Frequently Asked Questions

Over the past decade, Indonesia has undergone a significant transformation in tax administration. The government’s commitment to strengthening fiscal transparency, driven by the Harmonized Tax Law (HPP Law) and the introduction of digital tax systems, has made corporate tax behaviour a central focus of regulatory oversight. Companies that once viewed taxation merely as a compliance routine must now recognize it as a strategic component of risk management and corporate integrity. The Directorate General of Taxes (DJP) leverages big data analytics, inter-agency cooperation, and automatic information exchange (AEOI) frameworks to identify inconsistencies in reporting. Consequently, avoiding tax evasion investigations in Indonesia requires more than simply submitting annual returns on time; it demands proactive, well-documented, and transparent practices that can withstand digital scrutiny.

Today, multinational and local enterprises alike face heightened expectations for accountability. Even minor clerical discrepancies can trigger SP2DK notices or full-scale audits. This reality underscores the importance of aligning business processes, internal controls, and legal compliance to mitigate risks. The purpose of this article is to guide companies in understanding how to avoid unnecessary investigations and maintain a trusted relationship with Indonesian tax authorities through best practices rooted in law and integrity.

Understanding What Constitutes Tax Evasion Under Indonesian Law

Tax evasion is not simply an accounting error; it is a deliberate act of deceit under Indonesian law. According to Law No. 7 of 2021 on the Harmonization of Tax Regulations (HPP Law), tax evasion occurs when taxpayers intentionally falsify information, conceal income, or manipulate bookkeeping to reduce or eliminate tax liabilities. This conduct violates the General Provisions and Tax Procedures (KUP Law), which governs audits, administrative penalties, and criminal enforcement. The law empowers the DJP to pursue civil and criminal remedies, including fines up to four times the unpaid tax and imprisonment of up to six years for severe offenses.

It is essential to differentiate between tax avoidance and tax evasion. Tax avoidance such as structuring transactions to leverage deductions or incentives is lawful when supported by genuine economic purpose and documentation. Tax evasion, on the other hand, relies on fraudulent intent: fictitious invoices, hidden accounts, or sham transactions. In practice, the line can blur if companies engage in aggressive planning without adequate substance or transparency. Companies operating in Indonesia must, therefore, ensure that every tax-relevant transaction is backed by legitimate documentation, accurate reporting, and a clear audit trail. Recognizing these distinctions helps corporations design compliant tax strategies while steering clear of criminal exposure.

Common Triggers of Tax Evasion Investigations

Understanding what sparks a DJP investigation is critical for avoiding tax evasion investigations in Indonesia. The DJP’s data-driven approach means that patterns of irregularity rather than explicit complaints often initiate scrutiny.

1. Underreporting Income or Misstating Transactions

One of the most frequent triggers is the under-declaration of revenue or exaggeration of deductible expenses. Even small discrepancies between VAT reports, withholding tax filings, and financial statements can raise suspicion. The DJP’s automated cross-checking tools now compare data from banks, suppliers, and government agencies in real time, leaving little room for inconsistency.

2. Transfer Pricing Manipulation and Cross-Border Risks

Multinational groups with intercompany transactions are under constant observation for transfer-pricing compliance. The obligation to maintain Local File, Master File, and Country-by-Country Report under PMK 213/PMK.03/2016 ensures transparency in related-party dealings. Failure to prepare or update these documents may be construed as concealment or profit shifting.

3. Inaccurate VAT and Withholding Tax Reporting

VAT discrepancies particularly mismatches between e-Faktur invoices and third-party declarations are another red flag. Likewise, failure to remit or report withholding taxes under Articles 21, 23, 26, and 4(2) can quickly evolve into audit proceedings. Businesses must therefore prioritize monthly reconciliations and establish an internal review mechanism before submission.

The Investigation Process by the Indonesian Tax Authority (DJP)

The Indonesian Directorate General of Taxes (DJP) conducts investigations through a systematic and multi-stage process aimed at ensuring fairness and accuracy. It often begins with an SP2DK (Surat Permintaan Penjelasan atas Data dan/atau Keterangan), it is a written clarification request when the DJP’s data-matching tools detect anomalies in reported figures. Businesses should never treat SP2DK lightly. A delayed or vague response can escalate into a tax audit (pemeriksaan pajak), where officers review ledgers, invoices, and banking transactions. If during the audit the DJP uncovers strong indications of intentional wrongdoing, the case progresses into a criminal tax investigation (penyidikan pajak) handled by the Special Directorate of Tax Investigation.

During these procedures, taxpayers have both rights and obligations. They are entitled to receive formal notifications, access to evidence, and sufficient time to clarify discrepancies. However, they must provide requested documents, maintain confidentiality, and cooperate with officials. Failure to do so may be interpreted as obstruction, intensifying penalties. A professional response ideally assisted by a qualified tax consultant is vital. The lawyer ensures that communication remains lawful, consistent, and well-documented, preventing misinterpretation. Understanding the stages and timelines of DJP investigations empowers businesses to act prudently and preserve their legal standing.

READ MORE:

• New Tax Audit Procedures in Indonesia : Key Updates and Implications for Taxpayers
• Global Minimum Tax Implementation in Indonesia: What Businesses Should Know

Best Practices to Avoid Tax Evasion Investigations

Avoiding tax evasion investigations in Indonesia demands a preventive, structured approach rather than reactive firefighting. The first and most fundamental step is maintaining transparent financial records. Every transaction must be traceable to supporting evidence such as contracts, purchase orders, invoices, and bank records. Companies should adopt cloud-based accounting systems that integrate seamlessly with the DJP’s e-Faktur and e-Bupot platforms to reduce human error.

Secondly, regular tax health checks should be institutionalized. Annual or semi-annual reviews by external advisors can detect misclassifications and ensure compliance with the latest regulations. This proactive assessment helps identify risks before they trigger SP2DK or audit notices.

For multinational groups, transfer-pricing documentation remains critical. Under Indonesian law, related-party transactions must be supported by Master File, Local File, and CbCR reports. These documents demonstrate arm’s-length principles and protect companies from allegations of profit shifting.

Finally, businesses should utilize tax facilities and rulings responsibly. Incentives under the Harmonized Tax Law such as investment allowances, super deductions for R&D, or VAT exemptions can legally optimize tax positions if properly documented. Companies facing ambiguous situations should request advance tax rulings from the DJP to obtain certainty. Collectively, these best practices build credibility and drastically reduce the likelihood of investigative scrutiny.

The Role of Compliance and Corporate Governance

Effective tax management is inseparable from strong corporate governance. Boards of directors and commissioners must view tax as a governance issue not merely an accounting function. Establishing a Tax Compliance Framework that defines accountability, review cycles, and escalation procedures ensures every department aligns with legal expectations. Internal audit teams should periodically test compliance with Law No. 7/2021 (HPP), PMK 17/2013 on Audit Procedures, and OJK governance guidelines for listed companies.

Beyond internal systems, collaboration with external legal counsel offers an extra layer of assurance. Law firms specializing in Indonesian tax law like Kusuma & Partners help interpret evolving regulations, draft compliance manuals, and provide strategic guidance during audits. They can also mediate between companies and authorities, ensuring professional communication.

Another crucial component is board-level oversight. Directors must certify that financial statements reflect true and fair positions, as stipulated under the Company Law (Law No. 40/2007). Failing to do so may result in personal liability. Ultimately, companies that embed tax integrity within their governance DNA create a compliance culture that not only prevents investigations but also strengthens investor and regulator confidence.

How Digitalization Affects Tax Monitoring and Reporting

The Indonesian tax authority has entered a new era of data-driven enforcement. Through the Core Tax Administration System (CTAS) and integrated E-Systems, the DJP now consolidates taxpayer information from banks, customs, the Financial Services Authority (OJK), and even cross-border data exchanges under the Automatic Exchange of Information (AEOI) initiative. This digitalization enables real-time verification of corporate transactions.

While this transformation enhances efficiency, it also raises compliance expectations. Businesses must ensure that their ERP, accounting, and tax reporting systems are fully synchronized. Inconsistent coding between departments finance, procurement, and operations can easily create discrepancies visible to regulators. Furthermore, artificial intelligence within DJP’s analytics can flag unusual ratios or repetitive patterns, prompting immediate follow-ups.

To adapt, companies should invest in data governance, cybersecurity, and automation. Integrating tax processes into enterprise software not only improves accuracy but also demonstrates transparency when audited. Digital readiness is therefore no longer optional; it’s a compliance necessity. Embracing technology enables businesses to stay one step ahead in avoiding tax evasion investigations in Indonesia while streamlining internal efficiency.

READ MORE:

• Tax Dispute Resolution in Indonesia: Mechanisms, Legal Process, and Practical Insights
• Understanding Capital Gains Tax in Indonesia

Case Examples: Lessons from Indonesian Tax Investigations

Recent years have provided instructive examples of how even well-intentioned corporations can fall under investigation. In one instance, a manufacturing group faced penalties exceeding IDR 50 billion after inconsistencies emerged between export records and reported sales. Although the company claimed administrative oversight, the lack of supporting documentation prolonged the audit for two years. Conversely, another multinational enterprise successfully defended itself against alleged transfer-pricing manipulation because it maintained complete Local and Master Files, proving arm’s-length transactions.

The key lesson is that documentation and transparency are the best defenses. Businesses that can immediately produce accurate data, signed agreements, and reconciled ledgers typically resolve inquiries faster and avoid reputational harm. Moreover, companies that engage early with tax authorities, clarify positions, and maintain open communication often achieve more favorable outcomes.

In essence, prevention through preparedness is more cost-effective than litigation or penalty negotiations. Every tax investigation in Indonesia provides a similar moral: compliance is not a static obligation, it’s a continuous, evidence-based process that safeguards both financial and reputational capital.

Practical Commentary from Kusuma & Partners Law Firm

From our experience advising multinational and domestic clients, most tax investigations begin not with clear fraud, but with data inconsistency or procedural lapses. In many cases, errors stem from poor coordination between accounting, finance, and legal divisions. Our advice to businesses is to treat tax compliance as a company-wide function, not the sole responsibility of accountants.

We recommend conducting annual compliance audits, updating transfer-pricing documentation, and developing internal Standard Operating Procedures (SOPs) for responding to SP2DK or audit requests. Timely and honest communication with tax authorities reduces suspicion and demonstrates good faith. Additionally, businesses involved in complex or high-value transactions should proactively seek tax rulings to ensure legal certainty.

At Kusuma & Partners Law Firm, we believe compliance can be a competitive advantage. Companies that maintain clean records and transparent systems attract investors, secure financing more easily, and sustain long-term trust. We help clients build practical, legally sound strategies that balance tax efficiency with regulatory integrity empowering them to grow confidently in Indonesia’s evolving fiscal landscape.

Conclusion

Avoiding tax evasion investigations in Indonesia is not merely about ticking boxes; it’s about building a culture of integrity that reflects a company’s values and long-term vision. The government’s increasing use of technology, data sharing, and analytics means that opacity is no longer viable. Every transaction, whether local or cross-border, leaves a digital footprint. Businesses that embrace transparency and compliance from the start not only avoid costly audits and penalties but also strengthen their market reputation.

