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Is a Nominee Arrangement Regarding Company Shares Ownership Allowed in Indonesia?

Is a Nominee Arrangement Regarding Company Shares Ownership Allowed in Indonesia?

Is a Nominee Arrangement Regarding Company Shares Ownership Allowed in Indonesia?

In March 2020, Budi and Frans want to establish a foreign investment company (PT PMA) to run a potato cultivation business. Budi is an Indonesian citizen., while Frans is a Chinese citizen who has lived in Indonesia for a long time. They plan to export potato harvest from the cultivation to other countries. To realize this business, they agree to set aside their assets to be paid up as shares in the company.

Frans and Budi agrees that the breakdown of shares ownership in the PT PMA should be 63% (sixty three percent) for Frans and 37% (thirty seven percent) for Budi. However, this becomes an issue.

Under the applicable Negative Investment List (Presidential Regulation No. 44 of 2016, foreign shareholding ownership for potato cultivation business is 30% (thirty percent). Under their current plan, the shares ownership percentage of Frans (63%) is too high and does not comply with the Negative Investment List.

Frans insisted to have the majority of control in the company, citing he can use a nominee arrangement with another Indonesian friend of his, Cecep, so that Cecep will hold shares in the new PT PMA on behalf of Frans.

Can Frans have a nominee arrangement with Cecep?

WHAT IS A NOMINEE ARRANGEMENT?

The term “Nominee Arrangement” does not have a lawful definition, but is commonly used to refer to the usage of an Indonesian citizen’s name to hold shares on behalf of a foreign party in a limited liability company, whether a PT Local or PT PMA.

In practice it is also referred to the Nominee Arrangement as “Borrowing Name” arrangement or “Pinjam Nama”, since the Indonesian citizen usually don’t have any money that is used to pay up for the shares, so the money came entirely from the foreign parties. Therefore, the Indonesian citizen only provides his name and nationality, coining the term “Borrowing Name”.

There are many methods of Nominee Arrangement, but the intended outcome is the same: the Indonesian citizen will be the lawful registered shareholder, but the foreign shareholders will receive all the benefits of the shares held, including the profit and dividend. 

IS A NOMINEE ARRANGEMENT ALLOWED IN INDONESIA?

The short answer is: no, it’s not allowed.

The prohibition is regulated in the following laws and regulations:

  1. Law Number 25 of 2007 concerning Investment (“Investment Law”)

Article 33 paragraph (1) of Investment Law states that:

“Domestic investors and foreign investors who make investments in the form of a limited liability company are prohibited from entering into an agreement and/or making a statement asserting that share ownership in a limited liability company is for and on behalf of another person.”

  1. Law Number 40 of 2007 concerning Limited Liability Company

Article 48 paragraph (1) of the Company Law states that:

         “The shares of the Company shall be issued under the name of their owner.”

  1. BKPM Regulation No. 6 of 2018 concerning Guidelines and Procedures of Investment Licensing and Facility

Article 6 paragraph (6) of Investment Law states that:

“Investors are prohibited from entering into an agreement and/or making a statement asserting that share ownership in a limited liability company is for and on behalf of another person.”

WHAT IS THE RISK OF GOING THROUGH AND MAKE THE AGREEMENT OF A NOMINEE ARRANGEMENT?

Pursuant to Article 33 paragraph (2) of the Investment Law, any agreement and/or statement made to assert that the share ownership in a limited liability company is for and on behalf of another person is declared null and void by law.

Therefore, the risks of making a Nominee Arrangement is:

  1. It is not Enforceable before the Court

The Indonesian courts will not recognize any agreement and/or statement made to assert that the share ownership in a limited liability company is for and on behalf of another person. Therefore, in the event there is a dispute regarding who is the lawful owner of the shares and the rights and benefits attached to such ownership, the Nominee Arrangement documents cannot be enforced.

 

  1. The Indonesian Citizen will be Recognized as the Lawful Holder of the Shares and the Rights Attached to the Shares

The implication of the Indonesian citizen being recognized as the lawful holder of the shares and the rights attached to the shares is that they will become the rightful owner of the shares and all benefits and rights attached to it, including dividend.

  1. Risk of Fraud or Falsifying Documents

The shareholders can face situations that requires them to state that they are the rightful owner of the shares. If the Nominee Arrangement is disclosed or found, such statements can be rendered as false, and third parties can sue the shareholders or related parties for committing fraud and/or falsifying documents.

In the financial and banking sectors, this carries another implication: the Financial Services Authority (OJK) and Bank Indonesia requires the shareholders of a financial or banking institution to state that the funds they use to purchase or pay up the shares of the company must be from their own fund and not in the form of loan. A Nominee Arrangement is directly in contradiction of such statement.

  1. Risk of Taxpayer Verification

Based on our experience, Tax Offices can request verification for Indonesian citizens whose transactions or assets are deemed as irregular, which may be the case if the shares are valued high while the Indonesian citizen has a normal minimum wage salary.

if you have any questions about the establish a foreign investment company (PT PMA), you can contact us at ask@bplawyers.co.id or 082112341235.

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