Foreign investors entering Indonesia can establish a PT PMA with entirely foreign ownership where the relevant business activity permits it. Where foreign ownership is restricted, Indonesian shareholding may be required.
Even where 100% foreign ownership is permitted, a joint venture may still make commercial sense if the Indonesian partner contributes something that justifies sharing ownership and control.
Can the Business Be 100% Foreign Owned?
Indonesia’s investment rules determine whether a business activity is open to foreign investment and whether any foreign ownership restrictions apply.
Where the relevant business activity permits 100% foreign ownership, investors can generally establish a wholly foreign-owned PT PMA without an Indonesian equity partner.
Where foreign ownership is restricted below 100%, an Indonesian shareholder may be required for the company to conduct that business activity. The permitted ownership level should be established against the company’s KBLI business classification and any sector-specific licensing requirements before the ownership structure is agreed.
Contact MAP Resources Indonesia at info@mapresourcesindonesia.com to determine the ownership structure available for your Indonesian business activities.
Foreign investors should not use nominee shareholders to circumvent an applicable foreign ownership restriction. A nominee arrangement can leave the foreign investor without enforceable ownership rights over shares legally registered in another person’s name.
When Does a Local Partner Add Commercial Value?
A joint venture is not limited to sectors where Indonesian ownership is legally required. A foreign investor may choose a JV even when 100% foreign ownership is permitted.
The commercial case depends on whether the Indonesian partner contributes an asset, capability, or market access that the foreign investor cannot efficiently obtain through a commercial contract.
How Does a Joint Venture Affect Control?
Equity ownership alone does not determine how a JV operates. The articles of association and shareholders’ agreement determine which decisions can be made by management or the controlling shareholder and which require approval from the other shareholder.
Reserved matters can cover the issuance of new shares, changes to business activities, significant borrowing, appointments to management, major transactions, and disposals of important assets.
A foreign investor can consequently hold a majority of the shares while still requiring its Indonesian partner’s approval for specified decisions. The significance of a minority shareholding depends on the governance rights attached to it, not simply the percentage held.
The JV documentation should also establish how shareholder deadlock will be resolved.
How Do the Capital Requirements Affect the Choice?
A PT PMA is subject to Indonesia’s foreign-investment capital requirements. Under the current investment framework, a PT PMA generally requires total investment of more than IDR 10 billion, excluding land and buildings, subject to the applicable calculation rules and exceptions. The minimum issued and paid-up capital is generally IDR 2.5 billion.
In a JV, the shareholders can divide the required equity funding according to their ownership and financing arrangements. If a foreign investor owns 70% of a JV and the parties fund the company in proportion to their shareholdings, the foreign investor would contribute 70% of the equity while the Indonesian shareholder would contribute 30%.
A wholly foreign-owned PT PMA leaves the foreign shareholders responsible for the equity funding but also preserves the entire economic interest in the company for those foreign shareholders.
How Does the Structure Affect Profit Distribution?
Whether a PT PMA is wholly foreign owned or operated as a JV, dividends can only be distributed in accordance with Indonesian company law and the company’s available profits.
In a wholly foreign-owned PT PMA, the distributable profits remain attributable to the foreign shareholders. In a JV, the economic return is divided between the foreign and Indonesian shareholders according to their respective rights.
Dividends paid by an Indonesian company to a non-resident shareholder are generally subject to 20% withholding tax under Indonesia’s domestic rules. An applicable tax treaty may reduce the rate where the foreign shareholder satisfies the requirements for treaty relief.
The existence of an Indonesian JV partner does not itself reduce the withholding tax imposed on dividends paid to the foreign shareholder.
What Happens When the Company Needs More Capital?
In a wholly foreign-owned PT PMA, the foreign shareholders can determine how additional shareholder funding will be provided, subject to the applicable Indonesian corporate, investment and tax requirements.
Additional equity can be more complicated in a JV. If the company needs new capital and one shareholder does not participate, the consequences depend on the shareholders’ agreement and corporate approvals. The parties may need to determine whether the other shareholder can provide the additional equity and whether the non-participating shareholder’s ownership will be diluted.
This makes the treatment of future capital contributions an important part of the JV terms agreed at incorporation.
How Does the Ownership Structure Affect Exit?
A foreign investor exiting a wholly foreign-owned PT PMA can sell its shares subject to Indonesian share-transfer, licensing and sector requirements.
A JV adds another shareholder whose rights can affect the transaction. The shareholders’ agreement may contain rights of first refusal, tag-along rights, drag-along rights, transfer restrictions, or an agreed valuation mechanism.
These provisions become especially important where the business operates under sector-specific licenses or foreign ownership restrictions that affect who can acquire the shares.
When Is a Wholly Foreign-Owned PT PMA the Better Structure?
A wholly foreign-owned PT PMA is generally the more direct structure where 100% foreign ownership is permitted and there is no commercial reason to give an Indonesian partner permanent equity in the business.
It allows the foreign shareholders to retain the economic interest in the company and removes the need to negotiate shareholder-level decisions over additional funding, profit allocation, and exit with a local partner.
The company will still need to satisfy the applicable Indonesian capital, licensing, tax, employment, and compliance requirements. Full foreign ownership changes the shareholder structure; it does not change the regulatory requirements applying to the company’s activities.
Email info@mapresourcesindonesia.com to discuss whether a joint venture or wholly foreign-owned PT PMA is appropriate for your Indonesian investment.
Structure Your Indonesia Entry with MAP Resources Indonesia
MAP Resources Indonesia supports foreign investors in determining whether an Indonesian investment should be established with entirely foreign ownership or through a joint venture. Contact us at info@mapresourcesindonesia.com to assess the ownership structure for your planned business activities.
