Indonesia allows investment through a holding company. This holding term is commonly used by investors to define a structure owning some assets. However, what is a holding? What are the advantages and disadvantages of a holding company?
For investors in Bali and Indonesia, having a holding company can simplify some financial transactions between subsidiaries and help to optimise the taxation of the activity. The holding system is commonly used in Dubai, Singapore or other countries but is it possible to set up a holding company in Bali and why?
What is a holding company?
The holding system is frequently used by family offices or big companies. Everybody has heard about Google, but how many have heard about Alphabet? Google decided a few years back to integrate all its activities under one holding company and to distinctly different activities like Walt Disney’s under its holding company, Walt Disney Company.
A holding company is a company that primarily owns and controls other companies, known as subsidiaries. Other names are attributed to the holding company, such as Parent company. The holding company itself typically doesn’t manufacture products, sell services, or conduct its own business operations. The operations are proceeded under the subsidiary company.
What is the role of the holding company?
The role of a parent company can be divided into 3 main roles.
The first role of a holding is to clean the structure of the organisation. It applies a hierarchical and optimised structure. The holding is on the top of the group and acts as the main parent supervising its child.
Applying a structured organisation gives investors more clarification on what the group is doing and which activities generate revenues. For entrepreneurs looking for investors, applying a holding helps to separate activities and provide a clear vision to the investors by maintaining separate PnL and Balance sheets.
The second role of a holding company is to own and maintain interests in the subsidiaries. Holding companies can own more or less than 50% of the assets, but their role is to supervise the activity and the interests of the shareholders of the parent company. The holding usually provides oversight, sets strategic direction, and manages the overall operations of the group.
Also read: Comprehensive Guide to Opening a Company in Indonesia [2024]
What are the advantages of setting up a holding company?
Reduce the risk
The first one is as described above to separate the activities. Besides giving a clearer vision, the holding company allows for a reduction in risk. Nowadays, most companies are limited liability companies. Under Indonesian company law, most companies are limited liability companies, meaning shareholders’ liability is limited to their investment in the company. In case of a lawsuit against a subsidiary, the other subsidiary can still run while the one having a lawsuit can close. The holding company protects the other child while one has another issue.
Tax efficiency
Being transparent is probably the main reason for the tax efficiency resulting from the establishment of a holding company. A holding company can offer some tax advantages and consolidations. It helps circulate funds between companies and subsidiaries through the holding company.
Cost efficiency
Having a holding helps to apply transfer pricing between companies, especially between entities in different countries. Companies working on several projects or with several entities might be required to merge some functions at the top level of the company, such as HR, Finance or Marketing. Those transverse functions are usually located in the holding company.
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Holding Company in Bali and Indonesia
The Indonesian government recognized holding companies as below in OSS:
“Companies that control the assets of a group of subsidiary companies and whose main activity is ownership of the group. “Holding Companies” are not involved in the business activities of their subsidiary companies. Its activities include services provided by advisors and negotiators in designing corporate mergers and acquisitions.”
The vision of the Indonesian government regarding a holding company is clearly to classify the holding companies as entities holding assets but not involved in the activities of the subsidiaries. In other words, the holding company cannot own any land itself, and a subsidiary will need to purchase the land.
Also read: 12 things to know to create a company in Indonesia
Why set up a holding company in Bali and Indonesia?
A holding company starts to be beneficial for investors when they are looking to have more than one project in Indonesia or want to reduce their liabilities in Indonesia.
For instance, an investor buying several lands in Indonesia might see some benefit to limiting their responsibility on some projects and having his own name and liability reduced in case of issues.
For example having two projects development and one management company under a holding.
The other and main reason is certainly the tax advantages. Having a holding company allows a few advantages:
- Splitting the revenue between subsidiary companies and avoiding some threshold
- Injecting capital from the holding company in Bali through over subsidiaries without tax
- Limit the taxation at the company level and get tax facilities by reinvesting dividends
By leveraging these holding company benefits, investors can optimize their operations and financial outcomes in Indonesia.
How to set up a holding company in Bali?
Process
A holding company can be set up as a PT PMA in Bali and the rest of Indonesia. However, a holding company needs a specific address, and not all addresses can host a holding company. For example, a foreigner purchasing a villa will not be able to host the holding company in some areas and will need to use another address.
Similar to other PT PMAs, a holding company needs at least two shareholders. The shareholders can be a holding company in Dubai or other countries, a corporation or any other individual.
The process to set up a holding takes a few weeks and can be added later to purchase shares of existing companies.
Cost
The cost to set up a holding company in Bali or Jakarta is similar to setting up another PT PMA. However, the cost is definitely absorbable due to the tax benefits and limitations of risk that investors will gain.
Another cost could be restructuring the current company to have the holding take the shares of the current PT PMA.
However we duly recommend exploring this option if you plan to invest and develop your activity in Indonesia.
