“Foreign investors do not always fail because their businesses are weak, but because they do not know the applicable rules until those rules catch up with them.”
Foreign investment in Indonesia offers real opportunities: a large domestic market, consistent middle-class growth, and a licensing system that has been substantially simplified in recent years. Behind all this, however, lie real legal traps. They take the form of regulatory details easily overlooked by investors who focus on business plans without first examining the legal landscape, rather than dramatic corruption or uncertainty.
These traps are not always visible from the outside. Some only emerge after a company is established and begins operating. Others are felt only during corporate changes or due diligence by the next investor. JHY Legal outlines the legal traps most commonly encountered to help you avoid them before it is too late, rather than to cause alarm.
The First Trap: Misreading the DPI
DPI stands for Daftar Positif Investasi, the Positive Investment List: the official list establishing which business sectors are open to foreign ownership and the applicable percentage limits. Many investors check the DPI only in broad terms: “this business sector is open to foreigners.” What is often overlooked, however, is the detail of the conditions attached to that opening.
A KBLI code may allow 100% foreign ownership on condition that the company is a large business, partners with a local cooperative, or operates only in a particular economic zone. If these conditions are not read carefully from the start, investors may find that the ownership structure they have already designed does not meet the applicable requirements.
What Should You Do?
Do not stop reading the DPI at the permitted foreign ownership percentage. Read all notes and conditions accompanying every KBLI code you plan to use. If more than one code is relevant, check each separately because the requirements may differ.
The Second Trap: A KBLI Code That Does Not Reflect Actual Business Activities
The OSS (Online Single Submission) system uses KBLI codes as the basis for issuing permits. A KBLI code determines the types of business activity permitted, the applicable risk level, and any additional permits required. A common problem is that investors select a code that sounds sufficiently relevant without verifying whether it actually covers all planned activities.
As a result, the company carries out activities not covered by its registered KBLI codes. This is more than an administrative issue: it can give supervisory authorities grounds to declare that part of the company’s operations lacks a valid licensing basis. The risk increases when a company grows and develops new business lines without updating its registered KBLI codes.
The Third Trap: Ignoring Sectoral Permits After the NIB Is Issued
The NIB (Business Identification Number) is often treated as “licensing completed.” Yet it is merely an entry point rather than a complete operational permit. For many medium or high-risk KBLI codes, a Standard Certificate or Permit must be obtained before operations can lawfully begin.
Furthermore, some sectoral permits are issued outside the OSS system. OJK permits for the financial sector, BPOM product registration for food and pharmaceuticals, and Ministry of Health permits for healthcare services all have their own requirements and processes that are not automatically completed when the NIB is issued.
Investors who do not map all these licensing layers from the outset are often surprised to discover that they still cannot operate legally despite having an NIB.
“An NIB does not signal that you can already operate. It signals that you can start arranging the next permits.”
The Fourth Trap: A Weak Shareholders’ Agreement
When a PT PMA involves more than one shareholder, such as a combination of foreign investors and local partners, the shareholders’ agreement determines how decisions are made, disputes are resolved, and what happens if one party wishes to exit.
Several traps commonly arise here:
- The agreement is too brief and does not cover possible scenarios such as decision-making deadlock, unwanted ownership changes, or the forced exit of a party.
- The dispute resolution clause does not include an international arbitration mechanism, leaving foreign investors reliant on local courts in the event of a dispute.
- The document is prepared in only one language without a valid Indonesian-language version, potentially causing problems when it needs to be validated before an Indonesian notary or government authority.
- There is no clear mechanism for handling a change in the DPI that renders the existing ownership composition inconsistent with applicable requirements.
The Fifth Trap: Immigration Planning That Comes Too Late
Many investors only start considering KITAS for expatriates after the PT PMA has been established and operations have been planned. Immigration processes take time, particularly the Work KITAS route, which requires RPTKA approval from the Ministry of Manpower before a work visa can be issued.
If expatriates’ arrival dates have already been set but the RPTKA process has not begun, companies often face two equally unsatisfactory options: postpone the expatriates’ arrival or ask them to enter using a visa unsuited to its purpose, risking their immigration status and the company’s compliance reputation.
JHY Legal consistently emphasizes to clients that immigration planning should begin alongside PT PMA establishment planning, rather than afterwards.
The Sixth Trap: Nominee Arrangements Not Recognized by Law
This trap has the most serious consequences. A nominee arrangement, in which shares are formally held by an Indonesian party on behalf of a foreign investor to circumvent DPI restrictions, is a practice that Indonesian law neither recognizes nor protects.
The practice is legally vulnerable and, in certain circumstances, may qualify as a breach of investment provisions with significant consequences. Foreign investors using this structure often find themselves in a very weak position when their relationship with the nominee breaks down because, legally, the rightful shareholder is the person named in the deed.
The Seventh Trap: Ignoring Periodic Reporting Obligations
Once a company is established and operating, reporting obligations must be fulfilled periodically. PT PMA companies must report investment realization to BKPM. Tax reporting obligations also apply, and certain sectors require reporting to the relevant sectoral authority.
These obligations are often overlooked, particularly by early-stage companies without a structured compliance team. Accumulated reporting delays can create significant obstacles when a company applies for corporate changes or new permits in the future.
JHY Legal’s Experience Supporting Foreign Investors
JHY Legal is a legal advisory firm focused on immigration, corporate actions, and regulatory licensing in Indonesia, founded by practitioners with litigation and corporate backgrounds. In supporting foreign investors, we help with PT PMA establishment and identify and mitigate the legal traps discussed in this article from the planning stage. This includes DPI verification and accurate KBLI mapping, preparation of a complete licensing map including sectoral permits, coordinated immigration planning for expatriates, and review of shareholders’ agreements to ensure adequate protection for all parties involved.
Avoiding Traps Begins with Awareness
The seven traps discussed above are not all technically complicated. Most can be avoided through one simple measure: knowing they exist before proceeding further. Investors who understand the legal landscape before committing are in a much stronger position to avoid problems and to move faster and more efficiently when their investment plans begin to be executed.
The most concrete step you can take now is to check whether your existing investment plan has been verified against these seven risk points. Any point that has not been checked is the one most in need of further attention. For a more thorough and structured review, JHY Legal is ready to assist from the planning stage until your investment is ready to operate fully.