7 Common Mistakes To Avoid While Setting Up Company In Indonesia

common mistakeThere are many common mistakes foreigners make while setting up a company in Indonesia. Some of them are because of lack of preparation, some of them due to knowingly trying to twist the law.

This article serves the purpose to help you avoid those mistakes and get your company up and running without unneeded delays.

1.     Business activities are unclear

The first question anyone setting up a company in Indonesia should ask themselves is:

What are going to be my business activities?

This is very important because it will determine your business classification (KBLI). There are KBLI’s that can be owned 100% by foreigners but many of them are in negative investment list and restrict or prohibit foreign ownership.

Sometimes the business activities could fall under several KBLI’s. In such case ask your consultant to advise you which KBLI would be the most convenient for the incorporation process.

Read more: Foreign Ownership Restrictions and Negative Investment List

2.     Not being sure about your main location in Indonesia

In order to get your company registered you will need to provide a domicile letter that states your company’s head office.

Based on the location of your domicile you will need to get approval from the local government and start paying taxes to the local tax office.

If you run your business in Jakarta it’s often most convenient to start with a virtual office. This is fine as long as you plan to keep your business in Jakarta. But if you actually will be managing your business from another city, it will cause you either of the following issues:

  • You need to spend time and money to change your official location
  • You need to declare taxes in another city

It’s best to decide on the office location right from the beginning and then only change it later if really needed.

 

3.     Entering into unreasonable nominee arrangements

We use the word ‘unreasonable’ instead of ‘unsafe’ because there isn’t really a way to have nominee arrangements that are 100% safe.

Foreigners usually use nominee arrangements for two reasons – either the activity is in the negative investment list or they don’t want to pay up large amount of capital.

While a common practice, there are plenty of examples of how nominee arrangements have gone wrong. Like one client of ours put it – in business, don’t even trust your own mother.

So what could be called a reasonable nominee arrangement? The one where your assets are protected. Forget about nominee agreements, they are meaningless when you go to court.

Here’s how to protect your investment while in a nominee arrangement:

  • Be irreplaceable part of the company. E.g. when you bring in the main clients the company would not make money without you
  • Divide assets between several companies. If possible, keep some of the assets in your overseas company. If not you can open several local companies with different shareholders
  • Have several nominee shareholders. This way you can avoid one person owning majority shares.
  • Withdraw money from the company on a regular basis

 

4.     Starting the company with too small capital

Indonesian company law defines business sizes based on their capital:

  • Rp. 0 – Rp. 50.000.000: micro business
  • Rp. 51 million –Rp.  500 million (~5000-50000 USD): small business
  • Rp. 501 million – Rp. 10 billion (~50000-1 million USD): medium-sized business
  • >Rp. 10 billion (1.2 million USD): large enterprise

In order to protect local businesses, foreigners are allowed to only own large enterprises. However, foreigners that use nominee arrangements and open local companies are sometimes tempted to use the smallest allowed capital.

We strongly advise against using the smallest amount of capital. Small companies will not be allowed to hire foreigners or join big tenders. Increasing your capital will be more complicated than starting the company with bigger capital from the beginning.

In case you use 100% local shareholders, have the minimum capital of at least Rp. 501 million (~50,000 USD).

Read more: Minimum capital requirement for setting up PT PMA

5.     Using unprofessional agent to register the company

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Many companies offer the service of registering PT PMA’s in Indonesia. Some of them do it well, some of them not. Here are things to look out for.

  • Can the agent provide some references? Talk with their previous customers and see whether they were satisfied with the service.
  • Is the agent locally owned? Starting from June 2013, BKPM (Foreign Investments Coordinating Board) allows only locally owned consultancies to process PT PMA applications. Your agent should be either locally owned or have a local entity for that purpose.
  • Is the agent BKPM certified? Since July 2013, only BKPM certified consultants can act as agent for the foreign companies.

Once you have chosen a company to work with, make sure you keep an eye on the progress.

A common mistake is when the agent does not ask for power of attorney from the client for the following:

  • Investment coordinating board (BKPM)
  • Public notary
  • Tax office
  • Department of trade

If you don’t sign power of attorneys for all of those, it means your agent is going to fake your signatures. It happens more often than you would think.

If your agent fakes your signatures, it means that you basically have no control over what they will apply for.

Common mistake is to try to register company yourself

Illustration uses artwork from nkzs

6.     Trying to register company yourself

While it’s theoretically possible to study the Indonesian law, common practice and handle all the application process yourself, it is most probably a bad idea.

Incorporating a PT PMA needs to be done correctly and according to the ever-changing requirements from all of the governmental institutions involved. It’s usually not the law that changes but the government officials that overnight come up with new internal regulations.

E.g. BKPM requires a minimum capital of Rp. 10 billion. With current exchange rates (Aug 2013) it would be roughly 920,000 USD.

But it’s not the exchange rate that BKPM is following. For several years BKPM has been requesting the foreign companies to have minimum capital for at least 1.2 million dollars regardless of what is the actual exchange rate.

There are dozens of such details and unless you are incredibly well informed, you will make mistakes and your application will get either refused or delayed. Both mean wasted time and money.

 

7.     Not reporting tax from the beginning

Always report your taxes on time. You will be obligated to report withholding tax immediately after you receive your tax card regardless of whether you had any activity or not.

Reporting taxes is not complicated and can be easily outsourced if you don’t have an accountant on your payroll. There’s really no excuse why to skip a report and attract the tax office attention.

 

Bonus common mistake: thinking that if law doesn’t make sense you won’t need to follow it

There are several aspIndonesian law often doesn't make sense to foreign investorsects that confuse foreign investors, especially the ones coming from developed markets. Such as:

  • Why can’t I have a registered office in my residential house?
  • How come the capital requirement is that big?
  • Why can I own only X% of the business?
  • Do I really need to involve a second shareholder?
  • Why it takes so long time to get company registered?

Those are few examples of things that confuse many foreign investors. But remember – just because something doesn’t make sense doesn’t mean you don’t need to follow it. Indonesia has it’s particular business culture and way of doing things.

As foreigners we must respect that if we want to succeed here.

Read more: Understanding Indonesian Business Culture

 

This was a list of common mistakes we encounter as consultants on a regular basis. Hopefully it helps you to avoid some and grow your business bigger and faster in Indonesia

Featured image credit: danielfah

Indosight

Market entry services in Indonesia

Indosight provides legal and payroll services to companies entering and expanding in Indonesia. Get in touch with our consultants regarding our company registration, payroll, compliance or visa services.


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