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Company Registration in Indonesia (PT PMA): 10 Most Common Mistakes Done by Foreign Investors

Every country has its own regulation and culture. As a foreigner who is willing to start set up a company in a different country, a total understanding of the respective country’s law and culture is extremely needed.

This is no exception for Indonesia. To be able to set up a company legally in Indonesia, a foreigner should understand the Law No. 40 Year 2007 about The Company Law. A discussion with a reputable and trusted local consultant regarding the setting up of your PT PMA, the making of licenses, permits, and visas are absolutely recommended since the foreigner needs an assistant who is familiar with the local law and bureaucracy. However, as a foreigner, you still need to understand how the entire process is to avoid fraud and mistakes during the registration process.

This article will give you illustrations of some common mistakes that many foreigners made during their company registration process in Indonesia. Upon reading this article, it is expected that you will have a better understanding about Indonesian Company Law, so that you can avoid these 10 most common mistakes.

1. Registering Your PT PMA Yourself

No matter how good you are in business and how excellent your knowledge in law, you have to understand that every country has their own nature and culture when dealing with business and legal matters. You may read the Indonesian Company Law No. 40 Year 2007 and try to meet the every detail of it to establish your company in Indonesia, but still you may get confused when you finally have to deal with the bureaucracy. There are so many documents and permits that you have to prepare to register your company and making all of them yourself will be daunting tasks.

Don’t risk yourself of having your application refused or delayed because of your lack of information and understanding of Indonesian Company Law. Only for your information, you need to deal with the lowest government office (the district office to get your residence permit, personal domicile letter and probably other documents signed by a district head) to the high level government offices like BKPM and Ministry of Law and Human Right. Only a minor mistake due to your lack of understanding will result in your time and money being wasted for a returned or delayed registration document.

2. Contacting an Incompetent and Unprofessional Local Agent for your PT PMA Registration

You have to make sure that the local consultant that you chose to register your PT PMA has the expertise in doing their job. Knowing whether or not an agent is professional and competent can be found by making sure the following things.

  1. It is important to know that the local agent you use is owned by Indonesian. It is because the Foreign Investment Coordinating Board (BKPM) issued a new regulation that only a locally owned agent or at least has a local entity can help the registration process of PT PMA.
  2. Make sure that the consultancy agency is certified by BKPM. Only certified agent is able to help you with your PT PMA registration.
  3. Read through their website and find out some previous clients. Ask the local consultancy agency to provide some references. Call them to make sure whether or not they are satisfied with the agent’s services. Do not hesitate to ask for more than one reference, and then call them all.
  4. Make sure that during the process, your agent will ask you to sign Power of Attorney. This document is needed especially when you, as the owner of the PT PMA, cannot register yourself and ask the third party (the agent) to do the registration. BE CAUTIOUS that when they don’t ask for your signature for this document, they will likely to fake your signature, making the whole effort illegal. In every effort your agent makes regarding to your company registration, the related institutions (BKPM, Public Notary, the Ministry of Law and Human Right, the Tax Office, as well as the Department of Trade) will absolutely ask for this document. When your agent fakes your signature, it means that you do not have any control on what the agent will apply for.
  5. The agent will report the progress of the registration process even without being asked to. When communication does not work well, you have to be alert that something has happened. You have the right to always know about everything.


3. Not Certain about the Field of Industry and Business Activities

When you want to establish a PT PMA in Indonesia, your field of industry and business activities must be clear. A company registration is actually a simple and easy process as long as every document needed for the registration process is processed legally and then given completely.

In Indonesia, there are certain fields of industries that are restricted for PT PMA. The list of the restricted industries and industries prohibited for foreign investment can be seen in the negative investment list. To know further about the negative investment list, you need to consult it with the local agency that will help you with the registration process.


4. Not Certain about Your Company Location

One of the documents needed to register your PT PMA is the letter of domicile, which states the location where your PT PMA head office location is. This document is later used to create a Tax Card (NPWP) in the local taxation office.

If you are not certain about where do you actually want to run your business, you will encounter several problems in the future. First, you need to spend extra time and money because you have to change the location of your office. Second, you also need to close your NPWP of the previous office and declare a new one in the new place.

Therefore, it is really important to decide where your company head office will be in the very first place for changing the location of the company head office is both complicated and costly. Some cities in Indonesia, such as Jakarta, allow a PT PMA to have a virtual office. However, you have to consult it with your consultancy agent.


