Indonesia has long been a destination for foreign investment, offering a growing economy and a strategic location in Southeast Asia. International investors may encounter difficulties due to the nation’s foreign ownership regulations, especially in industries where such ownership is restricted. To circumvent local ownership restrictions, many foreign investors consider nominee directors a potential solution in these circumstances.
While the idea of using nominee directors may seem like a simple way to bypass these restrictions, it carries significant risks. This blog will explore what nominee directors are, their legal standing in Indonesia, the risks associated with using them, and the alternatives available to foreign investors who wish to remain compliant with Indonesian law. By the end, you’ll understand how to start a business in Indonesia the right way, without breaking the law.
Authority of a Nominee Director in Indonesia
In Indonesia, a nominee director’s authority usually comes through a Power of Attorney (POA) granted by the actual business owner. This arrangement gives the nominee limited powers to act on behalf of the owner, mostly for compliance or administrative purposes.
That said, using nominee structures to hide who really owns or controls a company is not permitted under Indonesian law. Regulators clearly distinguish between a nominee and the valid beneficial owner of a business. If companies are found relying on nominee arrangements to bypass foreign ownership rules, it can lead to serious legal issues—from fines to the loss of a business license.
Purpose of a Nominee Director
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Legal Requirement:
Indonesian law requires every company to have at least one resident director. Appointing a nominee is often seen as a way for foreign investors to meet this requirements.
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Passive Role:
In practice, nominee directors rarely make business decisions. They act only under the instructions of the actual owner or managing director, rather than running day-to-day operations.
Legal and Practical Considerations in Indonesia
Prohibition of Nominee Arrangements:
Indonesia law generally prohibits nominee agreements designed to conceal the actual ownership of shares or assets, particularly in industries where full foreign ownership is restricted.
Consequences:
Businesses and individuals involved in such arrangements face significant risks, including fines, cancellation of business licenses, or other legal penalties.
Beneficial Owner Status:
The law only recognises the beneficial owner as the true controller of the company, with full rights and obligations.
Power of Attorney (POA):
A nominee director’s authority is typically limited and defined through a POA granted by the beneficial owner, which sets boundaries for what they can do.
Resident Requirements:
To qualify as a director in Indonesia, the person must either be an Indonesian citizen or a foreign national holding a valid residency and work permit (KITAS) or permanent residency.
Independent Judgement:
Even when acting under a POA, directors are legally obliged to act in the best interests of the company and its shareholders, not merely as figureheads.
What Qualities Should a Nominee Director Have in Indonesia?
Foreign investors must still designate a local director to comply with Indonesia law, despite the prohibition on nominee directors. It’s critical to choose a director nominee who not only complies with local regulations but also contributes value to the company. Those who are truly capable of running the company and comprehending the local market make the best director nominees.
A good nominee director for a foreign business in Indonesia should meet several criteria:
Legal Knowledge:
They must be well-versed in Indonesian corporate law and familiar with regulatory compliance.
Industry Expertise:
Strong leadership and operational experience are essential for making informed decisions.
Management Skills:
The law only recognises the beneficial owner as the true controller of the company, with full rights and obligations.
Local Insight:
A good director understands local business practices and has connections in the community.
For smooth company incorporation in Indonesia, a strong nominee director should be reliable, credible, compliant with regulations, and aligned with your business goals.
How Can a Nominee Director Service Help Foreign Investors in Indonesia?
Foreign investors, particularly those unfamiliar with the intricacies of Indonesia business law, may find nominee director services to be a valuable resource. To ensure that businesses meet the legal requirement of having at least one Indonesian director, these services typically offer local professionals who can serve as directors.
Foreign investors must ensure that nominee director services are fully compliant with Indonesian law, even though they are frequently used, particularly in countries with similar regulatory frameworks. In addition to acting as a legal representative, the nominee director service ought to assist the company in navigating Indonesia’s regulatory environment.
However, it’s essential to understand that the nominee director service does not grant foreign investors the ability to bypass Indonesia’s laws on local management. These services should only be used when the director is genuinely fulfilling their legal duties.
What Are the Risks and Challenges of Using an Indonesia Nominee Director?
Using a nominee director in Indonesia comes with a range of risks and challenges that can jeopardise the smooth operation of a foreign-owned business. The most significant risks include:
1. Legal Risks
- Nominee directors are illegal in Indonesia and can result in fines or the revocation of their license.
- The BKPM closely monitors compliance, and breaking the rules can lead to legal trouble.
2. Operational Complications
- There is a gap between ownership and management because nominee directors are not involved in day-to-day operations.
- This can lead to delays and confusion in the decision-making process.