By integrating sound governance, technology, and legal strategy, companies position themselves for sustainable growth in an increasingly competitive environment. Tax compliance, therefore, is not an obstacle it is an investment in credibility and continuity. In the end, a proactive approach saves time, money, and reputation, ensuring your business thrives in Indonesia’s rapidly modernizing economy.

How We Can Help

If your company seeks professional assistance in developing compliance frameworks, conducting tax health checks, or managing potential investigations, Kusuma & Partners Law Firm stands ready to help. Our tax and legal experts combine deep regulatory insight with practical experience to protect your interests and ensure full compliance with Indonesian law.
Contact us today for a consultation and let our team help you strengthen your business’s fiscal resilience.

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“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.”

If you intend to establish, acquire, or invest in a company in Indonesia, you will encounter the country’s distinctive two-tier board system, which separates management under the Board of Directors (Direksi) from supervision under the Board of Commissioners (Dewan Komisaris). This separation is not merely formal, it defines who holds the authority to bind the company, who oversees risk and compliance, and who bears personal liability under the Indonesian Company Law. For business owners, executives, and foreign investors, understanding the difference between Board of Directors and Board of Commissioners in Indonesia is crucial to achieving sound governance, risk control, and regulatory compliance. Moreover, a well-structured governance framework not only enhances efficiency and reduces disputes but also strengthens investor and creditor confidence, thereby facilitating access to financing and supporting sustainable corporate growth.

Indonesia’s Two-Tier Board Model at a Glance

Indonesia’s corporate governance model is deliberately engineered to keep execution and supervision in different hands. The Board of Directors leads daily operations, represents the company before third parties, and implements strategy. The Board of Commissioners supervises, advises, and ensures the directors do not overreach. This design thereby establishes structural checks and balances that not only ensure compliance with applicable laws and regulations but also enhance the overall quality and integrity of corporate decision-making. Furthermore, for cross-border corporate groups, such a model aligns closely with contemporary international governance standards—where management is responsible for executing business operations, while an informed and independent board exercises oversight to safeguard transparency and accountability.

Legal Foundations: Company Law and Key Regulations

The core rules live in Law No. 40 of 2007 on Limited Liability Companies (Company Law) and its subsequent amendments. The Company Law codifies that the Board of Directors manages the company (including representation inside and outside court) and that the Board of Commissioners performs supervision and advice. Public companies must also comply with OJK (Financial Services Authority) regulations, covering independent commissioners, committees, disclosure, related-party transactions, and governance reporting plus IDX listing rules where relevant. Your Articles of Association (AoA) operationalize these requirements with company-specific details such as quorum thresholds, director titles, reserved matters, and committee mandates.

How the Two-Tier Model Shapes Corporate Culture

Separation of roles shapes culture: the directors focus on execution and results; the commissioners focus on outcomes, risk, and integrity. When commissioners ask disciplined questions about cash flow, customer concentration, or cybersecurity directors learn to substantiate decisions with data and alternatives. Over time this produces a culture where metrics, documentation, and forward-looking risk analysis are routine. That culture protects the company in downcycles and unlocks value in expansions or exits.

Board of Directors (Direksi): The Nerve Center of Management

The Board of Directors holds the authority to manage and represent the company. This includes signing binding contracts, hiring and firing, opening bank accounts, approving budgets, operating internal policies, and defending the company in court or arbitration. To outside parties, the director’s signature is the company’s voice unless the AoA specifically limits it or requires dual signatories. For leaders new to Indonesia, Understanding the Difference Between Board of Directors and Board of Commissioners in Indonesia begins with appreciating that directors carry the pen and therefore the first line of responsibility.

Representing the Company In and Out of Court

Directors represent the company before customers, suppliers, banks, regulators, and courts. In practice, that means negotiating major commercial contracts, responding to tax office letters, and appointing counsel in litigation or arbitration. Many AoA require joint signatures (e.g., President Director + one director) for large transactions, bank loans, or asset transfers; these internal signatory matrices protect the company against unilateral acts while preserving agility for routine operations.

Strategic Planning, Budgeting, and Execution

Directors own the strategic plan and the annual budget. They allocate capital, set KPIs, and translate strategy into quarterly execution: sales targets, procurement, plant utilization, and digital initiatives. They must ensure that assumptions are evidence-based; they also need scenario plans for shocks (currency swings, raw material price spikes, or regulatory changes). A documented planning cadence board calendars, budget workshops, and rolling forecasts gives commissioners and shareholders confidence that management is purposeful, not reactive.

Delegation, Internal Controls, and Signatory Matrices

Sound governance requires thoughtful delegations of authority (DoA). Directors should define monetary thresholds for procurement, capex, pricing exceptions, HR decisions, and litigation settlements. DoA frameworks work with internal controls segregation of duties, maker-checker rules, reconciliations, and exception reporting to lower fraud risk and improve speed. In addition, this framework should be complemented by a comprehensive policy architecture encompassing the Code of Conduct, Anti-Bribery and Corruption Policy, Related-Party Transaction Policy, Information Security Policy, Data Privacy Policy, and Whistleblowing Mechanism so that all personnel clearly understand their ethical and compliance obligations, and auditors are able to effectively assess the adequacy and implementation of internal controls.

Duties of Care, Loyalty, and the Business Judgment Rule

Directors must act prudently, in good faith, and in the best interest of the company. In plain English: inform yourself, weigh options, disclose conflicts, and document your rationale. The Business Judgment Rule (BJR) generally shields directors when decisions made on an informed basis and without conflicts turn out poorly due to business risk, not negligence or bad faith. Practically, that means maintain data packs for major decisions, record alternatives considered, get fairness or valuation opinions when prudent, and minute dissent where appropriate. Good process today is your best defense tomorrow.

Director’s Legal Responsibility, Liability Exposure, and Protective Mechanisms

Directors may face personal liability for losses arising from negligence, unlawful conduct, or breaches of AoA or law (e.g., misstatements, improper dividends, or failure to maintain proper bookkeeping). Safe harbors include documented reliance on expert opinions (law, tax, technical), compliance with AoA and policies, and timely escalation to commissioners and shareholders for approvals. For regulated sectors (finance, insurance), additional fit and proper tests and ongoing competency expectations apply underscoring why experienced counsel is indispensable.

READ MORE:

• Director’s Liability Under Indonesian Law: Civil and Criminal Consequences
• Legal Process for Director Change in Indonesian Companies
• How to Appoint Foreigner as Director in Indonesian Company

Board of Commissioners (Dewan Komisaris): Independent Oversight

Commissioners are the sentinels of governance. They do not run the business; they oversee it. They challenge assumptions, verify compliance, and advise on strategy. In monthly or quarterly meetings, commissioners review management’s performance and risk posture, test scenario plans, and interrogate related-party dynamics. Done well, oversight is not antagonistic; it’s a high-trust, high-challenge relationship that improves decision quality and reduces surprises.

Supervisory Mandate and Advisory Role

The law frames supervision broadly: commissioners ensure that directors execute their mandate consistent with law, AoA, and GMS decisions. Practically, that means reviewing the annual work plan and budget (RKAP), monitoring liquidity, analyzing capital expenditure cases, and overseeing internal audit findings, legal disputes, and regulatory interactions. Commissioners advise, but they do not direct operations. That line matters: cross it, and you risk blurring accountability and exposing commissioners to de facto management liability.

Commissioners’ Committees (Audit, Risk, Nomination/Remuneration)

Public companies must establish committees Audit Committee at minimum; often Risk Committee and Nomination & Remuneration Committee as well. The Audit Committee engages internal and external auditors, monitors financial statements’ integrity, and tracks the remediation of control weaknesses. Risk Committees map enterprise risks (credit, market, operational, cybersecurity, legal, ESG) and test mitigation plans. Nomination & Remuneration ensures fit-and-proper processes, succession planning, and pay-for-performance alignment. For private companies, adopting committees voluntarily is increasingly standard, especially when courting institutional investors.

Independent Commissioners and Public Company Expectations

For listed companies, a portion of commissioners must be independent—free from ownership, employment, and familial ties that could compromise impartiality. Independence creates evidentiary strength: when independent commissioners approve a sensitive related-party transaction supported by an external fairness opinion, regulators and markets are reassured. Even in private companies, appointing a respected independent commissioner can sharpen management discipline and increase lender confidence.

Standards of Conduct and Liability for Commissioners

Commissioners owe the same fiduciary bedrock care, loyalty, and good faith. Failures can create personal exposure, especially where red flags were ignored (e.g., significant control deficiencies, persistent covenant breaches, or unaddressed whistleblower allegations). Commissioners protect themselves and the company by ensuring information flows are rich and timely, insisting on management certifications, and documenting supervisory conclusions and requests in formal minutes and committee reports.

READ MORE:

• Conducting General Meeting of Shareholders (GMS) in Indonesia: Legal Procedures and Shareholder Rights
• Understanding Shareholders’ Rights and Duties in a Limited Liability Company (PT)

Understanding the Difference: Powers, Limits, and Accountability

The fundamental premise underlying Understanding the Difference Between Board of Directors and Board of Commissioners in Indonesia is a clean division of power. Directors decide and execute within an approved plan; commissioners question, approve where required, and supervise adherence to limits. Where many companies stumble is not law, but clarity: unclear reserved matters, fuzzy veto lists, and weak information rights. Clarity in the AoA and board charters prevents turf wars and accelerates approvals.

Decision Rights and Reserved Matters

“Reserved matters” earmark decisions that require commissioner approval or GMS approval: large borrowings, asset disposals, related-party transactions, major capex, mergers and acquisitions, long-term contracts, and changes to core policies. A practical tip: pair the list with quantitative thresholds and qualitative triggers (e.g., reputational risk, sanctions exposure, or data-privacy impact) so approvals focus on material risk, not bureaucracy.

Information Rights, Reporting Lines, and GMS Dynamics

Commissioners must receive periodic packs: management accounts, forecasting updates, covenant dashboards, litigation status, compliance attestations, and internal audit reports. Directors prepare and present; commissioners probe and record conclusions. The GMS (RUPS) remains the sovereign forum: directors table annual reports; commissioners present supervisory statements; shareholders adopt accounts, decide dividends, and approve appointments or removals. Robust minutes, signed attendance lists, and timely filings close the loop.

Related-Party Transactions and Conflict Management

Related-party transactions (RPTs) demand heightened scrutiny. Require disclosure of interests; obtain third-party benchmarks or fairness opinions; and ensure independent commissioner sign-off where material. Embed recusal mechanics interested directors abstain; independent commissioners lead the evaluation. A clear RPT policy protects against self-dealing and reassures auditors, lenders, and minority shareholders.

Foreign Investors and PT PMA: What to Get Right from Day One

For PT PMA (foreign-owned companies), boards sit at the intersection of law, immigration, and banking. Directors and commissioners can be foreigners, but immigration status (e.g., KITAS/ITAS) and local address requirements must be planned. Banks will request wet-ink signatures, specimen cards, and board resolutions aligned to the AoA. To avoid deadlock and ensure investor protection, Understanding the Difference Between Board of Directors and Board of Commissioners in Indonesia must be reflected in the shareholders’ agreement and AoA: specify reserved matters, drag/tag rights, information rights, and dispute resolution (arbitration venue and rules). Build veto rights with precision broad enough to protect, narrow enough to let the business run.

