Nominee arrangements: why they fail and what to use instead

A nominee arrangement puts land or company shares in an Indonesian’s name while a foreigner pays for them and tries to keep control through side agreements. It’s often presented as a formality. Under Indonesian law it’s void.

The asset belongs to the person named on the certificate or in the share register. The side agreements meant to protect the foreigner are the part the law cancels, so the arrangement tends to last only until a death, a divorce or a falling-out.

How a nominee deal is built

An Indonesian citizen, often a spouse, an employee or a friend, buys freehold land (Hak Milik) with the foreigner’s money or holds shares in a local company for the foreigner. Then a bundle of papers ties the asset back to the foreigner:

• a loan agreement saying the purchase money was lent to the nominee
• a statement that the nominee holds the land or shares on the foreigner’s behalf
• a power of attorney to sell, often stated to be irrevocable
• a long lease from the nominee to the foreigner
• a pledge of the shares, or the original certificate kept by the foreigner

Each paper can look ordinary alone. Together they show the intent, and intent is what the law looks at.

What the law says

Only Indonesian citizens can hold freehold, under Article 21 of the Basic Agrarian Law (Law 5 of 1960). Article 26 then voids any sale, gift, exchange, bequest or other act meant to transfer freehold to a foreigner, directly or indirectly. The land falls to the state. Rights that others hold over it, such as a mortgage, carry on. The money paid to the owner can’t be claimed back. The word “indirectly” catches nominee structures.

Shares are covered by Article 33 of the Investment Law (Law 25 of 2007). Domestic and foreign investors in a limited liability company (perseroan terbatas, PT) may not make an agreement or statement confirming that shares are held for and on behalf of someone else. If they do, it’s void by law. The rule stops a local name being used to get past a foreign ownership limit in the positive investment list.

Void means the agreement never had legal effect, so a court asked to enforce it has nothing to enforce. The asset stays with the person on the certificate or the register, or goes to the state if Article 26 applies. The power of attorney doesn’t help either. Government Regulation 24 of 1997 on land registration tells the land deed official (PPAT) to refuse a deed when a party acts on an absolute power of attorney that is in substance a transfer of the land.

How investors lose the asset

Losses often start in the nominee’s life, not in court.

The nominee dies. The land or shares pass to the nominee’s heirs, who may never have heard of the arrangement and aren’t bound by void agreements.

The nominee divorces. Property acquired during a marriage is joint marital property under Article 35 of the Marriage Law (Law 1 of 1974), so the spouse can claim a share, and a sale needs the spouse’s consent.

The nominee runs up debts. The asset is legally the nominee’s, so creditors can go after it, and a mortgage the nominee signs binds the land.

The relationship sours. The nominee can sell, borrow against the asset or refuse to sign what it needs, from a building approval to an extension of the title. The foreigner is left holding papers a court won’t enforce.

The foreigner dies. The heirs inherit void agreements, not the land.

Beneficial ownership reporting

Presidential Regulation 13 of 2018 requires companies to identify their beneficial owners and report them, with a statement that the information is true. For a PT, a beneficial owner is an individual who holds more than 25% of the shares or votes, receives more than 25% of the annual profit, can appoint or remove directors and commissioners, controls the company without needing anyone’s authorisation, benefits from it or is the real owner of the money behind the shares.

That last test catches nominee shareholding. The investor behind a nominee is a beneficial owner and has to be reported. A report that names the investor puts the arrangement on the record. A report that leaves the investor out is false, under a regulation written to fight money laundering and terrorist financing. The law ministry publishes a list of companies that haven’t reported.

What to use instead

Most goals behind a nominee deal have a legal route.

For a home, a foreigner can hold a house on a right to use (Hak Pakai) or a strata unit in their own name, within the limits in buying property as a foreigner.

For business land, a foreign-owned company (PT PMA) can hold a right to build (Hak Guna Bangunan, HGB) in its own name, or a right to cultivate (Hak Guna Usaha, HGU) for a plantation. Setting up a PT PMA covers the company side.

For use without ownership, a lease (sewa) from a genuine owner at a real rent, made before a notary, gives you the land for an agreed term. Under the Civil Code, selling the land doesn’t end an existing lease unless the lease says it does. Leasing land covers the terms to look for.

For a project with an Indonesian partner, the partner owns shares in their own right, paid for with what they contribute, and a shareholders’ agreement sets out votes, board seats, dividends and the exit. Where the positive list caps foreign ownership, the cap sets the split. A side letter giving the foreigner more is the kind of agreement Article 33 voids.

Before you sign anything

If a seller, agent or partner suggests putting land or shares in a local name for now, ask which right you’ll hold in your own name or your company’s, and get the notary’s or PPAT’s answer in writing. If the answer is none, the structure is the problem, whatever the price.

If you’re already in a nominee arrangement, act while relations are good. One fix is to move the asset into a legal form: a house into Hak Pakai in your name, or land into a PT PMA, where freehold becomes HGB. That needs the nominee’s signature and carries the usual transfer taxes and fees. Check too that your company’s share register and beneficial ownership report match who really paid.