

Agency Agreement

An ‘Agency Agreement’ is an essential first step needed to establish production-distribution line between ‘Principals’ and ‘Agents’/’Distributors’. To make things clear, ‘Principals’ are individuals or business entities (whether incorporated or unincorporated legal entities, both domestic and foreign) that appoint domestic Distributors or Agents to conduct sales of Goods. An ‘Agent’ meanwhile, acts as a Distribution Business Actor who acts as intermediary for and on behalf of parties who appoint them based on agreements in return for commission to conduct marketing activities of Goods. Finally, a ‘Distributor’ acts as Distribution Business Actor who acts on their own behalf and/or appointment from Producers or suppliers or Importers based on agreements to conduct marketing activities of Goods.

Note:

• Principals produce, own or control their goods
• Agents do not produce, own or control the goods they market

Types of Principals, Agents, & Distributors

Principals

Principals are divided into two categories: ‘Producer Principals’ and ‘Supplier Principals’

1. Producer Principals: Any individuals or business entities in the form of incorporated legal entities or unincorporated legal entities, with the status as Producers which appoint other business entities as Distributors, Sole Distributors, Agents or Sole Agents to conduct sales of production goods which are owned/controlled.
2. Supplier Principals: Any individuals or business entities in the form of incorporated legal entities or unincorporated legal entities that are appointed by Producer Principals to appoint other business entities as Distributors, Sole Distributors, Agents or Sole Agents in accordance with the authority granted by Producer Principals.

Agents

Agents are divided into two categories: ‘Sole Agents’ and ‘Sub-Agents’.

1. Sole Agent: A trade company that secures an Exclusive right from Principals based on agreements as the sole Agent in Indonesia or certain marketing areas
2. Sub-Agent: A trade company that acts as an intermediary for and on behalf of Principals based on appointments or agreements from Agents or Sole Agents to conduct marketing.

Distributors

Distributors are divided into two categories: ‘Sole Distributor’ and ‘Sub-Distributor’.

1. Sole Distributor: A trade company that secures an Exclusive right from Principals based on agreements as the only Distributor in Indonesia or certain marketing areas.
2. Sub-Distributor: A trade company that acts as an intermediary for and on behalf of itself based on appointments or agreements from Distributors or Sole Distributors to conduct marketing.

Main Requirements

In order to gain the legal acknowledgement and capacity to act as Agents or Distributors, applicants must gain Registration Certificate (“STP” or Surat Tanda Pendaftaran), this acts as proof that a company has been registered as a Distributor, Sole Distributor, Sub-Distributor, Agent, Sole Agent or Sub-Agent of Goods and/or Services.

Sources

Laws and Regulations

1. Presidential Decree 90 of 2000 on Representative Office
2. BKPM Regulation 5/2021 on Guidelines and Procedures For The Supervision Of Risk-Based Business Licensing
3. Regulation of The Government In Lieu of Law 2/2022 (“Omnibus Law”)
4. Regulation Of The Minister of Trade 24 of 2021 on Agreements For The Distribution of Goods By Distributors or Agents

Website

1. ‘How To Set Up A Representative Office In Indonesia’, ASEAN Briefing, 2023, https://www.aseanbriefing.com/news/set-representative-office-indonesia/

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