Board Composition, Immigration (KITAS), and Domicile Realities

If your key director is expatriate, plan the KITAS route early; align job titles and KBLI business lines; and coordinate with payroll and tax teams to avoid permanent establishment or withholding tax missteps. Where operations span multiple regions, consider appointing a local operational director to maintain agility for permits, inspections, and urgent signings.

Shareholder Agreements, Veto Lists, and Deadlock Breakers

Create a tiered veto list: commissioner-level approvals for material transactions; GMS approvals for existential changes (merger, dissolution, disposal of substantially all assets). Add deadlock breakers (escalation to an independent expert, chair’s casting vote in specific committees, or buy-sell mechanisms) so governance remains constructive even when partners disagree.

Risk, Compliance, and Internal Governance Architecture

A resilient company integrates risk and compliance into the board cycle. The directors operationalize the three lines of defense; the commissioners oversee its integrity. Together they build a system that not only complies, but predicts.

Three Lines of Defense: Management, Oversight, Assurance

Line 1 (management) owns risks and controls; Line 2 (risk & compliance) sets frameworks, monitors thresholds, and advises; Line 3 (internal audit) tests effectiveness and independence, reporting functionally to commissioners (via the Audit Committee). Directors must ensure Line 1 is strong, clear owners, KRIs, and remediation plans, so oversight is evidence-based.

Policies, Charters, and Annual Work Plans

Governance breathes through documents you actually use: Board Charters, Committee Charters, Code of Conduct, RPT Policy, Whistleblowing, Anti-Bribery & Corruption, Data Privacy, Information Security, Delegations of Authority, and Document Retention. Pair them with an annual board calendar that sequences strategy offsites, budget approvals, audit plan sign-offs, and policy reviews. When regulators or investors ask, you show the plan and the paper trail.

ESG and Sustainability Governance: Rising Expectations

ESG is no longer optional. Commissioners increasingly request climate and safety dashboards, human-capital metrics, supply-chain screening, and data-protection attestations. Directors translate this into KPIs for procurement, logistics, IT, and HR. Embedding ESG in charters and committee scopes rather than treating it as a side project creates durable value and protects reputation.

Frequent Pitfalls and Scenarios

The same governance mistakes recur across industries. By recognizing them early, boards save themselves litigation, regulator scrutiny, and reputation damage.

Shadow Directorship, De Facto Control, and Email Trails

A shareholder or commissioner who micromanages operations via email risks being viewed as a de facto director, with potential liability exposure. Keep oversight formal: use meetings, minutes, and resolutions. If you must instruct management, do it through the proper organ (a board decision), not ad hoc messages that blur roles.

Over-supervision vs. Interference: How Commissioners Cross the Line

Commissioners should challenge; they should not execute. Approving a strategy is fine; negotiating supplier SLAs or directing plant schedules is not. When commissioners step into management, they inherit management risk without management visibility. The safeguard is role discipline: if the matter is operational, ask for data and timelines; don’t give the order.

Non-compliance with AoA and Regulatory Approvals

Big moves acquisitions, asset transfers, loans often require layered approvals: AoA thresholds, commissioner sign-offs, GMS resolutions, and sometimes regulator or creditor consent. Skipping a layer can void transactions or trigger defaults. Maintain a transaction approvals checklist and seek counsel early; it’s cheaper than remedial work.

Practical Commentary from Kusuma & Partners Law Firm

We assist founders, family enterprises, private equity–backed entities, and multinational corporations in establishing and implementing effective and compliant corporate governance frameworks. The following represents our proven and field-tested governance approach

1. Role Clarity First. We redraft AoA and Board/Committee Charters to hard-code reserved matters, information rights, and approval thresholds. This is the backbone of Understanding the Difference Between Board of Directors and Board of Commissioners in Indonesia in your daily workflow.
2. Decision Hygiene. For material decisions, we create a Decision Dossier (business case, options, risk analysis, legal/tax notes, fairness/valuation where needed) and a tight board memo template. This anchors the Business Judgment Rule and speeds approvals.
3. Three-Lines Maturity Scan. We map your controls, risk registers, and internal audit plan against your top risks and industry norms; then align reporting packs to commissioners, no noise, just the signals.
4. RPT Guardrails. We implement a Related-Party Transactions Policy with recusal mechanics and external benchmarking.

Conclusion

A company thrives when it knows who decides, who supervises, and who is accountable. The Indonesian model achieves that through role separation and disciplined process. Directors lead with informed judgment; commissioners safeguard stakeholders with probing, independent oversight. When these roles are clear in the AoA, charters, and daily routines, you unlock better strategy execution, cleaner audits, and easier access to capital. For leaders serious about scale and resilience.

How We Can Help

If your company requires a governance structure that earns investor confidence and meets regulatory expectations, Kusuma & Partners Law Firm stands ready to assist. Our team can design and implement a board governance framework meticulously tailored to your organization’s risk profile, industry characteristics, and strategic growth objectives. Contact us for a comprehensive and actionable governance plan.

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.”

The Indonesian government has issued PMK 37/2025: E-Commerce Platforms as Income Tax Collectors in Indonesia, a landmark regulation that reshapes digital taxation. Under this rule, e-commerce platforms meeting certain thresholds are formally appointed as income tax collectors, shifting the responsibility from individual sellers to large digital marketplaces. This move ensures fair tax compliance, strengthens state revenue, and aligns Indonesia with global digital economy standards.

This regulation introduces a clear and binding mechanism under which e-commerce platforms—referred to as “Other Parties” (Pihak Lain)—are formally appointed as income tax collectors for transactions conducted by domestic sellers through electronic systems. Rather than imposing a new tax, PMK 37/2025 restructures the collection method, shifting responsibility from individual sellers (who frequently fell outside the formal tax net) to platforms with robust technological and financial systems. This structural shift is designed to improve administrative efficiency, transparency, and compliance within Indonesia’s rapidly expanding digital market.

Legal & Taxation Framework Leading to PMK 37/2025

1. Income Tax Law and Harmonized Tax Law (Law No. 7/2021)

The legal foundation for PMK 37/2025 rests in the Income Tax Law, as comprehensively amended by the Harmonized Tax Law (Law No. 7/2021). The HPP Law empowers the Minister of Finance to regulate new methods of tax collection, including the delegation of withholding functions to entities other than conventional taxpayers. It also introduces the principle of “significant economic presence”, reflecting Indonesia’s adoption of global reforms that emphasize economic substance over physical presence in determining tax obligations.

2. Prior E-Commerce Tax Regime and Regulatory Gaps

Before PMK 37/2025, the government attempted to regulate e-commerce taxation through PMK 210/2018, which primarily addressed VAT obligations for digital goods and services. While useful, these rules did not provide a systematic framework for income tax collection on transactions between domestic sellers and consumers via online platforms. This gap resulted in uneven compliance: many micro, small, and medium enterprises (MSMEs) selling online were not captured by the self-assessment system, while larger players faced inconsistent obligations. PMK 37/2025 remedies this deficiency by appointing e-commerce platforms as direct withholding agents under Article 22 of the Income Tax Law, thereby ensuring stronger enforcement.

Key Provisions of PMK 37/2025

1. Scope and Purpose

PMK 37/2025 regulates the appointment of marketplaces and other electronic system operators (PPMSE) as withholding agents (pemungut) of Income Tax Article 22 in respect of transactions undertaken by domestic sellers (Pedagang Dalam Negeri). The regulation establishes procedures for the collection, remittance, and reporting of withheld taxes, ensuring a structured mechanism that binds both platforms and sellers within the national taxation system. Importantly, the regulation clarifies that it does not impose a new tax liability but instead reallocates the collection function to entities with greater technological and financial capacity.

2. Appointment Criteria and Thresholds

Not every platform is subject to appointment. Under PMK 37/2025, only platforms meeting specific thresholds may be designated as withholding agents. These criteria, determined by the Director General of Taxes (DGT) under delegated authority, include:

• Transaction Value: Platforms must exceed an annual gross transaction value threshold (to be stipulated by DGT).
• User Traffic: Platforms must demonstrate significant user traffic or transaction frequency within a twelve-month period.
• Escrow Mechanism: Platforms must use an escrow or equivalent settlement mechanism to manage funds from buyers to sellers.

This selective appointment ensures that only platforms with a material economic footprint and the infrastructure to perform tax collection are burdened with these duties.

3. Withholding Rate and Base

The regulation prescribes a 0.5% (half percent) withholding rate applied to the gross turnover (peredaran bruto) of the seller from each transaction conducted on the platform, excluding VAT and Luxury Goods Sales Tax. This rate is modest but significant—it ensures regular revenue capture while minimizing excessive burden. The withholding applies at the time the platform receives payment from buyers, creating a timely and enforceable collection point.

4. Exemptions and Reliefs

To protect small sellers, PMK 37/2025 provides an exemption for individual sellers whose annual turnover does not exceed IDR 500 million. Such sellers must submit a written statement confirming their turnover status to the platform. Additionally, sellers holding an official SKB (Surat Keterangan Bebas) are exempt from withholding. For those under final income tax regimes (e.g., PP 23/2018), the withheld amount may be treated as final, while for others, it remains creditable against annual income tax liabilities.

READ MORE:

• Tax Holiday Indonesia: A Guide for Businesses
• Understanding Capital Gains Tax in Indonesia

Roles and Obligations of Appointed Platforms

1. Withholding, Deposit, and Reporting

Once appointed, platforms are legally bound to:

• Withhold 0.5% on each qualifying transaction;
• Deposit withheld amounts into the State Treasury within statutory deadlines; and
• Report collections in monthly tax returns, accompanied by supporting documentation.

This transforms e-commerce platforms into quasi-fiscal intermediaries, ensuring that tax collection occurs at the point of transaction rather than relying on sellers’ self-assessment.

2. Issuance of Documentation

Marketplaces must issue tax receipts or withholding certificates to sellers, serving as proof of deduction. Such documents are critical for sellers to reconcile their records, claim tax credits, or assert compliance in the event of audits. The regulation prescribes minimum data requirements—including seller identity, transaction amount, and withholding figures—to ensure transparency and auditability.

3. Data Sharing and Oversight

Appointed platforms must provide the DGT with periodic data reports, covering transaction details, seller profiles, and amounts withheld. While this strengthens enforcement, it also raises important considerations under Indonesia’s Personal Data Protection Law (Law No. 27/2022), requiring platforms to balance data privacy obligations with regulatory compliance.

Impact on Stakeholders

1. Domestic Sellers and MSMEs

For MSMEs above the IDR 500 million threshold, withholding at source ensures compliance but reduces liquidity. Sellers must enhance bookkeeping to reconcile withheld taxes with overall tax obligations. For smaller sellers, the exemption mechanism reduces administrative burdens, but compliance with statement requirements remains essential to avoid unnecessary deductions.

2. Multinational Marketplaces

Large global platforms such as Shopee, Tokopedia, Lazada, and Amazon face direct compliance obligations under Indonesian law, even without physical presence. This creates a new tax nexus, consistent with international trends, ensuring fairness between local and foreign operators.

3. Consumers and Public Interest

Although the regulation targets sellers and platforms, consumers indirectly benefit from improved regulatory certainty and fairness. By capturing tax revenues from the digital sector, the State strengthens its capacity to fund infrastructure and public services, ultimately supporting broader socio-economic stability.