5. Your PT PMA Capital is Lower than What is Stated in the Company Law

Indonesian government has a really strict regulation regarding to the minimum amount of capital a PT PMA must have. This is done by the government to protect local businesses, with the hope that foreign investors cannot easily set up the PT PMA in Indonesia. Based on the Indonesian Law, it is stated that a PT PMA must have at least Rp. 10 billion capital. Regardless the currency rate, the government has set the amount in dollar, which is not less than US$ 1 million.

You have to remember that when you want to set up a large enterprise in Indonesia, a minimum of US$ 1 million of capital must be met. Otherwise, a PT PMA cannot be established, because a PT PMA is considered as a large enterprise. You may start a lower scale company (a medium-sized business) and upgrade it once you have higher capital, but upgrading your company and making changes on the company’s capital is a complicated and costly thing. So, we strongly recommend you to start your company with the higher capital instead.


6. Unreasonable Nominee Arrangement with Local People

A nominee arrangement is often chosen by foreigners, who want to establish PT PMAs in Indonesia. We do not say that it is the best option, but we say that this is a solution for a complex registration processes. In order to save time and budget of establishing the PT PMA, a foreigner arranges a nominee agreement with local people. These local people are appointed to be shareholders and/or directors of the company, although they actually have no contribution to the establishment of the company. Foreigners do the practice of nominee arrangement to trick some of the complicated PT PMA registration process. Some of the reasons of choosing a nominee agreement will be:

  1. The foreigners do not have sufficient amount of capital as requested by the Indonesian Law to establish a PT PMA (a minimum of US$1 million), so that they prefer to make an agreement with one or more local people to become the shareholders of the company so that they can establish an Indonesian PT (company) with less capital.
  2. The foreigners do not have some documents needed to register the PMA (a working permit and a residence permit) so they appoint local people as the shareholders of the company until they are able to get the permits needed.

A nominee arrangement practice itself is not advisable by many consultancy agencies in Indonesia, but it is something that is sometimes unavoidable. Some of the worst possibilities that may occur upon the making of a nominee agreement are when the local people refuse to sell part of the shares or give up the positions they do not “actually” have.

A reputable and trusted consultancy agency always has ways to prevent the bad things happen to its clients. So, it is really important to carefully choose who will help you to register your company.

7. Having Your Legal Documents Kept by Your Consultancy Agent

Once the entire PT PMA registration process is done, a trusted agent will return all of the legal documents to you (the client). A common trick done by the local agent is to keep all of those documents with the hope that you will use the same agent to deal with any issues happen in the future, for example when you want to make changes of the capital or do some company restructuring.

You must realize that this is an illegal practice, because as a client, you are not obliged to stick with one agent once a contract is met and fulfilled. After keeping your documents with them, bad agent will eventually ask you to pay some amount of money in the future when you want to have your documents back. Although it is not a common practice, but unfair business happens everywhere in this world. Again, you learn how important it is to use the service of a reputable and trusted agent.

8. Underestimating Taxation Issues

The laws in any countries are so strict if it is about the tax, especially the tax paid by foreign companies that run their business in their territories. In Indonesia, you are obliged to pay your tax from the very first place upon receiving the Tax Card (NPWP), regardless your company has already had activities or not.

Hire a professional accountant to deal with the reporting and make sure that you report and pay the tax regularly. Otherwise, it will call a suspicion from the tax office. Playing with the bureaucracy is something that you should avoid when making business in a foreign country.


9. Underestimating the Indonesian Law and Bureaucracy System

Every country has their own law and system that every business person has to respect. Just because you think that something is not applied in your country, it does not mean that it is not important. Every detail and information related to the registration process must be met, with no exception. Violating them may be considered as an illegal act, and any illegal act will impact on your business in the future.


10. Underestimating the Local Business Culture

Similar to the explanation above, every country has its distinctive business culture that makes running business in a foreign country is unique and special experiences. You must learn Indonesian business culture if you want to run your business in Indonesia. It will help you understand many things that may happen during your business activities in Indonesia. These include many national holidays, long and confusing bureaucracy, difficult and complex registration process, countless document preparation, and many more. This is not something that you can master in a night, but when you think that it is worth it to establish a PT PMA in Indonesia, you will think that understanding the local business and working culture is a great asset you need to master. At the end, you will find it important, especially when you want to expand your business locally and hire more local people to work in your company in the future.