Indonesia is a fertile land for startups, with more than 2,300 young firms and no less than nine unicorns, according to Statista. Strangely, however, the same can’t necessarily be said for the archipelago’s VC firms.

Data from the Indonesian Financial Services Authority (OJK) shows that Indonesian venture fund products only had 360 billion rupiah (US$23.8 million) in assets under management (AUM) as of September last year. The data also showed that VCs in Indonesia owned only 6.5 trillion rupiah (US$428 million) in total assets.

In fact, there are only four venture fund products in Indonesia – far behind the 2,124 mutual fund products in the country’s capital market, which have an AUM of 504 trillion rupiah (US$33.2 billion).

These figures may seem solid to the uninitiated, but when compared to other countries, the paucity becomes clear.

According to data from the Monetary Authority of Singapore (MAS), there are 660 funds in Singapore, representing more than 1,300 sub funds. In addition, as of 2021, the MAS reported that Singapore’s asset management industry had an AUM of S$5.4 trillion (US$4 trillion).

Most VC companies from Indonesia fundraise via a VC license from another country, such as Singapore or the British Virgin Islands. Why is this preferable to getting licensed in Indonesia?

There are legitimate reasons for doing so, including simpler and cheaper tax rates, but there are also plenty of unfounded rumors about why Indonesian venture fund schemes aren’t attractive. Hopefully, this article can dispel some of these rumors and provide fresh information for fund managers and investors.

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Regulation and structure of venture funds in Indonesia

Venture fund products are regulated by the OJK, which means that they regulate the conduct of venture capital company (PMV) businesses. Venture funds are defined as joint investment contracts (KIB) made between PMVs or sharia venture capital companies (PMVS) with custodian banks.

In terms of definitions and regulations, Indonesian venture funds are similar to venture fund products in other countries. But what about the structure of the venture funds themselves?

The picture above shows that the structure of venture funds in Indonesia is similar to the limited partner (LP) and general partner (GP) model, which is common globally.

Venture fund products in Indonesia even offer more security because all funds from investors are managed by custodian banks and fund admins. The fund manager focuses on the investment process and portfolio management.

However, the weakness of this structure is that each venture fund only has one investment thesis. This means that a PMV has to form another venture fund if it wants to invest on the basis of a new thesis – which is costly and inefficient compared to other models.

The venture capital corporation (VCC) model offers flexibility and efficiency in management. This allows fund managers to form several sub funds based on the thesis or investment stage they want.

Indonesia KIB venture fund products can be like the VCC model and have several sub funds. A KIB Fund can be a standalone fund or an umbrella fund with two or more sub-funds.

Venture fund products in Indonesia are not inferior to those elsewhere in terms of regulation and structure, which are accommodative and transparent for both investors and fund managers.

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Taxation for venture fund products in Indonesia

Countries like Singapore, Hong Kong, the Cayman Islands, and the British Virgin Islands are attractive to investors, in part because their tax policies are investor friendly. No capital gains tax is imposed either for the sale of shares or for capital gains received by investors.

In Indonesia, the rumors are that investors face double taxation, expensive capital gains tax rates, and unfriendly regulations.

On the double taxation front, I can say it is not true because investors are not taxed on the investment profits they get from venture funds. In the KIB venture fund structure, investment profits from the sale of the portfolio are distributed to investors as dividends.

There is no tax on dividends and for domestic taxpayers, dividends are exempted from tax as long as they are reinvested into domestic investment products in Indonesia, which could be a KIB venture fund. For foreign taxpayers, dividends are exempt from tax as long as they are reinvested into Indonesia within three years.

Regarding capital gains taxes, there are two categories.

If the capital gains are from the sale of shares of a portfolio categorized as non-MSME and the company was listed on the stock exchange, then a final tax of 0.1% will be imposed. Investors who already held company shares before the company was listed on the exchange face an additional 0.5% tax.

For the sale of shares of a portfolio through the private secondary market, a general corporate tax of 22% is imposed. It’s notable that the tax rate is not calculated directly on the capital gains generated but after deducting costs incurred in managing the funds.

For capital gains tax from the sale of a portfolio categorized as MSME, the tax rate is 0.1% of the total transaction. Altogether, tax rates in Indonesia for the VC system are relatively competitive.

However, the definition of an MSME muddies the taxation waters. A 2008 law on MSMEs defines them as companies with between four and 99 employees, total assets of 50 million rupiah (US$3,293.7) to 10 billion rupiah (US$658,731.2), and total gross sales of 300 million rupiah (US$19,761.9) to 50 billion rupiah (US$3.3 million).

These criteria would mean few startups actually fall within the MSME bracket and therefore subject sales of their shares through the private secondary market to a much higher tax rate.

The government needs to provide clarity for this taxation scheme if it hopes to encourage more PMVs to operate in Indonesia.

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Regulatory alterations

Admittedly, the regulation, promotion, and structure of KIB venture funds still need improvements to compete with funds from other countries and attract global investors.

As I see it, the government and private sector need to come together to make some changes that help Indonesia reach its potential as a digital economy.

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1) Supervision and regulation

Improving OJK regulations related to venture fund products would make investors feel more comfortable investing in Indonesia.

The current regulations are accommodating, but improvements in several aspects, such as the structure of venture funds, are needed to keep up with market developments. Besides, the taxation system also needs clarification.

Supervision could also be greatly improved. Currently, PMVs are supervised by the OJK IKNB (which also supervises insurance, multifinance, and pension funds).

Venture fund growth would accelerate if it were supervised under the OJK Pasar Modal, which currently oversees the capital market and crowdfunding.

Why? To start, the OJK Pasar Modal has a lot of experience in the management and supervision of mutual funds, exchange-traded funds, and bonds. Companies listing on the Indonesia Stock Exchange would also face less bureaucracy, as the OJK Pasar Modal regulates the exchange.

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2) Education

Regulators, the government, and associations must educate investors and venture capitalists about venture fund products. The prospects and regulations for venture funds in Indonesia are attractive, but interest is low due to a lack of education.

I would urge local venture capitalists managing their funds outside Indonesia to come back and jointly build the ecosystem in Indonesia. One needs only to look at the success of the startup scene here to see what can be achieved.

This article originally appeared on TechInAsia based on our Fund Manager, Muhammad Khaidir’s Medium work. It has been edited for clarity.

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