Enforcement, Challenges, and Legal Risks

1. Monitoring and Enforcement by DGT

The DGT is empowered to issue appointment decrees, monitor compliance, and impose administrative sanctions, including fines or public naming of non-compliant platforms. However, effective implementation requires advanced monitoring systems, cross-agency cooperation, and potentially international coordination for foreign platforms.

2. Data Privacy and Cross-Border Complexities

Platforms must navigate potential conflicts between tax reporting obligations and data protection regulations, especially when handling cross-border transactions. Foreign platforms may invoke double taxation treaties to contest certain aspects of withholding, necessitating careful legal interpretation to avoid treaty violations.

3. Disputes and Litigation Risks

Potential disputes include:

• Incorrect withholding due to misclassification of sellers;
• Excess withholding for exempt sellers;
• Refund claims by sellers whose withheld tax exceeds final liability;
• Appeals against appointment decrees.

Such disputes may escalate to the Tax Court or even judicial review proceedings, making it crucial for platforms and sellers to maintain meticulous compliance records.

READ MORE:

• Personal Guarantee in Indonesia: Legal Framework, Risks, and Enforcement
• Legal Process to Sue for Debt When Warning Letter Fails

Legal and Comparative Analysis

1. Alignment with OECD/G20 BEPS

PMK 37/2025 embodies the OECD/G20 Base Erosion and Profit Shifting (BEPS) Pillar One principle, where taxation rights are allocated based on digital economic presence rather than physical presence. By requiring platforms to act as tax collectors, Indonesia aligns itself with global best practices in combating profit shifting and tax evasion.

2. Comparative Practices

• India: Equalization levy of 2–6% on digital transactions.
• Mexico: Mandatory withholding obligations imposed on platforms facilitating sales.
• EU: VAT collection obligations on digital platforms serving EU consumers.

Indonesia’s model is distinctive in targeting domestic sellers with a modest, creditable withholding rate, thereby balancing administrative efficiency with fairness.

Practical Commentary from Kusuma & Partners

At Kusuma & Partners, we emphasize that PMK 37/2025 is not merely a fiscal tool but a structural reform reshaping the digital economy. We advise:

1. For Platforms: Integrate withholding systems within payment infrastructure, appoint compliance officers, and establish protocols for data sharing with DGT.
2. For Sellers: Reassess turnover exposure, maintain detailed records, and where applicable, file exemption statements.
3. For Investors: Incorporate PMK 37/2025 obligations into due diligence processes when acquiring or funding e-commerce businesses.

In our experience, early compliance not only mitigates legal risk but also enhances credibility with regulators, investors, and consumers.

Conclusion

The issuance of PMK 37/2025 represents a decisive advancement in Indonesia’s taxation of the digital economy. By appointing e-commerce platforms as income tax collectors, the regulation ensures broader compliance, levels the playing field between digital and traditional commerce, and reinforces Indonesia’s alignment with international tax reforms. For businesses, this regulation is not merely a technical adjustment—it is a paradigm shift that demands strategic planning, compliance readiness, and proactive legal risk management.

How We Can Help

PMK 37/2025 impacts businesses and investments, making professional legal guidance critical. Kusuma & Partners Law Firm offers comprehensive advisory on compliance strategies, contractual adjustments, dispute resolution, and cross-border tax implications. Contact us today to secure your position in Indonesia’s evolving digital economy.

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.”

Indonesia’s port infrastructure constitutes the primary artery of its trade system and plays a decisive role in sustaining national economic growth. However, these very ports remain highly susceptible to violations of customs and excise laws, including the trade of non-excise or illegal goods. In recent years, the State has reinforced its position that corporate actors—rather than individuals alone—shall bear accountability for such violations.

Accordingly, the doctrine of corporate criminal liability for the trade of non-excise or illegal goods in Indonesian ports has become increasingly relevant. This doctrine underscores the principle that corporations benefiting from, directing, or negligently permitting unlawful trade activities will be held liable under Indonesian criminal law. The following analysis examines the statutory basis, enforcement practices, judicial precedents, and practical compliance imperatives for corporate entities engaged in port-related commerce.

Defining Non-Excise and Illegal Goods

The concept of non-excise and illegal goods in Indonesian law does not simply refer to goods exempt from taxation, but rather encompasses goods that are either unlawfully traded without compliance to excise obligations or are expressly prohibited from importation and distribution under prevailing laws. The classification derives from a web of statutory and regulatory frameworks, each with distinct legal implications:

a. Tobacco and Alcohol Without Excise Stamps

Under Law No. 39 of 2007 on Excise, all tobacco and alcoholic products must bear official excise stamps as evidence of duty payment. The absence of such stamps not only signifies tax evasion but also constitutes a criminal offense, undermining State revenue and fiscal stability.

b. Fuel and Lubricants Smuggled Without Import Clearance

Governed by the Customs Law (Law No. 17 of 2006), fuel and lubricants imported without customs documentation or diverted from subsidized quotas constitute smuggling. These violations often intersect with broader economic crimes, including subsidy fraud and illicit distribution networks.

c. Counterfeit Pharmaceuticals and Cosmetics

Products that are unregistered with the National Agency of Drug and Food Control (BPOM) or that fail to meet SNI (Indonesian National Standard) requirements fall into this category. Beyond fiscal implications, such goods directly endanger consumer safety and public health, elevating their legal gravity.

d. Wildlife, Timber, and Forestry Products

Illegal logging, wildlife trafficking, and exports of protected species contravene both domestic environmental regulations (e.g., Law No. 5 of 1990 on Conservation of Living Natural Resources) and Indonesia’s obligations under the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES). These offenses often attract international scrutiny and carry reputational risks for corporations.

e. Used Clothing Imports

Explicitly prohibited under Minister of Trade Regulation No. 18 of 2021 (as amended by Minister of Trade Regulation No. 40 of 2022), the importation of second-hand clothing is criminalized to protect domestic textile industries, ensure hygiene standards, and safeguard consumer interests. Enforcement actions in this area are highly visible and frequently publicized as part of consumer protection campaigns.

The breadth of these categories reflects the State’s multifaceted objectives: safeguarding public health, protecting consumers from dangerous or substandard products, preserving Indonesia’s natural resources, and securing fiscal revenue from excisable goods. Corporations involved in the importation, storage, or distribution of such goods within port jurisdictions are therefore not merely facing regulatory breaches—they are directly exposed to criminal prosecution, asset confiscation, and reputational harm under Indonesia’s robust enforcement regime.

Indonesian Ports as High-Risk Zones

With over 90% of Indonesia’s trade volume transiting through ports, enforcement challenges are acute. Major ports such as Tanjung Priok and Tanjung Perak process millions of containers annually, creating systemic vulnerabilities.

Risks are aggravated by:

• Limited capacity for physical inspection, compelling reliance on risk-based profiling.
• Potential collusion between port operators and syndicates.
• Fragmented inter-agency oversight between Customs, Police, Navy, and Port Authorities.
• Exploitation of bonded zones and transshipment procedures.

Consequently, ports remain a focal point for smuggling networks, and corporate liability serves as a deterrent mechanism against institutional complicity.

Regulatory Framework Governing Port Trade

Several legal instruments converge in regulating port-related trade:

1. Customs Law (Law No. 17/2006) – prohibits smuggling, misdeclarations, and misclassification of goods.
2. Excise Law (Law No. 39/2007 as amended by Law No. 7 of 2021) – mandates payment of excise and proper labeling of excisable goods.
3. Anti-Money Laundering Law (Law No. 8/2010) – extends liability to corporations where illegal trade constitutes a predicate offense.
4. Environmental Protection Law (Law No. 32/2009) – applies where illegal goods cause environmental harm.
5. Minister of Trade Regulation No. 18/2021 (as amended by Minister of Trade Regulation No. 40 of 2022) – bans specific categories such as used clothing.

The multiplicity of statutes underscores that port violations are rarely isolated offenses; they often invoke overlapping criminal provisions.

Mechanisms of Corporate Liability

Indonesian law imposes corporate criminal liability through well-established legal doctrines that ensure corporations cannot evade accountability by shifting unlawful conduct solely to individuals. These doctrines operate as follows:

a. Vicarious Liability

This principle attributes the unlawful acts of employees, officers, or agents to the corporation, provided such acts are committed within the scope of their duties or in furtherance of corporate interests. In the port-trade context, for example, if a logistics manager deliberately misdeclares the classification of imported goods to reduce customs duties, the liability extends not only to the individual but also to the corporation that benefited from the act.

b. Strict Liability

Certain regulatory offenses, particularly those under Customs Law (Law No. 17/2006) and Excise Law (Law No. 39/2007 as amended by Law No. 7 of 2021), apply strict liability standards. In these cases, intent or mens rea is immaterial. The mere occurrence of the violation—such as the importation of unstamped cigarettes or alcohol—renders the corporation liable. This reflects the State’s interest in safeguarding fiscal revenues and ensuring administrative efficiency in high-volume port operations where proving intent may be impractical.

c. Negligence Liability

Corporations may also be held liable for failing to establish and maintain adequate compliance frameworks to prevent unlawful acts. Negligence liability captures systemic deficiencies—such as the absence of internal audits, failure to vet third-party contractors, or lack of whistleblowing mechanisms—that enable violations to occur. In these instances, the liability does not arise from direct commission of the offense, but from the corporation’s failure to exercise a reasonable duty of care to prevent foreseeable risks.

Under Supreme Court Regulation No. 13 of 2016 (Perma 13/2016), Indonesian courts apply specific evaluative criteria when assessing corporate liability. Judges examine whether the corporation derived economic or strategic benefit from the unlawful act, whether decision-making or oversight failures contributed to the offense, and whether the corporation had established a credible compliance culture. The absence of demonstrable due diligence, internal controls, and preventive mechanisms is often determinative in convicting a corporation.

The legal framework thus shifts the expectation onto corporations to not only abstain from unlawful conduct but also to proactively implement governance systems designed to prevent violations. In effect, liability attaches not merely to acts and omissions but also to corporate culture and institutional behavior, underscoring the critical importance of compliance as both a shield and a strategic necessity in Indonesian port operations.

Investigative and Prosecution Procedures

Investigations are primarily conducted by Customs Investigators (PPNS DJBC), with prosecutorial authority vested in the Attorney General’s Office. Coordination frequently extends to PPATK where money laundering aspects arise.

Evidence typically includes bills of lading, invoices, HS classification records, excise documentation, and port surveillance. Prosecutors increasingly adopt a strategy of joining customs or excise violations with money laundering charges to broaden asset forfeiture and heighten penalties.

Sanctions and Consequences

Corporate sanctions extend beyond financial penalties. Statutes provide for:

• Fines—often multiples of the value of the illegal goods.
• Confiscation of goods, vessels, and facilities used in the commission of the offense.
• Revocation of licenses—including import/export and port access permits.
• Corporate dissolution in severe or repeated offenses.

Beyond statutory sanctions, reputational damage, supply chain exclusion, and financial sector scrutiny constitute collateral consequences that can permanently impair a corporation’s viability.

Common Violations in Port Operations

Empirical evidence reveals recurring patterns:

• Smuggling via container concealment.
• Undervaluation and misclassification to reduce duties.
• False declarations of origin to exploit preferential tariffs.
• Illegal diversion of bonded goods into the domestic market.
• Excise leakage through unstamped tobacco and alcohol products.

Although contractors and intermediaries frequently engage in these practices, prosecutorial practice attributes liability to the corporation.

