The ruling could force the Swedish furniture giant to come up with a new name to put outside its giant Tangerang store, near the capital, Jakarta.
Indonesian company Ratania Khatulistiwa applied to register the Ikea trademark in December 2013, long after the Swedish giant applied for the right to the brand back in 2010.
But the Indonesian Supreme Court on Thursday published a decision on the case on its website, ruling that as the Swedish company had not actively used the trademark in Indonesia for three consecutive years, it could be deleted, with the rights passed over to the Indonesian firm.
The Indonesian company claims that Ikea stands for ‘Intan Khatulistiwa Esa Abadi', a reference to rattan, an Indonesian palm used to make furniture.
It claims that any similarity to the Swedish Ikea, which combines the initials of founder Ingvar Kamprad, with Elmtaryd, the farm where he grew up, and Agunnaryd, his hometown, is simply coincidental.
The Indonesian company waited until Ikea had begun construction of its first megastore in Indonesia, in mid-2014, before bringing its case to the Jakarta district court, which ruled in favour of the Indonesian company that September.
Ikea then appealed the decision to the Supreme Court, which made its ruling in May last year but did not communicate its ruling either to the Swedish company or to the wider public.
Inter IKEA Systems B.V, a Dutch company which manages Ikea's international franchises, said on Friday that it had not yet had time to analyse the decision.
"The decision rendered by the Supreme Court in Indonesia in May 2015 was notified to our local, Indonesian, lawyers yesterday. We have therefore not yet had the opportunity to analyse the decision," it told The Local.
It said that it had taken measures to allow it to continue using the trademark.
"Despite the Supreme Court's decision, Inter IKEA Systems B.V. has provided for continued ownership of the IKEA trademark rights in Indonesia" it said. "This means that the Indonesian IKEA franchisee has and will be able to continue the IKEA operations uninterruptedly regardless of the Supreme Court's decision."