Can a Foreign Software Company Contract with an Indonesian Company Without a Local Entity?

Foreign software companies are increasingly providing software licenses, SaaS platforms, cloud-based services, technical support, and other digital services to companies in Indonesia without establishing a local company.

This raises a practical question: Is a foreign software company required to establish an entity in Indonesia simply to enter into a contract with an Indonesian company?

In principle, a foreign software company may enter into a cross-border contract with an Indonesian company without establishing a local entity, provided that its business activities do not constitute business operations or investment activities in Indonesia that require a local presence or Indonesian business entity.

Accordingly, the key issue is not simply whether the foreign company has customers in Indonesia, but how its business activities are actually conducted in Indonesia.

1. Can a Foreign Software Company Contract Directly with an Indonesian Company?

Indonesia’s Investment Law defines Foreign Investment (Penanaman Modal Asing or “PMA”) as investment activities undertaken by a foreign investor to conduct business within the territory of Indonesia. Where an activity is classified as PMA, Law No. 25 of 2007 generally requires such investment to be conducted through a limited liability company (Perseroan Terbatas or “PT”) established under Indonesian law and domiciled in Indonesia.

However, entering into a contract with an Indonesian company does not, by itself, mean that the foreign company is conducting PMA in Indonesia.

For example, a foreign software company may provide:

• software licenses;
• SaaS services;
• cloud-based services;
• remote technical support; or
• software development services performed from outside Indonesia.

Where such activities are genuinely conducted on a cross-border basis, without an operational structure in Indonesia, the foreign company may, in principle, contract directly with an Indonesian customer as a foreign party.

The analysis may be different, however, where the foreign company establishes ongoing business operations in Indonesia.

2. When May a Local Entity Be Required?

The need for an Indonesian entity depends substantially on the company’s business model and the activities it actually conducts.

A different analysis may apply where a foreign software company:

• establishes an office or other form of operational presence in Indonesia;
• maintains personnel in Indonesia to conduct its business activities;
• conducts commercial activities directly in Indonesia; or
• carries out activities falling within a particular business sector or investment structure that requires an Indonesian business entity.

In such circumstances, the business may no longer be considered purely cross-border and may become subject to Indonesian business licensing or investment requirements.

The current business licensing framework is governed, among others, by Government Regulation No. 28 of 2025 on Risk-Based Business Licensing, which replaced Government Regulation No. 5 of 2021.

Accordingly, the assessment should be based on the substance of the activities actually conducted, rather than merely the location of the customer or the fact that payment is received from Indonesia.

3. What If the Business Also Involves Physical Products?

The analysis is different where a software business is accompanied by the distribution of physical goods.

For example, a foreign technology company may provide software together with servers, networking equipment, industrial equipment, point-of-sale devices, or other physical products.

Minister of Trade Regulation No. 24 of 2021 regulates contractual arrangements for the distribution of goods through distributors or agents, including arrangements involving foreign principals and distributors or agents in Indonesia.

Accordingly, where the business model also involves physical goods and distribution activities in Indonesia, the company should separately assess the applicable trading, distribution, import, and licensing requirements.

This should be distinguished from a business model that only provides software licenses or SaaS services digitally.

4. What About the Language of the Contract?

Even where a foreign company is not required to establish a local entity, the contract remains subject to Indonesian language requirements.

Law No. 24 of 2009 and Presidential Regulation No. 63 of 2019 regulate the use of Bahasa Indonesia in agreements involving, among others, Indonesian private companies. Where an agreement involves a foreign party, it may also be prepared in the foreign party’s national language and/or English.

Accordingly, a contract between an Indonesian company and a foreign software provider should generally be prepared in Bahasa Indonesia, with an English version where appropriate.

The parties should also clearly determine which language will prevail in the event of any discrepancy in interpretation between the two versions. Presidential Regulation No. 63 of 2019 specifically addresses this issue.

This is particularly important for software licensing agreements, SaaS agreements, master service agreements, and other technology agreements involving an ongoing contractual relationship.

5. What About Terms of Service and Electronic SaaS Contracts?

Software companies do not always use conventional agreements negotiated directly between the parties. Many SaaS providers rely on Terms of Service, End User Licence Agreements (EULAs), click-wrap agreements, or other forms of electronic contracts.

The fact that an agreement is concluded electronically does not eliminate the need to consider Indonesian legal requirements.

Where a service is actively offered to users in Indonesia, additional issues may arise concerning electronic transactions, consumer protection, personal data protection, and regulatory obligations applicable to electronic system providers.

Accordingly, a foreign software company should assess not only whether it requires a local entity, but also whether its digital contracting structure complies with the applicable requirements in Indonesia.

Key Considerations

A foreign software company is not automatically required to establish an Indonesian entity merely because it enters into a contract with an Indonesian company.

The following distinctions should be considered:

Cross-border digital services
Software licenses, SaaS, cloud services, or technical support provided from overseas may, in principle, be structured through a direct contract between the foreign provider and the Indonesian customer, subject to applicable regulatory requirements.

Business operations in Indonesia
An Indonesian office, local personnel, operational presence, or activities classified as foreign investment or otherwise regulated business activities may trigger requirements for an Indonesian entity, business licenses, or other regulatory structures.

Distribution of physical goods
Where the business also involves the distribution of physical goods, separate trading and distribution requirements may apply.

Contract language
Regardless of whether a local entity is required, contracts involving Indonesian companies should comply with the applicable Indonesian language requirements.

Accordingly, the appropriate structure depends not only on where the customer is located, but primarily on how the foreign software company conducts its business activities in Indonesia.

This alert is part of a series examining legal and regulatory developments affecting foreign technology and software companies operating in or providing services to Indonesia. As digital business models continue to evolve, further developments should be monitored for their potential implications for cross-border service arrangements, local presence requirements, and regulatory compliance in Indonesia. Please feel free to contact us should you wish to discuss these developments further.

Disclaimer: Here

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