Judicial Precedents

Indonesian courts have imposed corporate fines and license revocations in high-profile cases such as:

• The used clothing smuggling cases in Tanjung Priok (2019).
• Cigarette smuggling networks in Batam, resulting in confiscation of assets and prosecution of both corporate and individual actors.
• Timber export cases prosecuted under both Customs and Environmental Law frameworks.

These precedents confirm the judiciary’s readiness to hold corporations accountable, consistent with comparative practices in Singapore and Malaysia.

Compliance and Risk Mitigation

Corporations should adopt structured compliance frameworks encompassing:

• Periodic internal audits of customs and excise compliance.
• Training of staff and contractors on regulatory obligations.
• Due diligence mechanisms for suppliers and logistics providers.
• Whistleblowing systems with anti-retaliation safeguards.
• Digital monitoring technologies, including blockchain and cargo tracking.
• Alignment with AEO (Authorized Economic Operator) standards, which strengthen credibility with regulators.

Proactive compliance investment is consistently less costly than criminal defense and post-enforcement remediation.

Practical Commentary from Kusuma & Partners

In advising clients, we observes recurring missteps: reliance on unvetted third-party contractors, insufficient documentation of HS classification and valuation, and delayed engagement with regulators.

Our recommended practices include:

• Early consultation with Customs to obtain binding rulings.
• Incorporation of compliance obligations and indemnities in contractual frameworks.
• Corporations may voluntarily disclose violations identified through internal reviews to mitigate potential penalties.
• Development of crisis management protocols for investigations.

In practice, the demonstration of a robust compliance culture remains the most effective defense against liability.

Conclusion

The enforcement of corporate criminal liability for the trade of non-excise or illegal goods in Indonesian ports reflects Indonesia’s commitment to safeguarding fiscal revenue, public safety, and international trade integrity. For corporations, this liability is not hypothetical; it is immediate and enforceable.

Accordingly, boards, compliance officers, and legal counsel must view port operations as high-risk zones demanding robust governance, diligent oversight, and proactive legal strategies. Failure to do so exposes corporations not only to statutory penalties but also to reputational and commercial ruin.

How We Can Help

For corporations engaging in Indonesian port operations, compliance is no longer optional—it is imperative. Kusuma & Partners Law Firm provides tailored legal advisory, compliance program design, and defense representation in customs, excise, and port-related matters.

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“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.”

If you own, develop, finance, or invest in land in Indonesia, you are operating in a regulatory window that is closing fast. This legal reminder on Indonesia land certificates: re-registration, customary rights expiry, and state acquisition of abandoned land is not just policy talk—it directly affects your ability to prove ownership, raise financing, complete M&A, and protect project timelines. A pivotal change arrives on 2 February 2026, when many legacy “customary” documents (like Girik and Letter C) stop functioning as valid proof of ownership and instead become, at best, supporting clues in the registration process. Understanding what changes—and how to act now—will determine whether your land portfolio remains bankable and dispute-resistant.

Core Legal Framework: From UUPA to the 2021 Regulatory Suite

a. UUPA No. 5/1960 and the Social Function of Land

Indonesia’s Basic Agrarian Law (UUPA) anchors the principle that land rights derive from the state and carry a social function. In practice, this means certainty of title is earned through registration and compliant use, and that rights can be limited or even revoked through due process where the social function is undermined (e.g., long-term non-use or harmful exploitation).

b. PP 24/1997 on Land Registration and its Continuing Role

PP 24/1997 codified how land should be registered and how certificates are issued/updated. While newer regulations refine the system, PP 24/1997 still underpins the mechanics of measuring, mapping, adjudicating rights, and issuing certificates—foundational steps you still must get right to avoid overlaps and defects during conversion or re-registration.

c. PP 18/2021 on Rights & Registration; PP 20/2021 on Abandoned Land

The 2021 regulatory suite modernized the landscape. PP 18/2021 tightened rules around old customary proofs and set a five-year deadline to regularize them; PP 20/2021 created clear procedures for penertiban kawasan dan tanah telantar (abandoned areas/land), including for Hak Milik (HM), HGB, HGU, Hak Pakai, and HPL. Together, they elevate evidentiary standards while empowering the state to act on persistent non-use—after due process.

Re-registration of Land Certificates: What Triggers It and Why It’s Crucial

1. Legal Basis, Scope, and “Living Document” Principle

Re-registration is not a one-time chore; it’s how you keep your certificate aligned with current reality (boundaries, split/merge, zoning, use changes, encumbrances). In complex projects, even small mismatches (e.g., outdated boundary data) can derail permits, lender drawdowns, or land consolidation. Treat certificates as living documents that must be refreshed when facts change or when you convert customary proofs into registered rights under national law.

2. Risks of Non-Compliance: Evidentiary Gaps, Deal Friction, and Financing Walls

Failing to re-register or convert leaves you in an evidentiary limbo. Post-2 Feb 2026, relying on Girik/Letter C to prove ownership won’t work; you will face tougher scrutiny in court, lower asset valuations, and bankability problems (banks underwrite certificates, not legacy slips). For developers and PE funds, this raises closing risk, heavier reps & warranties, and broader seller indemnities. Move now to keep your titles finance-ready.

READ MORE:

• Land Dispute Litigation in Indonesia: Title, Possession & Legal Remedies
• Legal Process to Sue for Debt When Warning Letter Fails

Customary Land (Hak Ulayat) and Formalization: Bridging Tradition with Title

1. Recognition under National Law and Local Verification

Indonesia recognizes hak ulayat (customary rights), but enforceability in national transactions demands formal registration. Practically, this means engaging both local customary authorities (for verification/acknowledgment) and BPN (for adjudication and registration). It’s not a denial of tradition; it’s the bridge that translates customary legitimacy into bankable rights.

2. Pathways to Conversion: From Girik/Letter C to Registered Rights

Owners typically convert legacy proofs (e.g., Girik, Letter C, Petuk D, Pipil, Kekitir, Landrente, Verponding Indonesia) into registered rights (e.g., HM, HGB, HGU, Hak Pakai). The practical route is via first registration (often using the PTSL program to accelerate mapping, announcements, and adjudication), plus curing gaps with witnesses, boundary agreements, and tax/history documents where available.

NEW: Legal Status of Girik and Other Customary Land Titles After 2 February 2026

1. What Counts as “Alat Bukti Tertulis Tanah Bekas Milik Adat”

Under PP 18/2021 Article 96, the category includes Petuk Pajak Bumi/Landrente, Girik, Pipil, Kekitir, Verponding Indonesia, Letter C, and similar old proofs of individual ownership. These documents historically served as primary evidence for first registration.

2. The Five-Year Deadline Under PP 18/2021 and Its Aftermath

PP 18/2021 took effect on 2 February 2021. It grants a five-year window for individuals holding those old proofs to register. After the window closes on 2 February 2026, the old proofs are no longer valid as evidence of land ownership and cannot be used as standalone proof in disputes or first registration. Instead, they may be treated only as “petunjuk” (indications) assisting the registration process—meaning you’ll need additional corroboration (witnesses, physical occupation, boundaries, historical tax, etc.). This is the crux of the 2026 pivot.

3. What Changes on/after 2 Feb 2026: Proof, “Petunjuk,” and Practical Consequences

Post-deadline, a holder of Girik/Letter C cannot simply present that document and expect BPN or a court to regard it as proof of title. At best, it becomes supporting context. Practically, this elevates the burden of proof, increases time and cost to regularize land, complicates financing, and invites opportunistic claims from third parties. Several legal commentaries and alerts emphasize these consequences and urge immediate conversion to a registered title before the deadline.

4. Not a State Grab: Clarifying Common Misconceptions

There has been viral misinformation that “all unregistered land will be seized in 2026.” The Ministry (ATR/BPN) has explicitly refuted this. The post-2026 change is about evidentiary status, not automatic confiscation. However, failing to register increases dispute risk and can interact with abandoned land rules where registered rights are not used. Don’t conflate the two: no automatic state grab, but stronger incentives to complete registration now.

If your land relies on Girik/Letter C (or similar), convert before 2 Feb 2026. After that, you’ll likely face costlier, slower, and riskier paths to certainty.

State Acquisition of Abandoned Land: When Does the State Step In?

1. Criteria, Process, and Differentiation Across HM/HGB/HGU/HPL

Under PP 20/2021, land can be designated telantar (abandoned) when a right holder intentionally leaves it unused, unmaintained, or not in line with its intended purpose. The regulation covers Hak Milik, HGB, HGU, Hak Pakai, HPL, and land controlled under a basis of possession. Rights such as HGU/HGB are particularly scrutinized if, for example, they remain unutilized within two years after grant (with nuances per right type). Designation follows investigation, warnings, and an administrative process; eventual outcomes can include revocation and reallocation via the land bank or other public purposes.

2. Practical Signs a Parcel Is at Risk—and How to Cure Them

Red flags include long-term inactivity, no evidence of maintenance, lapsed permits, or non-payment of obligations tied to the right. Cures focus on documented utilization (cultivation/construction), timely extensions/renewals, remedial environmental/social compliance, and—critically—paper trails (photos, reports, tax, O&M records) that prove use in line with the right. For large portfolios, implement a compliance calendar with periodic site audits.

READ MORE:

• Conducting General Meeting of Shareholders (GMS) in Indonesia: Legal Procedures and Shareholder Rights
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Dispute Patterns to Watch: Overlaps, Expired Proofs, and Boundary Issues

Expect a spike in disputes where one party relies on post-2026 “old proofs” while the other holds a registered title. Courts and BPN will weigh registered data heavily; old proofs may be considered petunjuk only. Boundary overlaps will also surface as PTSL mapping densifies cadastre data. You’ll want survey-grade coordinates, signed boundary agreements with neighbors, and documented physical possession.

Compliance Playbook for Owners, Developers, and Investors

1. PTSL Acceleration, Evidence Mapping, and Boundary Control

Leverage PTSL to fast-track first registration and reduce costs. Prepare a dossier: old proofs, identity/authority docs, tax receipts, history of possession, witness statements, and clear boundary markers (patok) acknowledged by neighbors. Proactive participation in the data announcement period helps flush out objections early—cheaper than defending a lawsuit later.

2. M&A/Lending Readiness: Data Rooms, Reps & Warranties, and CPs

If you’re selling, buying, or financing land-heavy assets, build an evidence map now. For sellers: complete conversion and re-registration pre-deal to maximize value. For buyers/lenders: require condition precedents (CPs) on conversion, robust reps & warranties, indemnities covering legacy documents, and post-closing covenants to cure any residual land admin issues. After 2 Feb 2026, expect lenders to tighten title conditions—plan accordingly.

Practical Commentary from Kusuma & Partners

We routinely see transactions stall because land is still backed by Girik/Letter C with patchy boundary and usage evidence. Our advice is pragmatic:

• Convert now, not later. After 2 Feb 2026, your old proofs stop being title evidence. You’ll spend more time and money proving what could have been straightforward today.
• Bundle conversion with clean-up. Align boundaries, renew rights, cure overlaps, and document use to inoculate against PP 20/2021 risks.
• Institutionalize audits. Annual title-health checks (evidence, boundaries, usage, payments) are cheaper than litigation.
• For foreign investors/PE: bake conversion and usage proofs into CPs, and price deals accordingly.

