Indonesia is one of Southeast Asia’s most compelling investment destinations. With a population of over 270 million, abundant natural resources, and a rapidly growing middle class, the country offers genuine long-term opportunities for international capital. But the legal landscape here is unlike most markets in the world, and understanding its legal risks before committing capital is not just prudent, it is essential.
Regulatory reforms introduced through the Omnibus Law on Job Creation (Law No. 11 of 2020) have simplified many processes for foreign investors, and the government has signalled a clear desire to attract more foreign direct investment (FDI). Yet structural challenges persist — from sector restrictions and IP enforcement gaps to corruption risks and regulatory unpredictability. Foreign investors who enter without proper legal counsel often discover these realities only after problems arise.
This article outlines the most significant legal risks foreign investors face in Indonesia today, along with the practical considerations every investor should weigh before and after entering the market.
Related Article: Buying a Company in Indonesia? Here Are the Legal Risks You Should Look Out For
1. Navigating Foreign Ownership Restrictions and the Positive Investment List
One of the first legal risks a foreign investor encounters in Indonesia is the question of ownership structure. Under Presidential Regulation No. 10 of 2021 (as amended by Presidential Regulation No. 49 of 2021), Indonesia replaced the former Negative Investment List with a Positive Investment List (PIL), opening more than 200 business sectors to full foreign ownership. This was a significant liberalisation — but it did not eliminate restrictions.
Many sectors remain classified as ‘conditional, open to foreign participation, but subject to specific ownership caps, mandatory local partnerships, or additional licensing requirements. Others remain entirely closed to foreign investors, including gambling, certain media activities, and industries linked to national security. For investors, choosing the wrong business classification code (KBLI) can mean operating outside the permitted scope of their licence a serious compliance failure that can result in administrative sanctions or even revocation of the business licence.
All foreign-owned companies in Indonesia must operate as a PT PMA (Perseroan Terbatas Penanaman Modal Asing) a foreign investment limited liability company. As of October 2025, the minimum paid-up capital requirement for a PT PMA has been reduced to IDR 2.5 billion (approximately USD 150,000) under BKPM Regulation No. 5 of 2025, down from IDR 10 billion. While this lowers the barrier to entry, the minimum total investment plan of IDR 10 billion per business classification code remains unchanged, and investors must self-declare compliance through Indonesia’s Online Single Submission (OSS) system.
The key risk here is not just non-compliance, it is misunderstanding the rules in the first place. The legal framework is detailed, frequently updated, and sector-specific. Conducting thorough due diligence on the permitted ownership structure before incorporation is a basic but often overlooked step.
2. Regulatory Unpredictability and the Burden of Compliance
According to the U.S. Department of Commerce, businesses operating in Indonesia frequently contend with abrupt regulatory changes, inconsistent enforcement, and a lack of transparency in policymaking. These characteristics complicate long-term planning and represent a genuine operational risk, particularly for capital-intensive investments with long recovery periods.
The Omnibus Law was designed to streamline Indonesia’s regulatory environment, and in many respects it has. However, implementation has been uneven across different government bodies and regions. Indonesia’s decentralised governance structure means that local governments may apply rules differently from central government guidelines, creating friction for businesses with multi-region operations.
Local Content Requirements (TKDN) are one concrete example. Originally applied to the oil and gas sector, these requirements have expanded to cover pharmaceuticals, medical devices, renewable energy, electronics, and aerospace. Foreign companies, particularly those supplying goods or services must ensure their products meet the applicable TKDN threshold or face disqualification from government procurement processes. Indonesia’s oil and gas regulator, for instance, targets an average of 91 percent local content, placing foreign energy service providers at a measurable disadvantage unless structured correctly.
Foreign investors also face mandatory testing and certification requirements that can duplicate international standards already met in their home markets. This adds both cost and time to market entry, and represents a regulatory risk if not anticipated during the investment planning phase.
3. Intellectual Property: A Persistent Legal Risk for Foreign Businesses
Protecting intellectual property (IP) in Indonesia remains a significant challenge for foreign investors. Indonesia has continued to appear on the U.S. Trade Representative’s Priority Watch List due to persistent concerns about the adequacy of IP protection and enforcement. Widespread counterfeiting and piracy, particularly on online marketplaces, affect businesses across sectors from pharmaceuticals and software to consumer goods and creative content.
Indonesia enacted Law No. 65 of 2024, amending the 2016 Patent Law to better align with international standards. The amendment introduces simplified patent administration, enhanced licensing provisions, and stricter reporting requirements for patent holders. These are positive developments. However, as the 2025 U.S. Investment Climate Statement notes, enforcement remains the central issue: the two primary enforcement channels, the police and the IP Office’s Government Enforcement Officers, are both hindered by procedural delays and resource constraints.
A specific structural concern is that customs IP registration, a key tool for intercepting counterfeit goods, is currently limited to Indonesian legal entities. This excludes foreign trademark owners without a local subsidiary, potentially creating a gap in border enforcement that runs counter to the TRIPS principle of National Treatment.
