Michael Lenihan, founder of PT Gateway Consulting Group, shares his insights on the risks for nominees and foreign investors entering commercial relationships in Land and Business in Indonesia.
Southeast Asia, Indonesia, is an attractive destination for foreign investors looking to expand their business ventures. However, Indonesia’s legal landscape—especially in land ownership and business operations—can pose significant challenges for foreign nationals seeking to enter the market.
To navigate the complexities of Indonesia’s regulations, some foreign investors partner with local nominees to hold land or business interests. While this arrangement may seem viable, nominees and foreign investors face various legal, financial, and operational risks that must be carefully considered through the following
1. Legal Framework for Foreign Ownership in Indonesia.
Indonesia’s legal framework regarding foreign ownership is particularly restrictive in specific sectors, including land ownership. The Indonesian Constitution (UUD 1945) and a range of laws governing land and foreign investment (such as the Basic Agrarian Law and Investment Law) limit foreign nationals or entities from directly owning land. Foreign investors may only acquire land rights in Indonesia through specific mechanisms, including:
Hak Pakai (Right to Use) – This is the most common method for foreign nationals to use land in Indonesia. Under Hak Pakai, foreigners can use land for a specific period, typically up to 25 years, with the option to extend. However, they cannot own the land outright.
Nominee Structures -Because foreigners cannot hold freehold land titles, some investors use local nominees (Indonesian citizens or entities) to have legal titles. In theory, the foreign investor maintains control over the land or business by means of a beneficial ownership structure, but this arrangement is fraught with legal and financial risks.
Here is Why!
2. Risks for Foreign Investors Using Nominees
While using a nominee structure may seem like an effective way to bypass land and business ownership restrictions in Indonesia, it exposes foreign investors to legal and operational risks, leading to Legal Uncertainty and Violation of Indonesian Law.
One of the most significant risks associated with using a nominee is the potential for the arrangement to be deemed unlawful by Indonesian authorities. Although nominee structures are not explicitly prohibited in Indonesia, they are viewed with scepticism and may not hold up in a legal dispute.
If the Indonesian authorities determine that a nominee agreement was crafted to evade ownership laws, they may invalidate the arrangement and seize the property or business. This scenario creates enormous financial risks for nominees and foreign investors, who could lose their investment and associated time and resources.
Under the Nominee and Foreign Investment arrangement, there is
3. Lack of Ownership Security.
Since a nominee is merely holding the land or business on behalf of the foreign investor, the investor’s control over the property is tenuous. In practice, the foreign investor may have only a beneficial interest, meaning they are not the legal owner. This creates a situation where the nominee could potentially sell or transfer the property or business without the investor’s consent. The investor may be left powerless if a dispute arises, particularly if the nominee refuses to honour the terms of the arrangement. If a dispute arises between the foreign investor and the nominee, the investor’s legal recourse may be limited, as Indonesian law may not fully recognise the foreign investor’s beneficial ownership. Furthermore, if the nominee decides to terminate the arrangement or act contrary to the investor’s interests, the investor may face prolonged legal battles to recover assets or assert ownership.
4. Tax and Regulatory Risks
Tax and regulatory risks need to be considered, and foreign investors using nominees to circumvent ownership restrictions may also face scrutiny from Indonesia’s tax authorities. Indonesia’s tax system is complex, with direct and indirect taxes applicable to business transactions, land ownership, and corporate earnings.
Foreign investors who do not fully disclose their ownership structure could be penalised for non-compliance with tax laws. Additionally, Indonesia has stringent regulations related to business activities, including foreign investment, capital repatriation, and profit-sharing.
Foreign investors must comply with the Foreign Investment Law (Law No. 25/2007), which sets specific business operations and ownership guidelines.
Using a nominee may expose the foreign investor to allegations of tax evasion or illegal foreign ownership, mainly if the structure is seen as an attempt to circumvent regulatory frameworks.
5. Risks for Nominees
While the risks for foreign investors are significant, local nominees also face legal liabilities and obligations in the context of land and business arrangements. Acting as a nominee for a foreign investor in Indonesia can expose local individuals or entities to potential legal and financial consequences.
Legal Accountability—Nominees in Indonesia may face risk if Indonesian authorities consider the arrangement unlawful. If the Indonesian government perceives the nominee as acting in bad faith or involved in circumventing land and business ownership laws, the nominee could face legal consequences, including fines and criminal charges. Additionally, the nominee could be held liable if the foreign investor, non-compliance, default on any legal or financial obligations associated with the land or business. This risk is significant in business ventures where the nominee may be listed as the legal owner or director, exposing them to civil liabilities for debts, taxes, or regulatory breaches, leading to Reputational Damage – Being involved in a potentially illegal arrangement can damage the nominee’s reputation.
Local nominees who act as intermediaries for foreign investors may be scrutinised by other business partners, competitors, or government agencies. In some cases, involvement in nominee arrangements—especially those perceived as attempts to bypass Indonesian law—could damage the nominee’s professional credibility or standing in the business community.
As foreigners are guests of the Indonesian Government, they are invited and approved to operate legitimate and compliant foreign investments in PT PMA Companies to add significant positive economic value to Indonesia.
6. Conflicts of Interest
Nominees also face a challenge when there is a conflict of interest between their role as a legal holder of assets and the interests of the foreign investor. The nominee must balance their legal obligations with the expectations of the foreign investor, which can lead to tensions or disputes. For example, if the nominee decides to sell the property or withdraw from the agreement, this could result in significant financial and legal repercussions for both parties.
7. Obligations and Liabilities for Both Parties
Foreign investors and nominees in Indonesia must understand specific legal obligations and liabilities before entering a business arrangement. The foreign investor and the nominee must conduct thorough due diligence to ensure the arrangement complies with Indonesian law. This includes verifying the legal status of the land and business structuring, confirming that the nominee is acting lawfully, and ensuring that the agreement terms are clearly outlined. Failure to perform adequate due diligence can lead to costly mistakes and legal challenges.
8. Contractual Agreements
Foreign investors and nominees should formalise their relationship through a well-drafted, clear, and legally binding contract to mitigate risks. This contract should outline each party’s roles, responsibilities, rights, and obligations. It should also include provisions on profit-sharing, exit strategies, dispute resolution, and the rights of the foreign investor in the event of a nominee’s breach.
9. Compliance with Indonesian Laws
Both parties must ensure the arrangement complies with all relevant Indonesian laws governing land use, business ownership, and foreign investment. Foreign investors must follow the Investment Law and other regulatory frameworks restricting foreign ownership in specific sectors. Nominees must ensure they are not violating Indonesia’s Anti-Money Laundering and Foreign Ownership restrictions.
When considering a nominee foreign investment structure, it must be understood that while Indonesia offers abundant opportunities for foreign investment, particularly in land and business ventures, the risks associated with using nominees to navigate the country’s complex legal framework cannot be overstated. Both foreign investors and local nominees must understand the legal liabilities and obligations involved and take proactive steps to ensure that their business relationships comply with Indonesian law.
Investors should carefully consider alternative entry methods, such as joint ventures with Indonesian partners, establishing local entities, PT PMAs or utilising leasehold arrangements to avoid the potential legal pitfalls of nominee structures.
Seeking expert legal advice and conducting extensive due diligence is critical to minimising risks and safeguarding investments in Indonesia’s dynamic market. Without a clear understanding of the legal landscape, foreign investors and local nominees can be exposed to significant financial and reputational damage.
PT Gateway Consulting Group can support foreign investments by clearly outlining the best compliant structures for your business and land investments.