Conclusion

This legal reminder on Indonesia land certificates: re-registration, customary rights expiry, and state acquisition of abandoned land is about preserving value and agility. By 2 February 2026, Girik/Letter C and similar proofs lose their evidentiary status; after that, they’re merely petunjuk. Pair timely conversion with disciplined use and maintenance to sidestep abandoned-land pitfalls. The earlier you act, the cheaper and cleaner your outcome.

How We Can Help

Contact us today for a tailored action plan to safeguard your land assets and investments.

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.”

Land is not just a piece of earth in Indonesia, it represents wealth, security, and often cultural identity. For many families, land is an inheritance passed through generations, while for companies and investors, it is the foundation of business expansion and infrastructure development. Yet, despite its importance, land ownership in Indonesia is often clouded with uncertainty. Weak land administration systems, historical claims, overlapping regulations, and the existence of customary rights frequently give rise to disputes. Land dispute litigation in Indonesia is therefore more than a legal technicality; it is a social and economic necessity. Without clear ownership, projects can stall, investments may collapse, and communities may face displacement.

Legal Framework Governing Land Disputes

The 1960 Basic Agrarian Law (UUPA)

The Basic Agrarian Law (Law No. 5/1960) is the cornerstone of Indonesia’s land law. Its vision was to unify the fragmented land regulations inherited from colonial times and integrate them with customary (adat) practices. The UUPA emphasizes state control over land while recognizing various rights such as Hak Milik (ownership), Hak Guna Usaha (right to cultivate), Hak Guna Bangunan (right to build), and Hak Pakai (right to use). Yet, because the law attempts to harmonize modern legal concepts with adat practices, interpretation often becomes challenging. Many disputes stem from the gap between written law and local customary understandings of land rights.

National Land Agency (BPN) and Court Jurisdiction

The National Land Agency (Badan Pertanahan Nasional or BPN) is tasked with managing land registration, issuing certificates, and resolving administrative issues. However, when conflicts arise particularly over ownership, overlapping certificates, or fraudulent transactions, litigation becomes inevitable. District courts hear civil land disputes, while the State Administrative Court (PTUN) handles cases involving unlawful administrative acts, such as the wrongful issuance of certificates. In some cases, when fraud, forgery, or land mafia activities are involved, criminal courts also step in. Thus, land disputes in Indonesia often require a multi-forum approach, depending on the legal issue at hand.

Common Causes of Land Disputes in Indonesia

1. Overlapping Titles and Certificates

Perhaps the most notorious issue is overlapping land certificates. Due to weak coordination between BPN offices, local governments, and outdated mapping systems, multiple certificates can be issued for the same plot of land. These overlaps create legal uncertainty, forcing rightful owners into lengthy litigation. For businesses, this can delay construction projects, derail investments, and expose them to financial risks.

2. Issues of Land Possession and Customary Rights (Hak Ulayat)

Indonesia also recognizes customary land rights (hak ulayat) belonging to indigenous communities. While these rights are constitutionally protected, they often lack formal registration. Investors holding certificates frequently clash with indigenous groups who claim ancestral possession. Courts must then balance formal legal ownership with customary legitimacy, a process that often leads to complex judgments and, sometimes, social tensions on the ground.

3. Boundary Conflicts and Unregistered Land

In many rural areas, land boundaries remain vague, with physical markers such as rivers or trees serving as the only reference. This informality leads to disputes when land is sold, inherited, or developed. Moreover, millions of hectares of land in Indonesia remain unregistered, leaving room for opportunistic claims and fraudulent transactions. Without proper registration, possession rights are easily challenged, making litigation inevitable.

Litigation Pathways for Land Disputes

1. Civil Litigation in District Courts

The primary forum for resolving land disputes is the district court. Claimants can file lawsuits seeking recognition of ownership, cancellation of certificates, or compensation for damages. These cases typically involve presentation of title documents, deeds, and witness testimonies. Civil litigation can be lengthy, often stretching over several years, but it provides a definitive legal judgment that clarifies ownership and possession.

2. Administrative Litigation and PTUN (State Administrative Court)

When the dispute arises from administrative errors such as wrongful issuance or cancellation of certificates the proper forum is PTUN. Administrative judges review whether BPN or other government agencies acted lawfully in granting rights. PTUN litigation is particularly important for businesses facing unlawful revocation of land permits or investors whose certificates were annulled without due process.

3. Criminal Elements in Land Disputes

Some land disputes involve criminal acts, such as forgery of deeds, fraudulent sales, or land grabbing by organized syndicates (often referred to as land mafia). Criminal charges may accompany civil or administrative proceedings. While criminal cases punish offenders, they rarely settle ownership; victims still need to pursue civil claims to restore their rights.

READ MORE:

How to Deal with a Breach of Contract in Indonesia

Legal Remedies Available in Land Dispute Cases

1. Declaratory Judgments and Title Cancellation

Courts can issue declaratory judgments confirming rightful ownership and ordering cancellation of conflicting or fraudulent certificates. Such judgments are vital to ensure clarity in land registries and to restore confidence for future transactions.

2. Compensation and Damages

Where wrongful occupation or fraudulent sale has caused losses, the aggrieved party may claim compensation. For businesses, this may include lost profits, project delays, or reputational damage. Compensation awards, however, depend heavily on evidence of actual financial loss.

3. Mediation and Alternative Dispute Resolution (ADR)

Recognizing the sensitivity of land disputes, Indonesian courts often encourage mediation before proceeding to full trial. Mediation can be faster, less costly, and more culturally acceptable, particularly in disputes involving communities. ADR mechanisms such as arbitration are less common in land disputes, but they are sometimes used in large-scale commercial cases involving joint ventures and foreign investors.

Landmark Cases in Land Dispute Litigation

Indonesia’s Supreme Court has issued several landmark rulings clarifying principles of ownership and possession. For example, cases have affirmed that while land certificates are strong evidence, they can be annulled if proven to be obtained unlawfully. Other cases have highlighted the importance of respecting customary rights and preventing unlawful encroachment by corporate actors. These precedents serve as guidance for lower courts and illustrate how land dispute litigation in Indonesia evolves through judicial interpretation.

The Role of Evidence in Land Disputes

1. Certificates and Notarial Deeds

A land certificate is strong prima facie evidence of ownership, but it is not absolute proof. If it is shown that the certificate was issued unlawfully, courts can annul it. Supporting documents such as notarial deeds of sale, inheritance papers, and government permits are crucial to strengthen claims.

2. Witness Testimonies and Customary Evidence

In disputes over possession or customary rights, oral testimonies from community leaders and neighbors play a significant role. Courts may also accept historical records, maps, and even photographs as supporting evidence. This demonstrates the hybrid nature of Indonesian land law where formal legal documents coexist with traditional proof.

READ MORE:

Buying Property in Indonesia: A Legal Guide for Foreigners

Practical Challenges in Enforcing Land Decisions

Winning a case is only half the battle. Enforcing land judgments in Indonesia is often difficult. Physical repossession can face resistance from occupants, and bureaucratic delays in BPN may hinder the correction of land records. In some cases, even after a court victory, the rightful owner cannot immediately enjoy their rights due to social unrest, political intervention, or administrative bottlenecks. Businesses and individuals therefore need not just legal victories, but also strategic enforcement plans.

Practical Commentary from Kusuma & Partners

We have handled numerous cases of land dispute litigation in Indonesia. Our experience shows that prevention is better than cure: thorough due diligence before land acquisition saves clients years of litigation. When disputes do arise, we combine strong litigation strategies with negotiation and mediation to secure not only favorable judgments but also practical resolutions. We emphasize building community trust, leveraging precedents, and working closely with BPN to ensure that court victories translate into enforceable rights.

Conclusion

Land dispute litigation in Indonesia represents one of the most challenging areas of Indonesian law. It involves legal complexities, cultural considerations, and administrative hurdles. For businesses, unresolved disputes can mean stalled investments; for families, it can mean loss of heritage. With proper legal strategy, strong evidence, and experienced counsel, disputes can be resolved effectively.

How We Can Help

Are you currently facing a land dispute? Protecting your property and investments requires decisive legal action. We stand ready to safeguard your rights, resolve disputes effectively, and provide tailored legal solutions you can rely on. Contact us today for trusted and professional advice.

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.”

Shares classification in Indonesia company is not merely a drafting choice; it is a statutory-anchored mechanism that determines control, economics, governance stability, and investor protections. Under Law No. 40 of 2007 on Limited Liability Companies (UUPT) as amended companies may create one or more classes of shares in their Articles of Association (Anggaran Dasar/AD), provided the rights and obligations of each class are expressly set out. Consequently, robust share-class architecture is essential to: (i) preserve founder control while admitting capital, (ii) tailor investor upside and risk, (iii) prevent decision-making deadlocks, and (iv) ensure regulatory compliance for private and (if applicable) public companies.

Legal Framework and Hierarchy of Sources

The UUPT (notably, Article 53) authorizes a Perseroan Terbatas (PT) to issue one or more share classes as stipulated in the Article of Association. Where multiple classes exist, at least one must constitute common (ordinary) shares with baseline rights. In addition, the company’s General Meeting of Shareholders (RUPS) is the sole organ empowered to approve new classes or amend existing ones via Article of Association amendments, which must be set forth in a notarial deed and submitted for approval/receipt by the Ministry of Law and Human Rights (MOLHR).
Furthermore, if the company is a public company (Tbk), capital actions must also comply with OJK and IDX regulations (e.g., procedures on pre-emptive rights, disclosure, and settlement). Accordingly, it must align: (i) UUPT; (ii) Article of Association; (iii) shareholder agreements; and (iv) sectoral/OJK rules (if applicable).

Core Taxonomy of Share Classes (with Typical Rights)

Although practice allows bespoke combinations, the following archetypes are most common. Each should be defined exhaustively in the Article of Association rights, conditions, procedures, and any financial formulas.

1. Common (Ordinary) Shares

• Voting: Full voting rights at RUPS (unless law/ Article of Association restricts in specific circumstances).
• Economics: Entitled to dividends pro rata and residual assets upon liquidation, subject to solvency and retained-earnings tests.
• Transfer: In principle transferable, yet the Article of Association may impose approval rights, rights of first refusal (ROFR), lock-ups, and tag/drag-along mechanics.
• Pre-emptive Rights: Typically enjoy pre-emptive rights (non-public PT per Article of Association; public PT per OJK rules).

2. Preferred Shares (Non-redeemable/Redeemable/Convertible)

• Voting: May be limited or non-voting; if so, the Article of Association must articulate precisely which matters (e.g., mergers, liquidation, related-party transactions) still trigger class consent.
• Dividend Priority: Cumulative or non-cumulative dividend preferences; formulas (fixed %, index-linked, or board-discretion bands) should be explicit.
• Liquidation Preference: Multiple or 1x preference, participating or non-participating, with clear distribution hierarchy.
• Redemption: Terms (timing, price, funding source) must respect capital-maintenance rules; consider solvency protections and MOLHR filing implications.
• Conversion: Automatic/optional triggers (e.g., IPO, qualified financing), ratios, anti-dilution (full-ratchet/weighted-average), and protective provisions (no impairment without class consent).

3. Non-Voting Shares

• Voting: No general voting rights, but critically class veto may still apply for fundamental changes affecting that class.
• Economics: Customizable (e.g., higher fixed dividend).