For foreign businesses, the practical implication is clear: simply registering your IP is not sufficient. A proactive IP strategy in Indonesia should include local registration of all relevant marks and patents, monitoring of online and physical marketplaces, engagement with local enforcement authorities, and the establishment of a local legal entity that can access customs protections directly.
4. Corruption and Judicial Risks in Commercial Dispute Resolution
Corruption remains a material risk for foreign investors in Indonesia. The Transparency International Corruption Perceptions Index 2024 ranked Indonesia at 34 out of 100, a persistent concern for investors who depend on fair and predictable regulatory and judicial processes. High-profile cases, including the 2025 Pertamina fuel fraud scandal, which reportedly resulted in losses of approximately USD 12 billion, have underscored governance risks, particularly in state-owned enterprise (SOE)-dominated sectors.
Indonesia’s judiciary operates within a civil law system, with specialised courts handling commercial disputes, bankruptcy, and intellectual property matters. However, according to the U.S. State Department’s 2024 Investment Climate Statement, the application of the commercial cod, including bankruptcy provisions, remains uneven. The business community attributes this in part to corruption and capacity gaps within the judiciary. Foreign investors report that obtaining predictable outcomes through Indonesian courts can be difficult.
International arbitration is widely used by sophisticated foreign investors as a preferred mechanism for dispute resolution. Indonesia acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1981, and arbitration is governed domestically by Law No. 30 of 1999. Including a well-drafted international arbitration clause in any joint venture agreement, commercial contract, or investment structure is a fundamental risk mitigation measure that foreign investors should prioritise.
5. Employment Law and Labour Regulation Complexity
Indonesia’s labour laws represent another layer of legal risk that foreign investors frequently underestimate. The Constitutional Court’s landmark Decision No. 168 of October 2024 introduced significant changes to the Manpower Law, affecting employment termination procedures, fixed-term employment contracts, foreign worker regulations, wage policies, and dispute resolution mechanisms.
Foreign companies employing Indonesian workers are subject to specific obligations regarding social security contributions (BPJS), severance entitlements, and restrictions on fixed-term contracts. Employing expatriate workers requires a valid work permit and a sponsor company structured appropriately under Indonesian law. Violations of employment law, even inadvertent ones, can result in disputes with employees, union action, or regulatory penalties.
The risk is compounded by the fact that Indonesian employment law continues to evolve. The October 2024 Constitutional Court decision followed years of legal challenges and debates, and the regulatory environment for labour matters is expected to continue developing. Foreign investors should ensure their HR frameworks are reviewed by local legal counsel on a regular basis, not just at the time of initial company setup.
6. Legal Risks in Land Acquisition and Property Rights
Land and property rights present one of the more distinctive legal risks for foreign investors in Indonesia. Under Indonesian law, foreigners and foreign-owned companies cannot hold land under freehold title (Hak Milik). Foreign investment companies (PT PMAs) can hold land under specific titles, including Hak Guna Bangunan (Right to Build) and Hak Guna Usaha (Right to Exploitation), but these are time-limited rights that require renewal.
Disputes over land tenure are common in Indonesia, particularly where land has been acquired through customary (adat) arrangements or where boundaries are not clearly documented. Infrastructure and agricultural investors are particularly exposed, as land acquisition in these sectors often involves multiple layers of government approvals, community consultations, and sometimes compensation negotiations with local communities that can be complex and prolonged.
The OECD has noted that Indonesia’s Online Single Submission system has reduced some perceived risks for infrastructure investors. However, navigating land acquisition in practice still requires careful legal structuring, thorough due diligence on title history, and early engagement with local stakeholders.
How to Manage These Legal Risks: A Strategic Approach
Indonesia’s legal risks are real, but they are manageable with the right preparation and the right local legal support. The investors who succeed in this market share a common approach: they conduct thorough legal due diligence before entry, they structure their investments with local regulatory requirements in mind from the outset, and they maintain ongoing legal support through a qualified Indonesian law firm.
Practically speaking, this means verifying business sector eligibility against the Positive Investment List before incorporating, registering IP with the Directorate General of Intellectual Property (DGIP) as early as possible, including international arbitration clauses in all major commercial agreements, aligning employment structures with post-2024 labour law requirements, and ensuring land acquisition is underpinned by a clear and legally sound title.
Indonesia’s reform trajectory, particularly the Omnibus Law and subsequent investment regulations, reflects a government that is actively working to improve the investment climate. The direction is positive. But the gap between what the law intends and how it is applied on the ground is still wide enough to create meaningful risk for investors who proceed without proper legal guidance.
At WNP Asia Law Firm, our team of experienced corporate lawyers works with foreign investors across a wide range of sectors, from initial market entry and company establishment to ongoing compliance, commercial negotiations, and dispute resolution. Understanding the legal landscape is the first step to protecting your investment in Indonesia. We help our clients take that step with confidence.
