Companies aiming to penetrate the Indonesian market must comply with applicable laws and regulations in Indonesia. The manpower and immigration laws in Indonesia mandate that foreign workers can only work in Indonesia under a local legal entity. Without a local legal entity as their sponsor, the authorities will reject their work and stay permit application.
The most obvious option for the foreign company to comply with Indonesian regulations is to setup a local legal entity. However, foreign entities are not always ready to establish a local entity in Indonesia for a variety of reasons. These can include:
- Costs. The foreign entity is not willing to invest in the setup of a local legal entity in Indonesia. This often the case for one-off or short term projects (for example, installation of machinery in factory for a duration of 1 week);
- Time. There is not enough time to setup a local legal entity before the start date of the project; or
- Liability. The foreign company does not want to expose itself to corporate legal risks in Indonesia (for example, potential penalties or prosecution by the government).
In this article we will discuss the options available for foreign companies, to allow their foreign workers to work in Indonesia.
The setup of a local legal entity
Generally, foreign companies can setup 2 types of companies in Indonesia:
- A foreign representative office. A representative office serves as a representative of the foreign company in Indonesia. The representative office cannot operate commercially in Indonesia. This means all revenue must go directly the parent company abroad. The representative office can serve as sponsor for foreigners whishing to work in Indonesia, however there are limitations to the job titles available. As a result, foreign workers are limited in the work they can perform in Indonesia.
- A foreign owned limited liability company. A limited liability company with foreign shareholders (PT PMA) can fully operate commercially in Indonesia within its business field. The PT PMA requires an initial investment of IDR 10 billion in paid-up share capital. In addition, the company must proof its investments in the Indonesian economy through quarterly investment reports to the investment authority. The PT PMA can serve as sponsor for the work and stay permits of foreigners. The job titles available depend on the business activities of the company.
For more details, please check out the Company Formation page at our group firm PNB Law Firm.
USE THE CLIENT or partner COMPANY AS SPONSOR
In the event a foreign company works on a project in Indonesia, or works together with a partner on a project in Indonesia, foreign workers may be able to use the sponsorship of such client or partner. However, often local clients or partners are not willing to provide such sponsorship as they do not want to take on the liability that comes with sponsorship of foreign workers. Under the immigration manpower and immigration laws, sponsors are fully responsible for the behavior of the foreign workers. Non-compliance can lead to both administrative and criminal sanctions, including:
- Imprisonment of members of the board of directors of the sponsor company; and/or
- Administrative fines reaching up to IDR 500 million.
Besides that, foreign companies are often reluctant to request these kind of services from their clients and prefer to arrange the work and stay permits by themselves.
Use third parties to sponsor Foreign worker permits
For foreign companies which are unable to hire their workers using the options above, can make use of a third party service provider to sponsor their foreign workers. A third party service provider will assist the foreign company in obtaining the work permit. In addition, it will process all administrative task to ensure full compliance according with the Indonesia Law. These include running payroll, paying and reporting taxes and social securities and preparing necessary legal documents.
Therefore, it is critical to have the third party company that deeply understands the Indonesian laws and regulations and that can offer advice and experience to ensure compliance. Our group firm PNB Law Firm offers dedicated Employer of Record packages for foreign companies or foreign individuals seeking this kind of assistance.