Key Mistakes to Avoid When Establishing a Company in Indonesia

Thinking of building a business in Indonesia? Indonesia’s rapidly growing economy, rich resources, and strategic location make it a magnet for foreign and local investors. But here’s the kicker: establishing a company in Indonesia isn’t just about having capital or a solid business idea. There are common — and often costly — mistakes that even seasoned investors make.

This article unpacks the key mistakes to avoid when establishing a company in Indonesia, based on legal insight, on-ground practice, and real-world experience. Whether you’re a startup founder, a corporate investor, or an overseas entrepreneur, this guide is your legal playbook for building a compliant and successful business in Indonesia.

Key Takeaways

• Choosing the correct legal structure is crucial to your company’s success in Indonesia.
• Foreign investors must meet strict capital and licensing rules.
• Legal due diligence and proper permits are non-negotiable.
• Ignoring labor, tax, and social security obligations can result in heavy penalties.
• Working with a legal expert can prevent major regulatory and operational risks.

Understanding Indonesia’s Business Landscape

Indonesia ranks among Southeast Asia’s top destinations for investment. With over 270 million people and a government open to foreign direct investment (FDI), the potential is massive. But it also comes with a complex legal and regulatory framework.

New investors often underestimate the bureaucratic intricacies involved. Indonesian business regulations are governed by the Investment Law (Law No. 25 of 2007), the Omnibus Law (Law No. 6 of 2023), and sectoral regulations.

Here’s the truth: success in Indonesia starts with understanding the law — and avoiding costly missteps from day one.

Choosing the Wrong Business Entity

Choosing the right legal structure is the foundation of your operations. Many investors go wrong right here.

PT PMA vs. PT PMDN: Know the Difference

• PT PMA (Foreign Investment Company): For companies with any foreign shareholding.
• PT PMDN (Local Investment Company): For 100% locally owned businesses.

Some foreign investors try to register a PT PMDN by using nominee Indonesian shareholders to get around restrictions. That’s risky and illegal under Indonesian law. The government is cracking down on such structures.

Always align your business type with your actual ownership structure to avoid being flagged by BKPM (Indonesian Investment Coordinating Board).

READ MORE:

• PT PMA vs PT PMDN in Indonesia: Key Differences, Legal Framework, and Setup Guide
• How to Set Up PT PMA in Indonesia

Ignoring Minimum Capital Requirements

This is one of the top key mistakes to avoid when establishing a company in Indonesia. The minimum paid-up capital for a PT PMA is IDR 10 billion (approx. USD 650,000).

Some investors attempt to “simulate” this capital without really injecting it:

• Proof of capital must be shown through a bank statement and notarized documentation.
• BKPM can revoke business licenses for failure to meet this requirement.

Failing to Understand Foreign Ownership Restrictions

Indonesia’s Positive Investment List (Presidential Regulation No. 10 of 2021) specifies which sectors are open to foreign ownership.

Mistakes often happen when investors start operations in a sector that is:

• Fully closed to foreign investors.
• Open but with ownership limitations (e.g., 49%, 67%, etc.).

Conduct a legal review of the investment list or consult a law firm before deciding your business sector.

Skipping Legal and Tax Due Diligence

Whether you’re setting up from scratch or acquiring an existing business, failure to perform due diligence can lead to:

• Hidden debts or tax liabilities.
• Illegal operations.
• Disqualified licenses.

Engage a legal expert to perform a tax and legal diagnostic review before you proceed.

Neglecting Proper Licensing and Permits

Indonesia operates under the Online Single Submission (OSS) system. Yet, many companies:

• Fail to get the correct business classification (KBLI).
• Operate without industry-specific permits.
• Misclassify their activities.

This leads to revoked NIBs (Business Identification Numbers) or heavy fines from the Ministry of Trade, BKPM, or regional governments.

Thus, it is advisable to match your KBLI code with the actual business you intend to run. One wrong code could invalidate your business license.

READ MORE:

• Profit Repatriation for Foreign Investors in Indonesia

Misunderstanding Local Content Requirements

Certain industries — especially in construction, mining, manufacturing, and telecommunications — require compliance with local content requirements (TKDN).

Failure to comply leads to:

• Ineligibility for government projects.
• Loss of tax incentives.
• Legal penalties under Presidential Regulation No. 16/2018.

Underestimating the Importance of a Local Nominee (if needed)

In restricted sectors, foreign investors may consider using an Indonesian nominee. But this is very risky if not structured properly.

Thus, it is advisable that a nominee structure must involve legal safeguards:

• Shareholder loan agreements.
• Voting rights restrictions.
• Binding legal contracts.

Always consult a professional law firm. Illegal nominee arrangements may be declared null and void.

Overlooking Employment and Labor Law Compliance

Indonesia has a rigid labor framework under Law No. 13 of 2003, as revised by the Omnibus Law.

Common labor-related mistakes include:

• Hiring without employment agreements.
• Not paying religious holiday bonuses (THR).
• Not registering employees with BPJS Kesehatan and BPJS Ketenagakerjaan (mandatory social security).

This can lead to labor disputes, lawsuits, or government sanctions.

Not Registering for Tax Obligations Properly

Every company in Indonesia must:

• Obtain a NPWP (Taxpayer Identification Number).
• Register for VAT (PPN) if applicable.
• File monthly and annual tax returns.

Failure to do so may lead to tax audits, fines, and even business closure.

Ensure you engage a tax consultant to assist with your setup and monthly reporting.

READ MORE:

• New Tax Audit Procedures in Indonesia : Key Updates and Implications for Taxpayers

Poor Documentation and Articles of Association

Your Articles of Association (AoA) define your business operations and must be:

• Clear, legally compliant, and approved by the Ministry of Law and Human Rights.
• Include correct company objectives, capital, shareholding structure, and director authority.

Many businesses fail to update their AoA when changes occur — like capital increase or director replacement — which leads to legal invalidity.

Delaying BPJS, OSS, and NIB Registrations

Once incorporated, don’t forget these must-have registrations:

1. OSS System – For Business Licensing.
2. NIB (Business ID Number) – Like a business passport.
3. BPJS – Social Security for employees.

Delays here can prevent you from opening bank accounts, hiring staff, or securing operational permits.

Practical Commentary from Kusuma & Partners

At Kusuma & Partners, we’ve helped our clients — from startups to multinationals — navigate Indonesia’s legal maze. We’ve seen million-dollar investments nearly collapse over simple legal oversights.

Our advice?

• Engage local counsel early.
• Structure your shareholding and licenses based on long-term plans, not just short-term access.
• Do not compromise compliance to save time.

We provide end-to-end services: incorporation, tax advisory, legal opinion, licensing, corporate structuring — all under one roof.

READ MORE:

• Key Post-Incorporation Compliance for Company in Indonesia

How We Can Help

Establishing a company in Indonesia is exciting — but it comes with real risks if you’re unaware of the legal terrain. From choosing the wrong business entity to ignoring tax and labor obligations, each step matters. Avoiding these key mistakes when establishing a company in Indonesia can save you from penalties, revoked licenses, and legal battles.

Ready to start your business in Indonesia with confidence? Contact us today.

Fill in the form below to get our expert guidance.

“DISCLAIMER: This content is intended for general informational purposes only and should not be treated as legal advice. For professional advice, please consult with us.”