4. Shares with Nomination/Appointment Rights

• Governance: Right to nominate or appoint 1 Director/Commissioner (or more) and/or committee seats; tie this to ownership thresholds and qualifications (fit and proper).

5. Series Shares (A/B/C…)

• Differentiation: Same “type” (e.g., preferred) split into series with staged economics (Series A vs B) and consent mechanics.

6. Restricted/Founder Shares

• Transfer Limits: Lock-ups, performance/vesting, buy-back rights, forfeiture on bad-leaver events, and pricing formulae (fair market value vs nominal).

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Implementing New or Amended Share Classes: Procedure

Given that errors in process could vitiate the structure, the steps must be carefully complied with:

• Board Proposal → Draft term sheet + black-line Articles of Association changes (rights, definitions, schedules, and formulas).
• Shareholder Approval (RUPS) → Comply with quorum and voting thresholds; if multiple classes already exist, obtain separate class approvals where rights are affected.
• Notarial Deed → Record Articles of Association amendments in a notarial deed.
• MOLHR Submission → File within statutory deadlines; address any clarifications; secure approval/receipt.
• Share Register & Certificates → Update the List of Shareholders, issue certificates or electronic records, and annotate legends/restrictions.
• Ancillary Agreements → Align shareholders’ agreement, investment agreement, and management policies with the Articles of Association to avoid conflicts.
• Regulatory/OJK (if Tbk) → Disclosures, circulars, HMETD mechanics, and KSEI settlement where relevant.

Foreign Investment Interface (Positive Investment List)

Since Presidential Regulation No. 10/2021, Indonesia applies a Positive Investment List regime. Sectoral caps and conditions may require Indonesian control. Therefore, share-class engineering often couples:

• Indonesian holders with voting/control classes; and
• Foreign holders with economic/non-voting or preferred classes.
  Importantly, avoid nominee arrangements that contravene law. Instead, use transparent, Articles of Association anchored preferences (dividend/liquidation). Additionally, in conditional sectors (licenses, local content, or strategic industries), ensure that the share-class design does not undermine compliance undertakings embedded in permits.

Drafting Architecture: What Must Be in the Articles of Association

To pre-empt disputes and MOLHR queries, codify at least the following items verbatim in the Articles of Association (and mirror in transaction documents):

• Definitions (e.g., “Liquidation Preference,” “Change of Control,” “Qualified IPO,” “Qualified Financing”).
• Voting Matrix (ordinary/special matters; class veto; supermajority thresholds; written resolutions; quorum).
• Dividend Mechanics (priority, cumulative status, compounding, arrears cure).
• Conversion/Redemption (formulas, timelines, cash source, procedures, financial covenants).
• Anti-Dilution (method, exceptions for ESOP, rounds below threshold, MFN).
• Transfer Regime (ROFR, co-sale/tag, drag-along, lock-ups, encumbrances).
• Board/Commissioner Nomination Rights (eligibility, removal, independence, committees).
• Information & Audit Rights (financial package cadence, inspection windows, confidentiality).
• Deadlock Resolution (escalation, independent commissioner vote, put/call, mediation/arbitration).
• Exit Waterfall (priority, caps, participation, distribution order).

Governance Safeguards and Minority Protection

Because share classes can entrench control, balance them with predictable safeguards to enhance enforceability and investor comfort:

• Class Consent for adverse changes.
• Related-Party Transaction approval rules (board/commissioners/independent approval).
• Reserved Matters list (M&A, dissolution, asset disposals, indebtedness caps, ESOP pools).
• Information Rights with default remedies (e.g., temporary dividend block if reporting in arrears).
• ESG/Compliance Covenants for reputational risk.
• Arbitration Clause (seat, language, institution) for cross-border investors.

Economics: Dividend, Preference, and Waterfalls

To avoid litigation, economics must be formula-driven and mechanical:

• Dividend Priority: State rate, base, accrual, compounding, and payment windows; clarify if board discretion applies.
• Liquidation Preference: Define liquidation events (winding-up, sale, deemed liquidation), multiple (1x/2x), participation (participating vs non), and caps.
• Conversion: Ratio, price-based and broad-based weighted-average anti-dilution; triggers (qualified financing size threshold; IPO market cap).
• Redemption: Year, price (par/premium), source (distributable profits), and deferment if solvency at risk.
• Exit Distribution: Order of payments and cap behaviour under multiple series.

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Risk, Compliance, and Pitfalls to Avoid

• Ambiguous Articles of Association Language → invites MOLHR queries and shareholder disputes. Draft with definitions, examples, and schedules.
• Ignoring Sectoral Caps → can jeopardize licensing/regulatory standing. Validate investment caps before issuance.
• Under-estimating Solvency → redemption obligations can breach capital-maintenance rules; use deferment and solvency tests.
• Document Misalignment → Articles of Association, SHA, and investment agreements must be consistent; include conflict-override clauses.
• Tax Oversights → dividends, redemption gains, and cross-border payments may attract withholding tax and treaty analysis; loop in tax counsel.
• Accounting Treatment → certain preferences may be treated as equity vs liability; align with auditors to avoid covenant breaches.

Public vs Private Company Considerations

• Private PT: Greater contractual freedom in Articles of Association and SHA; nonetheless, maintain clarity on pre-emptive rights and transfer controls.
• Public Tbk: Must follow OJK rules on rights issues, disclosures, related-party transactions, and fairness opinions; share settlement via KSEI; stricter minority protections and timelines.
  Accordingly, any migration path from PT to Tbk should include a re-papering workstream to harmonize preferences with public-market rules.

Practical Commentary from Kusuma & Partners

From our point of view, the most resilient structures are those whose Articles of Association reads like a term sheet with definitions, eliminating grey areas that typically trigger litigation or regulatory queries. Moreover, aligning economics with solvency and sectoral compliance at the drafting stage invariably saves time and cost at exit or IPO. Finally, in multi-class settings, we strongly recommend class-specific consent maps and worked examples in schedules these two features alone resolve most interpretive disagreements before they surface.

Conclusion

In essence, shares classification in Indonesia company is a strategic legal tool that secures investor confidence, preserves founder control, ensures compliance with investment rules, and provides flexibility for capital raising or exits. Properly drafted share structures safeguard governance and growth, while unclear classifications risk disputes and regulatory challenges.

How We Can Help

We help businesses structure and implement effective share classifications by drafting clear Articles of Association, advising on foreign investment limits, and aligning shareholder agreements with the law. Our tailored approach ensures compliance, protects control, and supports sustainable business growth.

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.”

Construction Companies in Indonesia are the backbone of the country’s ambitious development agenda. With the government targeting massive infrastructure expansion under the “Golden Indonesia 2045 Vision,” the industry is becoming one of the most attractive sectors for both local entrepreneurs and foreign investors. From skyscrapers in Jakarta to renewable energy projects in Sulawesi, the opportunities are diverse and growing. But while the rewards are enticing, navigating the legal framework, cultural dynamics, and regulatory landscape requires careful planning. This article will help you understand the sector from both a legal and business perspective, so you can make informed and confident decisions.

Why Construction Companies in Indonesia Are Booming

Indonesia is not just Southeast Asia’s largest economy; it is also one of the fastest growing. The construction industry contributes significantly to GDP, often exceeding 10% annually. The reasons are clear. Rapid urbanization, coupled with a young and growing population, fuels demand for housing, shopping centers, industrial complexes, and transport infrastructure. The government itself invests billions of dollars annually in highways, airports, and seaports to connect its 17,000 islands.

Foreign investors are drawn to this momentum because Construction Companies in Indonesia are not only serving domestic demand but are also part of the country’s regional integration with ASEAN. For businesses, this means entering an industry where growth is almost guaranteed—but also one where competition and compliance are critical to success.

Legal Framework for Construction Businesses in Indonesia

1. Key Regulations Governing the Sector

Indonesia has built a strong legal foundation to ensure that construction services meet safety, quality, and accountability standards. The cornerstone regulation is Law No. 2 of 2017 on Construction Services, which was later refined by the Omnibus Law No. 6 of 2023. These laws outline obligations of contractors, safety requirements, environmental standards, and dispute resolution mechanisms. Complementing them is Government Regulation No. 14 of 2021, which provides detailed implementation guidance.

For businesses, these rules mean that operating in Indonesia requires more than just financial capital—it requires legal compliance and local expertise. Companies that fail to adapt to these regulations risk fines, delays, or even termination of projects.

2. Licensing and Permits Required

Construction Companies in Indonesia cannot legally operate without the right licenses. The most important include:

• Business Identification Number (NIB) obtained through the OSS RBA system.
• Sertifikat Badan Usaha (SBU) issued by LPJK (Lembaga Pengembangan Jasa Konstruksi).
• Sectoral permits for foreign companies engaging in high-value or specialized projects.

These documents are not just bureaucratic requirements; they are the foundation of your legal standing. Without them, a company cannot sign contracts, bid on tenders, or legally employ workers for construction projects.

Types of Construction Companies in Indonesia

1. Local Construction Companies

Local companies dominate the market, particularly in small and medium-scale projects. They benefit from fewer restrictions and often have a deeper understanding of local customs, regulations, and labor dynamics. However, their access to technology and international financing may be limited, which is where partnerships with foreign companies can create strong synergies.

2. Foreign-Owned (PT PMA) Construction Companies

Foreign investors are welcome, but their entry is regulated. PT PMA (Penanaman Modal Asing) allows international players to participate in Indonesia’s construction industry. These companies often bring advanced technologies, project management skills, and access to international capital. Yet, the trade-off is higher capital requirements, strict licensing obligations, and restrictions in certain subsectors. For instance, while consultancy services are generally open, specific high-value construction activities may require joint ventures with local companies.

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Setting Up a Construction Company in Indonesia

1. Business Entity Options

Investors can choose between several business structures:

• PT (Perseroan Terbatas) for local investors.
• PT PMA for foreign investors.
• Representative office for foreign companies focusing on consultancy rather than execution.

Each option carries different legal consequences, tax obligations, and ownership rights.

2. Capital Requirements

The capital threshold varies depending on the type of company:

• Local PT has flexible requirements, often depending on the project scale.
• PT PMA must present a minimum investment plan of IDR 10 billion, with IDR 2.5 billion as paid-up capital.

These requirements reflect Indonesia’s commitment to attracting serious, long-term investors rather than speculative players.

3. Licensing via OSS RBA System

The introduction of the OSS RBA platform has transformed the licensing process. Previously fragmented and slow, licensing is now centralized and digital. Companies can apply for NIB, sectoral permits, and other compliance documents online. This reform shows Indonesia’s seriousness in improving ease of doing business—something foreign investors value highly.

Challenges Faced by Construction Companies in Indonesia

1. Regulatory Compliance

Regulations in Indonesia evolve quickly. For example, labor laws, tax regulations, and environmental regulations are frequently updated. Construction companies that fail to keep pace risk project suspensions or penalties. Having a legal partner on the ground ensures compliance and risk management.

2. Land Acquisition and Environmental Issues

Land disputes are a common bottleneck in Indonesian projects. Overlapping land certificates, community resistance, and environmental clearance (AMDAL) can delay projects for months, if not years. For construction companies, this means due diligence in land acquisition is as critical as project financing.

