What Is a Nominee Structure and Should You Use One in Indonesia?

Setting up a company in Indonesia can be a strategic move for foreign investors, thanks to the country's robust economic growth, young population, and expanding digital landscape. However, navigating local laws and regulations, especially those involving foreign ownership restrictions, can be challenging. One solution that often comes up in this context is the use of a nominee structure. In this article, we will explore what a nominee structure is, how it works in Indonesia, the pros and cons of using one, legal considerations, and whether it is the right choice for your business. We’ll also introduce a reliable option for company registration in Indonesia at the end.

What Is a Nominee Structure?

A nominee structure is an arrangement in which one party (the nominee) holds legal title to an asset or company shares on behalf of another party (the beneficial owner). This structure is commonly used by foreign investors in countries where there are restrictions on foreign ownership in certain sectors. In Indonesia, nominee structures are often used to enable foreign individuals or companies to operate in sectors where 100% foreign ownership is not allowed under the Negative Investment List (DNI), which has now evolved into the Positive Investment List as per Presidential Regulation No. 10/2021.

How a Nominee Structure Works in Indonesia

Typically, a nominee structure in Indonesia involves:

• An Indonesian citizen or company acting as the legal shareholder of the local entity.
• A set of private agreements between the nominee and the foreign investor outlining the true ownership and control.
• Additional safeguards such as power of attorney, loan agreements, or call option agreements to protect the investor’s interests.

While these agreements are designed to provide foreign investors with effective control and financial rights, they are not always enforceable under Indonesian law.

Why Foreign Investors Consider a Nominee Structure

Access to Restricted Sectors

Certain sectors in Indonesia are partially or fully closed to foreign investment. Using a nominee structure allows foreign investors to operate in these sectors while complying—at least superficially—with legal ownership requirements.

Cost-Effective Entry Strategy

Establishing a local company with an Indonesian nominee may be quicker and cheaper compared to setting up a fully foreign-owned company (PT PMA) that comes with more capital requirements and licensing processes.

Simplified Bureaucracy

Nominee arrangements often allow businesses to bypass the rigorous documentation and reporting obligations that apply to PT PMAs.

Risks and Legal Considerations

Legality Under Indonesian Law

Nominee structures are not officially recognized by Indonesian company law. The Indonesian Investment Coordinating Board (BKPM) and courts may view such arrangements as attempts to circumvent the law. If discovered, this could lead to:

• Invalidation of agreements.
• Sanctions or dissolution of the company.
• Deportation or blacklisting of foreign investors.

Lack of Legal Protection

Since nominee agreements are often private and unofficial, they may not offer strong legal protection in case of disputes. If the nominee decides to act against the interests of the foreign investor, legal recourse can be difficult.

Ethical and Reputational Risks

Relying on nominee structures can raise red flags with regulators, banks, and potential partners, affecting the credibility and future growth of your business.

Alternatives to a Nominee Structure

Establishing a PT PMA

A foreign-owned limited liability company (PT PMA) is the most secure and legally recognized structure for foreign investment in Indonesia. While it may require higher capital and longer processing time, it provides:

• Full foreign ownership (in open sectors).
• Clear legal rights and protections.
• Transparent compliance with Indonesian laws.

Joint Ventures

Partnering with a local company through a joint venture structure is another alternative. Unlike nominee structures, these are formal and legally binding arrangements, often with shareholder agreements that outline control and profit-sharing mechanisms.

Representative Office

If you're testing the waters, opening a Representative Office (KPPA) allows you to conduct market research and promotional activities without full commercial operations.

Should You Use a Nominee Structure in Indonesia?

The decision to use a nominee structure should be made with extreme caution. While it may offer short-term convenience, the legal and financial risks often outweigh the benefits. If you are serious about establishing a long-term, sustainable business in Indonesia, the safer route is to opt for a PT PMA or other officially sanctioned structures. Always consult with qualified legal and corporate advisors to assess your options.

Conclusion

A nominee structure can appear to be a convenient shortcut for foreign investors aiming to enter restricted sectors in Indonesia. However, this route is fraught with legal ambiguity, risk, and uncertainty. With Indonesia pushing for greater transparency and compliance, the use of nominee structures is becoming increasingly scrutinized. Instead of risking your investment, consider establishing a PT PMA or pursuing a joint venture. These structures not only offer legal protection but also ensure long-term business viability in Indonesia’s dynamic market. If you're ready to start your business journey in Indonesia the right way, CPT Corporate is here to help. With our in-depth knowledge of Indonesian company law and extensive experience assisting foreign clients, we make the registration process smooth, compliant, and hassle-free. From choosing the right business structure to handling licensing and legal documentation, our team of experts is ready to support you every step of the way. Contact us today to find out how we can assist you with seamless company registration and compliance services in Indonesia.