Foreign Investment and Tax Structures for Nominees in Indonesia

For many years, foreign investors looking to establish businesses in Indonesia used nominee agreements to bypass foreign ownership caps. Under a nominee structure, an Indonesian citizen acts as the legal shareholder of a company, holding the shares on behalf of a foreign individual or entity, often bound by side agreements, power of attorney documents, or loan agreements.

However, Indonesia has established a clear legal stance against this practice. Article 33 of the Investment Law (Law No. 25 of 2007) explicitly prohibits domestic and foreign investors from making agreements where shares in a limited liability company are held on behalf of or for the benefit of another party. Any such nominee agreements are legally void *ab initio* (from the beginning), leaving foreign investors with zero legal recourse if a dispute arises over ownership or control.

Severe Tax Risks of Nominee Setups

Beyond the massive legal risks, nominee structures present severe exposure to tax audits, double taxation, and recharacterization penalties by the DGT:

1. Recharacterization of Funds

When a nominee-held company distributes profits to the foreign investor, the transfer of funds cannot legally be declared as dividends because the foreigner is not a registered shareholder. If the tax office audits the transaction, they can recharacterize these transfers as:

Hidden Dividends: Subject to a flat 20% PPh 26 withholding tax on the gross amount (which may not benefit from Double Tax Treaty relief due to lack of beneficial ownership documentation).
Taxable Personal Income: If treated as fee payments, the nominee may be subject to progressive personal tax rates (up to 35% under PPh 21).
Taxable Gifts: Subject to normal income tax rates under Article 4(1) of the Income Tax Law.

2. Nominee Asset Mismatches

Under the automatic exchange of financial information and modern digitized tax records, the DJP matches an individual's reported income on their personal tax return (SPT) with their bank accounts and asset registries. If a nominee holds shares in a company but their reported annual income does not justify the purchase of those shares, they face audits for unexplained wealth, carrying tax liabilities plus interest penalties.

Compliant Alternative: PT PMA (Foreign Investment Company)

To safely invest in Indonesia, foreign businesses should establish a compliant PT PMA (Perseroan Terbatas Penanaman Modal Asing). A PT PMA is a limited liability company that allows foreign ownership (up to 100%, depending on the sector's limits defined in the Priority Investment List, or *Daftar Prioritas Investasi*).

Capital and Structural Requirements:

Minimum Paid-Up Capital: The minimum capital requirement for a PT PMA is IDR 10,000,000,000 (excluding land and buildings), of which 25% must be paid up.
Tax Residency: A PT PMA is considered a resident corporate taxpayer in Indonesia, subject to a standard corporate income tax rate of 22%.

Dividends and Withholding Tax under a PT PMA:

When a PT PMA distributes dividends to its shareholders, the tax treatment is compliant and predictable:

To Domestic Corporate Shareholders: Exempt from withholding tax under the UU HPP.
To Domestic Individual Shareholders: Subject to a flat final tax rate of 10%.
To Foreign Corporate Shareholders: Subject to a flat 20% PPh 26 withholding tax. However, if the foreign entity resides in a country with a Double Taxation Treaty (DTT) with Indonesia (such as Singapore), this rate can be reduced to 10% or 15%, provided they hold a valid Certificate of Domicile (Form DGT-1).