How to use Nominee Indonesian Shareholders Safely
Nominee shareholders are people or companies that register as company shareholders on someone else's behalf. This type of ownership structure is not legally recognized in Indonesia; however, it does provide certain advantages that may make it worth the potential risk for some foreign investors.
There are two key reasons why an investor may consider using nominee structure in Indonesia:
1) Restrictions on overseas share ownership in Indonesia
The total permitted foreign ownership of Indonesian shares depends on a company's business classification (“KBLI”). This could range from 100 percent open, to completely closed to foreign ownership.
The Negative Investment List regulates the foreign ownership in companies depending on KBLI. In the event that a business is closed (either partially or completely) to foreign ownership but the investor would still like to maintain 100.0% control, the ideal solution is to start a locally held company using nominee shareholders.
2) Minimum requirements for capital
The second key reason why many investors choose to use nominee shareholders relates to the minimum paid up capital requirement for foreign held businesses.
To set up a foreign owned entity (PT. PMA) in Indonesia investors must invest a minimum of IDR 2.5bn (appx USD $170K) as paid up capital. On the other hand, a mid-sized local entity requires a paid-up capital commitment of only IDR 500mm (appx USD $32K). For many businesses, particularly those which do not have fixed assets, the paid-up capital requirement for the foreign owned entity is onerous, and therefore investors often choose to set up a locally held structure to begin with which can then be converted into a foreign owned entity in the future if and when there is a business case to do so.
Investors must practice caution in selecting nominees for their businesses in Indonesia. Ideally the investor choosing this structure will work with nominees that they have a very high degree of trust with, perhaps a member of the family or someone with whom they have a close personal relationship. It is important to remember that in the eyes of the law, the nominee shareholders are the rightful owners of the business, and if they choose to act against the interest of real owner there is limited legal recourse for the beneficial owner.
While working with nominees involves a degree of risk, there are steps investors can take to mitigate these risks to an acceptable level. If investors do not have existing nominee candidates that they trust, it is advisable to engage a professional corporate services company like ours which provide nominee director, commissioner, and shareholder services. Prior to engaging a company for nominee services, investors are advised to meet with the company to make sure that they are a professional company that has a track record of operating with integrity.
Regardless of whether an investor chooses to work with nominee service provider, if an investor is engaging nominees, legal documents will need to be prepared to protect the investment of the investor and create a smooth mechanism for the potential transfer of shares at a later date. Note that while there are structures in place which can reasonably protect the initial principal investment of the real owner, it challenging to protect any appreciation in the underlying assets.
Another major consideration for investors when working with nominees is putting in place a structure to efficiently (from a tax perspective) distribute profits to the real owners. There are methods of transferring funds from a nominee held company to the investor in a tax efficient manner, but this needs to be discussed with an advisor as the methodology can vary significantly depending on the nature of the business.
How We Can Help
If an investor seeks to establish a nominee held entity in Indonesia, Permitindo can assist in every step of the process, from the planning stage, to the actual company formation, to providing nominees, and finally to putting in place an efficient and legal methodology to distributing as much income as possible from the nominee held company to the ultimate owners.