The nominee structure in Indonesia has been used and offered by some lawyers and agents for a while in Indonesia. A recent comment from the Indonesian government was calling for Indonesians not to lose their rights by providing a nominee in Bali. To be clear, a nominee agreement is illegal and is a crime. Here are the things before considering a nominee agreement in Bali, Indonesia.
What is a Nominee in Indonesia?
Nominee company
A company with a nominee in Indonesia is a company using Indonesians as shareholders in a company in order to conduct an activity not allowed by foreigners. Lawyers and agents offer some agreement between the Indonesians and the foreigners to protect the foreigners and compensate the Indonesian nationals. The common practice is to offer:
- Loan agreement
- Pledge of shares as collateral
- Compensation agreement
Nominee licence holder
The notion of nominee also applies when a foreigner uses the name of an Indonesian in order to get licences that the person could not use if the foreigner was using their own name. This practice is used by some real estate companies and property management companies in order to get licences.
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Why Do Companies Use Nominees in Indonesia?
Foreign Ownership Restrictions
Indonesia imposes restrictions on foreigners in several aspects, which can make it difficult to conduct business activities in certain domains:
- Real estate
- Marketplace
- Laundry
- Architecture
- Construction
- Mining
- etc
The most common case is the one on the land. Indonesia has several types of land ownership, Hak Atas Tanah (HAT), and the most common right is the SHM (Hak Milik). This full right on land has no limitation in time, and some foreigners might be tempted to use their local partner or spouse to buy the land under the name of the Indonesian.
On the other hand, some activities are not open to foreigners under a foreign investment company (PT PMA), and some lawyers or agents suggest opening a company PT PMDN with Indonesian shareholders (sometimes selling their own name) to go around the law to conduct the business.
Minimum Capital Requirement in Indonesia
Despite the law being sometimes confusing, corporate law is clear for companies. The capital of a company for foreign investment starts at 10 billion IDR (ten billion Indonesian rupiah). The amount of capital to deliver is 25% of this amount. Some investors might be sceptical about delivering this amount or investing it in a small business. At the opposite of a PT PMA, the PT PMDN (local company) requires only 51 million IDR (1 billion if the company hires a foreigner).
Nominee Agreements Used in Real Estate
The real estate sector is using nominees in several aspects. The most common practice in the last decades has been to purchase land by using the name of an Indonesian. This practice tends to disappear since PT PMAs are allowed to get some rights on Freehold property.
Despite the acquisition, the real estate sector has used some stratagem to legitimise property rental in Indonesia on a daily basis by offering Indonesian names to be able to rent out a property on a daily basis or the landlord to apply for the licence. This practice is not secure and legitimate for the foreigner and the Indonesian itself as the tax should be paid under the licence holder, which is the Indonesian person. Having a Pondok Wisata under a local person and using its licence is a nominee licence holder.
Other sectors in real estate, such as contractors, also use some nominees to be able to offer service of construction or get the building permit under the name of the landlord.
Also read: How to Register a Holding Company in Indonesia (2024 Guide)
Potential Risk of Having a Nominee for Your Business
Having a nominee for your company in Indonesia is clearly illegal and against the principle of law of having restrictions. It is not rare to see the court cancelling agreements in relation with the nominee practice in Indonesia.
The second risk is to have the nominee itself claiming its rights by selling the business, land, or taking over the business. Bali is full of stories of nominees, wives and spouse or partners taking over the business despite the agreements.
Can You Make a Nominee Agreement More Secure?
By definition, a nominee agreement is illegal. However, it is possible to partner with an Indonesian for certain activities and secure agreements. While some mechanisms, like loans or partnerships with foreign companies, are possible, using a nominee for your company in Indonesia is not a legal or beneficial option. Some lawyers or agents may recommend a pledge of shares, but this isn’t truly advantageous. Since the shares are under the Indonesian’s name (as foreigners cannot own them), the foreign party can only sell the shares to another Indonesian or attempt to force a sale, which ultimately isn’t beneficial for the business.
We recommend you contact us to review the partnership agreement before entering into any deal.
Alternatives to Nominee Agreement in Indonesia
Since 2021, Indonesia has opened a lot of business sectors to foreign investment, and it is now possible to conduct business without having to enter into a nominee agreement. PT PMA can now purchase land certificates and conduct activities in some sectors.
Setting up a PT PMA in Bali is a good alternative and a simple process to conduct business without a local person. The PT PMA allows 100% shareholding to foreigners in most of the sectors. The company can have local partnerships with local companies or provide some services as part of the local company’s activities.
Also read: Your essential guide for your company registration in Bali Indonesia
