Corporate compliance in Indonesia is a critical and non-negotiable requirement for any foreign company seeking to tap into this lucrative market. 

While the opportunities are vast, the regulatory landscape, encompassing company formation, taxation, and labor laws, is notoriously complex and presents significant hurdles. Understanding these challenges upfront is crucial for selecting the optimal market entry strategy.

Two Paths to Operating in Indonesia

For a foreign company looking to hire in Indonesia, there are two primary pathways:

  1. Establishing a Direct Legal Entity (PT PMA)
    This is the traditional route, involving the full incorporation of a foreign-owned company. It requires significant capital investment and makes you directly responsible for navigating all the corporate compliance issues detailed below. This path is ideal for long-term, large-scale commitments.

  2. Using an Employer of Record (EOR)
    This is the agile, modern route. An EOR enables you to legally hire employees in Indonesia without establishing a local entity. Your EOR partner acts as the legal employer, handling all payroll, tax, and HR compliance on your behalf. This path is ideal for speed, flexibility, and testing the market.

To help you decide, let’s examine the in-depth compliance requirements you’ll encounter when choosing the direct entity path.

Company Formation Requirements

The initial step, yet the most crucial aspect in establishing companies in Indonesia is understanding the company formation requirements. The formation should align with the applicable provisions to ensure corporate compliance.

  • Company Name

Establishing a company name for both foreign-owned companies (PMA) and local companies in Indonesia should follow the requirements enacted on Article 16 of the Company Law, which include:

  1. The company name must be in the Roman alphabet
  2. Unique or distinct from other companies and authorities’ names (state, government, and international authority)
  3. Not violating public morals
  4. Should not consist of numbers
  5. In line with the company’s objective
  6. Should begin with “PT” or Perseroan Terbatas

  • Directors of Indonesian Companies

In Indonesian corporations, directors are part of the board of directors and are responsible for supervising the company’s management. A company is required to have at least one director.

  • Shareholders of Indonesian Companies

A person or legal entity who invests capital in a company is called a shareholder. For foreign-owned companies (PT PMA), the requirements are quite specific. In accordance with BKPM Regulation No. 5 of 2019 (Article 6), these companies are required to have at least two shareholders.

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The regulation further stipulates that the minimum investment value for each shareholder is IDR 10 million.

  • Commissioners of Indonesian Companies

All foreign-owned companies are required to have one commissioner, but does not have to be an Indonesian citizen.

Tax Compliance

Tax compliance in Indonesia requires companies to adhere to tax laws and regulations. This covers several aspects, such as:

  • Corporate Income Tax (CIT)

All companies, including those owned by local and foreign entities, are required to submit CIT annually. The final payment due date can be any time before CIT returns. 

  • Value Added Tax (VAT)

Companies that have reached a revenue of IDR 4.8 billion are required to register VAT.

  • Withholding Tax and Payroll Taxes

Employers are required and responsible for withholding income tax or PPh 21 on behalf of employees and remitting it to the State Treasury.

  • Tax Audits and Reporting

Tax audits in Indonesia cover all types of taxes or only one specific type. All companies that earn income in this country are required to report in accordance with the applicable regulations.

Tax Payment and Filing Deadlines in Indonesia

Besides comprehending tax compliance, it’s also crucial to pay attention to the tax payment and filling deadline as part of corporate compliance. Generally, the deadlines can vary depending on the tax category.

  • Personal & corporate income tax: Due date on 15th of the coming month
  • Withholding tax: Due date on 10th of the coming month
  • VAT: Due date before the deadline of VAT filing return

Labor Law Compliance

Indonesia has specific labor law that governs important elements, from employment contracts to occupational health and safety.

  • Employment Contracts and Rights

There are two types of employment contracts in Indonesia, namely permanent and fixed term. Permanent contracts are often used for full-time roles, while fixed-term is limited to project-based.

  • Minimum Wage and Benefits

Following new regulations set in 2024, minimum wages in Indonesia are based on regional economic development. To maintain corporate compliance, employers are required to provide benefits such as paid annual leave and maternity leave.

  • Social Security Contributions

Employers are also required to register their employees for BPJS or Social Security Benefits. It covers a wide range of insurance, including health, life, and pension plans. 

  • Occupational Health and Safety

All companies are obligated to create a safe work environment by implementing health and safety procedures in accordance with applicable laws.

Environmental Compliance

Environmental-Compliance-Abhitech

The Government of Indonesia has set specific rules regarding environmental compliance to mitigate environmental effects. The regulation constitutes ecological permits and waste management, just like the following:

  • Environmental Permits

Specific business sectors that have a potential impact to the environment should conduct Environmental Impact Assessment or AMDAL. The assessment ensures businesses are operating under sustainable practices.

  • Waste Management and Emissions Control

This enforces companies to adhere to the applicable regulation dealing with responsible waste management and emission control.

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Corporate Governance and Reporting

Corporate governance and reporting involve a set of processes and regulations on corporate management to ensure accountability and transparency.

  • Board Composition and Governance Standards

Board composition in Indonesia consists of two boards of commissioners (BOC) and board of directors (BOD). They work with complementary tasks, with BOD managing operations while BOC oversees the BOD.

  • Financial Reporting and Audits

This process is implemented by presenting the company’s financial information to stakeholders. It must be governed by applicable laws to increase transparency in the business sectors.

EOR (Employer of Record) Services for Foreign Companies in Indonesia

Navigating corporate compliance is a crucial task for any company seeking to expand its business presence in Indonesia. However, many companies find this process complicated and struggle to undergo it.

Through EOR services, Abhitech can accelerate your business launch, enabling you to hire employees in Indonesia without the need to establish a physical local entity. With seasoned teams, we also ensure compliance with tax and local labor laws.

Our expertise in navigating Indonesia’s regulatory landscape, handling payroll, and HR tasks effectively establishes us as the ideal choice for your business. Contact our team for further consultations and gain more insightful knowledge on HR and people management, exclusively on our blog page.