Writer Kerli Pärnapuu debunks the most common myths surrounding foreign business ownership in Indonesia.
Common Myths about Doing Business in Indonesia
Indonesia is a land of great potential. Rich in culture and resources, the world’s largest archipelago offers a wide array of opportunities for lifestyle business as well as the corporate behemoths that have vested interest and are flocking to the nation to grab market share. Yet, for the individual investor and entrepreneur who has lived or considered building a small business here in Indonesia there are plenty of tall tales and myths accompanying such enterprises that need to be dispelled.
Some claims are so ingrained that even those who have lived in Indonesia for a length of time have trouble differentiating between what is true and false. The rumours shared through the expat community are not usually spread with bad intentions, but perhaps are based on misguided and outdated information. Many of these myths can be (and are) easily debunked below.
The Local Shareholder Myth
One of the most common misconceptions about doing business in Indonesia is that a local shareholder is required for starting a company. In reality, many business lines are open to full foreign ownership.
Foreign investors are allowed to set up 100 percent foreign- owned trading and real estate companies in Indonesia. In the hospitality industry, that means hotels with three or more stars classification can be fully controlled by a foreign business entity. However, it’s the lesser rated hotels that require percentage ownership with a cap at 67 percent for foreign holdings and the remaining stakes held by
Foreign shareholding depends on your business classification. The document regulating restricted industries is the Negative Investment List or Daftar
Negatif Investasi (DNI), and it is revised every three years. The purpose of the DNI is to protect local companies, especially smaller and aspiring businesses, from foreign competition.
Business through Partnerships
Another common misconception in Indonesia is that partnerships, specifically marital partnerships, allow business in Indonesia to be more conducive. Whether these partnerships are purely to secure residence permits, company registration or simply for further insight into the Indonesian business culture; it’s all speculative. And, although Indonesians do have a smaller capital requirement when starting a company, asset control is a huge issue – especially if the expat partner in question doesn’t legally hold any.
From the local perspective, it is oftentimes wiser to turn to a professional consultant or lawyer as regulations in Indonesia can change overnight and the information from a “trusted” advisor might become outdated or simply untrue. And, there are alternatives to partnerships for all other issues such as visas and company establishment,.
Indeed, building a company under a local spouse’s name might seem like a good idea, but it carries high risks. Unsecured nominee agreements constitute one of the diciest ways of starting a business anywhere. As a foreigner in Indonesia, you would not have any legal claims to your business should the marriage go south.
There are non-financial ways to contribute since paid up capital can be in the form of money or other assets. A personal nominee is only based on good will whereas professionally pledged shareholding agreements keep your assets safe.
The Question of Marriage
In Indonesia, religion plays a significant role. Foreigners who wish to marry an Indonesian partner often think they are required to convert to their future spouse’s religion, but there are ways around this statute. Most foreigners who change their faith do it because it is the wish of their spouse or their spouse’s family and they do it by choice, and perhaps a bit of obligation. Weddings conducted abroad are currently recognized in Indonesia. It takes a little bit of time and paperwork, but your marriage can be acknowledged by the Indonesian government. However, dual citizenship is not recognized in Indonesia so any move to change citizenship must be scrutinized with a fine-toothed comb.
Land and Property Ownership
The Basic Agrarian Law No. 5 Year 1960 dictates that foreigners are not allowed to own freehold land in Indonesia. The same law stipulates that foreigners can only obtain land under the following rights: Hak
Guna Bangunan – Right to Build, Hak Guna Usaha –
Right to Cultivate, and Hak Pakai – Right to Use.
It is common practice among foreign investors to buy land or real estate using a local nominee, but this is a high risk manoeuvre that would waive any legal protection over your investment. Human relations have a tendency to change and there is no guarantee that your nominee won’t take over your land or property. The safest option to invest in property in Indonesia is through a foreign- owned company, which would allow legal ownership of the property.
Conducting business in Indonesia may seem arduous. Most businesses that struggle in Indonesia struggle for the same reason anywhere in the world – lack of demand, high competition or poor management.
The real issue here is red tape, so be prepared to invest a lot of time into your business venture.
Seek advice from experienced people who have a proven track record in the relevant industry and try to ignore hearsay and horror stories. Investors entering Indonesia face entry barriers, but these obstacles are some of the reasons why the competition is relatively low. Opportunities abound, and playing it wisely can provide some lucrative rewards.