3. Financial Risks
- Banks may hesitate to work with companies that use nominee directors due to concerns about transparency and accountability.
- Raising capital or securing loans can be difficult without clear ownership and leadership.
4. Reputational Risks
- Using a nominee director can damage the company’s reputation and erode trust with partners and investors.
- Missed opportunities and damaged relationships could follow.
What Are the Safer Alternatives to Using an Indonesia Nominee Director?
Foreign investors have several legal options that comply with Indonesian law and provide complete control over the company, as an alternative to relying on nominee directors. Among these choices are:
1. Setting Up a PT PMA (Foreign Investment Company)
The most popular structure for foreign investors in Indonesia is a PT PMA (Perseroan Terbatas Perusahaan Asing). In industries where foreign ownership is permitted, this type of business allows foreign investors to maintain complete control. Although a resident director is necessary for a PT PMA, this director actively participates in the management of the company, ensuring adherence to regional regulations while providing accountability and transparency.
| Benefits of PT PMA | Why It’s the Best Option? |
|---|---|
| Allows Full Foreign Ownership | Foreign investors can own 100% of the company, providing full control and flexibility in operations. |
| Complies with Indonesia’s Legal Framework | Structured according to Indonesian investment laws, ensuring legal compliance and protection. |
| Requires a Genuine Local Director | Ensures transparency and alignment with national governance standards through a qualified local director. |
| Provides Legal Transparency and Operational Control | Offers clear ownership structure, making it easier to manage operations and meet regulatory requirements. |
| Widely Accepted by Investors and Banks | Recognized as the most credible structure for foreign-owned businesses in Indonesia. |
| Fosters Trust and Credibility with Stakeholders | Builds confidence among clients, partners, and authorities, enhancing business reputation. |
2. Joint Ventures with Local Partners
Another excellent option for foreign investors wishing to enter sectors with stricter restrictions on foreign ownership is a joint venture with a local partner. The local partner can provide valuable market information and assist with regulatory compliance in their capacity as the director. This enables foreign investors to maintain a substantial stake in the business while collaborating with a reputable local entity in management and operations.
3. Holding Companies in Friendly Jurisdictions
Foreign investors can also establish holding companies in jurisdictions such as Singapore or Hong Kong, where laws governing foreign ownership are more lenient. The holding company can then own a subsidiary in Indonesia, enabling foreign investors to avoid nominee director structures while still maintaining effective control over the business.
How Can Foreign Investors Find the Best Nominee Director Service in Indonesia?
Although nominee director services are not ideal for foreign businesses seeking to fully comply with Indonesian law, they can be helpful in certain instances, such as when a company needs to meet local director requirements while adhering to the legal framework.
To find the best nominee director service, foreign investors should consider the following:
Local Expertise:
Choose a service provider with extensive experience in Indonesian corporate law.
Transparency:
Ensure the service provides clear agreements and documentation that reflect the proper relationship between the nominee director and the company.
Compliance:
Collaborate with service providers who adhere to local laws and assist in ensuring the business remains fully compliant with Indonesian regulations.
Reputation:
Opt for a service with a solid reputation in the industry and among other businesses.
Conclusion
Using nominee directors may seem like a quick workaround, but the risks, including legal, financial, and reputational, far outweigh any short-term benefits. Indonesia requires genuine local directors, making nominee arrangements illegal.
Foreign investors can maintain compliance and security by choosing structures such as PT PMA or joint ventures with local partners. Partnering with experts like 3E Accounting Indonesia ensures the establishment of a proper legal structure, transparency, and adherence to local laws and regulations. Following these practices fosters trust, preserves credibility, and lays the groundwork for sustained success in Indonesia’s dynamic market.
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Frequently Asked Questions
No, using a nominee director to bypass foreign ownership laws is illegal in Indonesia. The law requires at least one resident director, and non-compliance can result in fines or the loss of your business license.
A PT PMA (Foreign Investment Company) allows foreign investors to establish complete control in Indonesia, provided they comply with local laws regarding directors and ownership.
Foreign investors can establish a PT PMA with at least one local director who is actively involved in the business. This structure ensures compliance with Indonesian law.
A nominee director service appoints a local director to meet legal requirements. However, it’s essential to ensure the service complies with Indonesian laws to avoid legal risks.
Yes, a foreign investor can be a director in Indonesia, but they must meet specific requirements, including being a resident or having a valid permit to operate in the country.
Abigail Yu
Author
Abigail Yu oversees executive leadership at 3E Accounting Group, leading operations, IT solutions, public relations, and digital marketing to drive business success. She holds an honors degree in Communication and New Media from the National University of Singapore and is highly skilled in crisis management, financial communication, and corporate communications.