3. Tax and Employment Matters

Taxes on construction services include corporate income tax, VAT, and withholding tax on contractor services. In addition, companies must comply with Manpower Law No. 13/2003 and its amendments, ensuring proper worker contracts, safety, and benefits. Failure to comply may lead to costly disputes with labor unions and regulators.

Opportunities in Indonesia’s Construction Sector

1. Infrastructure and Government Projects

Indonesia plans to invest heavily in toll roads, airports, ports, and railways. Government-backed projects are not only lucrative but also less vulnerable to payment risks. Construction Companies in Indonesia with the right licenses can participate in tenders worth billions.

2. Renewable Energy and Green Construction

Sustainability is no longer optional. With Indonesia’s commitments under the Paris Agreement, renewable energy projects like solar farms and green buildings are gaining traction. Construction companies with expertise in eco-friendly design have a clear competitive edge.

3. Public-Private Partnerships (PPP)

The PPP scheme enables private companies, including foreign players, to collaborate with the government in financing and executing large-scale projects. This model reduces investment risk and offers access to projects that were traditionally exclusive to state-owned enterprises.

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Foreign Investment in Indonesian Construction

1. Restrictions and Possibilities

The Positive Investment List (PR 10/2021) liberalized many sectors, including construction. While some specialized activities remain restricted to locals, foreign companies can still play a significant role in high-value and complex projects where local expertise is insufficient.

2. Joint Ventures with Local Partners

Joint ventures remain one of the most effective strategies for foreign investors. They allow access to local licenses, land, and relationships, while the foreign partner contributes capital and technology. It’s a win-win if structured correctly—but only with the right contracts to avoid disputes.

Dispute Resolution in Construction Sector

1. Arbitration under BANI

Most contracts include an arbitration clause under BANI (Badan Arbitrase Nasional Indonesia). Arbitration is faster, more confidential, and better suited for technical disputes than local litigation.

2. Litigation in Indonesian Courts

Court litigation remains available but is generally slower and more formalistic. It is often chosen when enforcement requires state power, such as seizing assets or annulling fraudulent agreements.

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Practical Commentary from Kusuma & Partners

At Kusuma & Partners, we have assisted numerous local and international clients in setting up and running construction companies in Indonesia. In our experience, the most successful investors are those who invest time in due diligence, carefully draft contracts, and establish clear risk allocation. For instance, including liquidated damages clauses, performance bonds, and arbitration agreements can prevent disputes from escalating.

We also advise clients to engage with communities early in land acquisition processes, as social acceptance is as important as regulatory approval. Ultimately, legal foresight saves costs, prevents disputes, and ensures smoother project execution.

Conclusion

Construction Companies in Indonesia are at the center of one of the world’s most promising markets. From infrastructure megaprojects to green energy developments, the opportunities are vast. Yet, success depends on understanding the legal environment, choosing the right business structure, and mitigating risks.

How We Can Help

At Kusuma & Partners Law Firm, we are committed to guiding you through Indonesia’s complex construction landscape. Whether you are setting up a PT PMA, negotiating a joint venture, or resolving a dispute, we deliver solutions that protect your business and maximize your investment.

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.”

Energy is the heartbeat of any nation, and Indonesia is no exception. Despite a growing global shift toward renewable energy, oil and gas remain the backbone of Indonesia’s economic and industrial development. They fuel transportation, power industries, and secure state revenues that finance infrastructure, healthcare, and education.

For businesses and investors, the oil and gas sector represents a double-edged sword: the opportunities are massive, but so are the risks. Investors often ask: Is Indonesia still worth the bet? The answer lies in how the government regulates cooperation. With the issuance of MoEMR Regulation No. 14 of 2025 (Reg. 14/2025), Indonesia has signaled a bold step forward. This regulation introduces new schemes that are not only investor-friendly but also designed to ensure long-term national energy security.

Transitioning into this new regulatory era, it becomes clear: if businesses want to unlock Indonesia’s oil and gas potential, they must first understand the legal frameworks shaping cooperation schemes today.

The Issuance of MoEMR Regulation No. 14/2025

1. Background and National Energy Priorities

Indonesia’s dependence on oil and gas has been both a blessing and a challenge. While revenues from oil and gas production have supported the state for decades, declining reserves, rising operational costs, and global market volatility have pushed the government to rethink its strategy.

MoEMR Reg. 14/2025 was born out of this necessity. It seeks to rejuvenate investor confidence, streamline cooperation processes, and align Indonesia’s energy sector with global standards on transparency, efficiency, and environmental sustainability.

2. What’s New Compared to Previous Frameworks?

Unlike earlier regulations that often leaned toward rigidity, Reg. 14/2025 brings flexibility. Investors can now negotiate cooperation models tailored to project realities—whether that’s a gross split PSC, cost recovery arrangement, joint operation, or even enhanced recovery initiatives.

Another key innovation is the explicit support for unconventional oil and gas resources such as shale gas and coal bed methane—areas previously overlooked but critical to Indonesia’s long-term strategy. By adopting these reforms, Indonesia positions itself as a competitive destination amid fierce global competition for energy investment.

Cooperation Schemes under MoEMR Reg. 14/2025

1. Production Sharing Contracts (PSC): Gross Split vs. Cost Recovery

The PSC has always been the foundation of Indonesia’s oil and gas industry. Under Reg. 14/2025, investors can choose:

• Gross Split PSCs: Simple, predictable, and upfront sharing of production without cost recovery claims. Attractive for investors seeking transparency, but the risk burden is heavier.
• Cost Recovery PSCs: Allowing contractors to recover their expenses before profit-sharing, making them suitable for high-risk projects. However, these models often require meticulous audits, leading to potential disputes.

This flexibility is a breath of fresh air for companies that previously felt locked into rigid models. The choice now lies in aligning contract structures with corporate strategy and risk appetite.

2. Joint Operation Models: Partnering with SOEs and Private Players

Not every investor wants to establish a wholly new entity in Indonesia. Recognizing this, Reg. 14/2025 makes joint operation models more attractive. Through this approach, foreign investors can work alongside state-owned enterprises (SOEs) or private Indonesian companies.

This is more than a legal formality—it is a strategic gateway. By partnering locally, foreign companies gain invaluable insights into local business culture, regulatory expectations, and community relations.

3. Enhanced Oil Recovery (EOR) Partnerships for Mature Fields

Indonesia’s older oil fields are far from exhausted, but tapping into remaining reserves requires advanced technology. EOR techniques such as CO₂ injection and chemical flooding are vital. Reg. 14/2025 actively promotes EOR partnerships, recognizing that without technological innovation, Indonesia’s production levels could stagnate.

For investors with advanced EOR expertise, this is a golden window of opportunity to enter Indonesia’s market.

4. Special Cooperation for Unconventional Oil and Gas

Global energy markets are increasingly looking toward unconventional resources. Indonesia, with vast reserves of shale gas and coal bed methane, is opening doors through Reg. 14/2025. While the technical challenges are higher, the long-term rewards are equally significant. Investors who dare to pioneer in this space will find themselves in a position of competitive advantage.

READ MORE:

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Legal Framework and Governance Structure

1. Laws, Regulations, and Government Oversight

The oil and gas industry functions within a comprehensive legal framework. Its primary foundation is Law No. 22/2001 on Oil and Gas, as amended, and further detailed through ministerial regulations, including Regulation No. 14/2025. This multi-tiered structure balances investor flexibility with the protection of national interests.

2. The Central Role of SKK Migas

SKK Migas, Indonesia’s upstream oil and gas regulatory body, remains at the center of governance. From contract approvals to monitoring performance, SKK Migas ensures projects remain aligned with regulatory and national goals. For investors, maintaining a cooperative relationship with SKK Migas is not just advisable—it is essential.

Opportunities for Foreign and Domestic Investors

1. Competitive Access to Oil and Gas Blocks

Reg. 14/2025 introduces greater transparency in licensing and bidding processes. Foreign investors now find it easier to participate in block tenders, increasing competition but also raising standards.

2. Fiscal Incentives and Tax Reliefs

Indonesia sweetens the deal with fiscal perks:

• Tax holidays for pioneering projects.
• Exemptions on import duties for exploration equipment.
• Investment credits for deep-water and frontier exploration.

These incentives show the government’s seriousness in attracting global capital.

3. Local Content Rules and Compliance Obligations

Yet, with opportunity comes responsibility. Investors must comply with local content rules (TKDN). This ensures that Indonesian suppliers, engineers, and communities benefit directly from projects. While compliance may raise initial costs, it strengthens social license to operate—an invaluable asset in Indonesia’s regulatory environment.

Challenges and Legal Risks in Implementation

1. Navigating Regulatory Uncertainty

Frequent regulatory adjustments are a hallmark of emerging markets. Investors in Indonesia must anticipate potential shifts in fiscal terms or compliance obligations. Without well-drafted stabilization clauses, profitability may suffer.

2. Meeting Environmental and Social Expectations

The world is watching how companies manage their environmental and social footprints. From AMDAL requirements to ESG standards, failure to comply could trigger community protests, legal penalties, and reputational damage.

3. Managing Contractual and Dispute Resolution Risks

Even with the best intentions, disputes may arise—often over cost recovery audits, tax obligations, or production targets. Reg. 14/2025 recognizes arbitration (both domestic and international) as a valid resolution method, but success depends on drafting contracts that anticipate and address potential conflicts.

Practical Commentary from Kusuma & Partners

Key Steps to Structuring Cooperation Agreements

Our law firm frequently advises clients on oil and gas cooperation structures. We recommend businesses:

• Clearly define fiscal terms to avoid future disputes.
• Build flexibility into contracts without sacrificing protections.
• Ensure compliance obligations are properly addressed from day one.

Risk Management and Investor Safeguards

We strongly advise incorporating:

• Stabilization clauses to mitigate regulatory risks.
• Arbitration clauses to ensure effective dispute resolution.
• Due diligence on partners to assess reputation, financial stability, and compliance history.

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Case Studies and Global Insights

Lessons Learned from Indonesia’s PSC Journey

Indonesia’s PSCs have historically faced cost recovery disputes and bureaucratic delays. Learning from these lessons, Reg. 14/2025 simplifies processes but does not eliminate the need for robust legal protections.

What Investors Can Learn from Global Models

Other nations such as Malaysia with its PETRONAS model and Qatar with its LNG partnerships demonstrate how clarity and investor-friendly policies drive long-term success. Indonesia is moving in that direction, but investors must adapt strategies to local realities.

Looking Ahead: The Future of Oil and Gas in Indonesia

Transition Toward Renewable Energy and Its Challenges

Indonesia is committed to renewable energy, but hydrocarbons will remain indispensable for at least the next two decades. Balancing renewable investment while maximizing oil and gas output is both a challenge and an opportunity.

How Regulation 14/2025 Balances Growth and Sustainability

Reg. 14/2025 is Indonesia’s balancing act: it invites investors with incentives while holding them accountable for sustainability. For businesses, this means opportunities exist—but only for those prepared to operate responsibly.

Conclusion

Indonesia’s oil and gas sector is evolving rapidly. While Reg. 14/2025 makes the playing field more attractive, success depends on understanding the fine print. Legal risks remain, but with the right advice, they can be transformed into manageable opportunities.

How We Can Help

We help businesses navigate Indonesia’s oil and gas sector under MoEMR Reg. 14/2025. From structuring PSCs to joint operations and regulatory compliance, we deliver strategies that protect and maximize your investments.

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.”