Why More Foreign Firms Are Choosing Employer of Record Over Entity Setup in Indonesia

Indonesia continues to rank high on the list of expansion targets for foreign companies. With Southeast Asia’s largest domestic market, a young workforce, and strong demand across digital, professional services, and consumer sectors, the opportunity remains compelling. Yet in 2025, the discussion among foreign executives has shifted.

The question is no longer whether Indonesia is attractive, but how to enter the market efficiently, compliantly, and with manageable risk. Increasingly, the answer for many firms is not immediate entity formation, but the use of an Employer of Record (EOR).

For decades, the standard way for foreign companies to operate in Indonesia has been through a foreign-owned limited liability company, known as a PT PMA. This structure allows direct commercial activity, local contracting, and long-term expansion. It also comes with a complex regulatory framework.

Establishing a PT PMA involves engagement with multiple authorities, including the investment authority, notaries, tax offices, and sector-specific regulators. While digital systems such as the Online Single Submission platform have improved transparency, incorporation remains document-heavy and highly procedural.

Capital requirements are often cited as a key barrier. Although paid-up capital thresholds have been relaxed in certain sectors, most foreign investors are still expected to demonstrate a substantial total investment plan. Combined with ongoing compliance obligations—corporate reporting, tax filings, manpower regulations, and social security contributions—this structure can be disproportionate for companies that only intend to hire a small local team or explore the market.

Time is another factor. Even under ideal conditions, entity setup can take several months before a company is fully operational.

An Employer of Record is a locally registered entity that legally employs staff on behalf of a foreign company. The EOR becomes the formal employer under Indonesian law, handling employment contracts, payroll, income tax withholding, social security (BPJS), and statutory compliance. The foreign company, meanwhile, retains full operational control over the employee’s daily work and performance.

Crucially, the foreign firm does not need to establish a legal entity in Indonesia to hire local talent. This distinction has made EOR an increasingly popular option for companies seeking speed and flexibility.

In practice, EOR arrangements allow firms to hire within weeks rather than months, with predictable monthly costs and significantly reduced regulatory exposure.

Several converging trends have pushed EOR from a niche solution into a mainstream market-entry strategy.

First, global expansion strategies have become more cautious. Venture funding constraints and economic uncertainty have encouraged companies to test new markets before committing capital. EOR enables this approach by lowering upfront financial and legal commitments.

Second, compliance complexity in Indonesia has increased. Labour regulations, reporting obligations, and social security enforcement are more actively monitored than in previous years. For companies without local HR or legal teams, outsourcing these responsibilities reduces the risk of inadvertent non-compliance.

Third, remote and hybrid work models have normalized distributed teams. Many firms no longer see the immediate need for offices or entities in every country where they employ staff. EOR fits naturally into this operational shift.

Finally, the local EOR market itself has matured. Indonesia now has providers with established compliance frameworks, local expertise, and experience supporting eventual transitions from EOR to entity setup when companies scale.

EOR is particularly well suited for companies that want to hire a small number of employees, launch pilot operations, or support regional clients without long-term commitments. Consulting firms, technology startups, and overseas headquarters hiring local sales or support teams often fall into this category.

It is also a practical option for project-based or time-limited activities, where establishing a full corporate structure would add unnecessary complexity.

However, EOR is not a universal substitute for incorporation. Businesses that require sector-specific licenses, plan to scale large teams, or need a local entity for contractual or regulatory reasons will eventually need to establish a PT PMA.

For many firms, the optimal approach is sequential: EOR first, entity later.

As foreign companies become more selective about expansion, market entry is increasingly treated as a strategic decision rather than a procedural one. Choosing between EOR and entity setup involves assessing headcount plans, regulatory exposure, cost structures, and long-term objectives.

Advisors familiar with Indonesia’s employment and corporate landscape play a key role in this evaluation. Firms such as CPT Corporate are often referenced by international businesses for guidance on Employer of Record services in Indonesia, particularly where companies want a compliant starting point without committing immediately to incorporation.

The growing preference for EOR does not signal a decline in Indonesia’s appeal. Rather, it reflects a more disciplined approach to expansion. Companies are prioritizing speed, flexibility, and risk control—especially in the early stages of market entry.

Indonesia in 2025 remains open to foreign business, but the pathways have diversified. For many firms, Employer of Record is no longer a temporary workaround, but a deliberate first step in building a sustainable presence in one of Asia’s most dynamic markets.