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Property Regulation: How Foreigners Can Own A Land In Indonesia?

Introduction

Like most of South East Asia, foreigners are not permitted to have outright title to property here. There is a chance that this will change in the future. The Indonesian government has taken a more and more flexible point of view on this matter. However, foreign individuals can legally acquire property in Indonesia and enjoy full beneficial rights. Ray White Kuta always recommends to clients that they should secure the best legal advice when securing property in Bali.

A. Title

There are six kinds of land titles and one mortgage in Indonesia:

1. The right of ownership (Hak Milik/Free Hold)
2. The right of use of cultivation (Hak Guna Usaha)
3. The right of built and use of structure (Hak Guna Bangunan)
4. The right of use (Hak Pakai)
5. The right of management (Hak Pengelolaan)
6. The right of strata title ownership (Hak Milik atas Satuan Rumah Susun)
7. The right of encumbrances; Mortgages (Hak Tanggungan)

But the major land title needs to be discussed are:

• Hak Milik (Freehold) is the type of title that can only be held by an Indonesian citizen.
• Hak Pakai (Right of Use)
• Hak Guna Bangunan, other forms of title can be held by a P.T. or PMA Company (Foreign Investment Company).

A non-Indonesian citizen cannot own land in Indonesia only Hak Pakai (Right of Use).

Hak Pakai is the right to use and or to harvest the land. The duration of this title is twenty-five years and extendable to another twenty-five years. After those all durations have been expired, the owner is entitled to reextend the title, it is like re-register your driving license.

Hak Pakai is transferable and inheritable and upon Hak Pakai, the right of encumbrances is also acceptable.

The main difference between Hak Milik (Freehold) and Hak Pakai (Right of Use) might be in the duration of the title but extendable, where Hak Milik has no limit in duration.

B. Solutions

There are 3 ways for foreigners to own the property in Indonesia:

Method 1: Utilization of an individual Indonesian nominee

The most common method utilized to “acquire” land in Bali is to do so in the name of an Indonesian individual, i.e. to use and Indonesian nominee to purchase the property. There are always risks inherent with purchasing property through a third party, but this method has been used for many years and a clear process has now evolved with legal precedents being established.

Once the appropriate site has been selected, the nominated Indonesian purchases the freehold land from the previous owner. It is always important to have a change in ownership from one individual to another, registered on the land title deed. We strongly recommend that the original landowner does not become the foreigner’s nominated individual, as there is no clear transition of ownership. Where this has occurred previously, families have successfully contested that a transfer never took place.

Simultaneously to acquiring the land, the Indonesian individual completes three additional agreements with the foreigner.

Basically, there are major agreements the local nominee should sign with the foreigner :

1. A loan agreement which acknowledges that the foreigner has loaned to the Indonesian citizen the purchased price of the land. This is then registered on the land exactly the same as a first mortgage or caveat and it is noted on both the title at the Land Department ( we called it “HAK AKTA TANGGUNGAN” -registration at the Land Dept. is 0.5% of the loan) and the copy held by the owner. There can be no dealing in the property until the loan agreement is cleared from the title documents (Or if you wish the property sold only by you, you can state that on the agreement). With the foreigner’s loan details registered on the title, it also prevents the reissuing of new title deeds without the foreigner’s consent.
2. An irrevocable power of attorney is signed giving the foreigner complete authority to sell, mortgage, lease, build on, improve or otherwise deal in the land. Without notice to the Indonesian Citizen, the foreigner can sell or otherwise deal in the property. It is important to include the power of attorney to freely substitute the nominee at any time.
3. A permanent right of use agreement is completed, giving the foreigner rights to use and occupy the land.

To cover the event of death of the nominee, the Power of Attorney is drafted in such a manner so that the governing conditions are passed on to the foreigner’s heirs.

In the event of subsequent dispute with the nominated Indonesian, the Power of Attorney also allows the foreigner to sell the property to another Indonesian.

Method 2: Utilization of a Company

In 1997 the Indonesian Government introduced the PMA program (Penanaman Modal Asing or Foreign Investment Company) to encourage overseas investment. A PMA allows foreigners to set up a company in Indonesia which can be owned 100% by the foreigner and which can in turn own property as part of its assets.

To establish a PMA company you will be required to:

1. Submit a detailed business plan
2. Make an appropriate cash deposit in an Indonesian based bank as working capital. (The amount of deposit is calculated from the total capital employed)
3. List the property investment as an asset of the company
4. Pay the PMA start up fee, which at the time of this publication was between Rp. 40 – 50 million (approx US$5,000)

Some foreign investors may find the above method unacceptable due to the third party ownership. Certain publicly quoted companies, trusts or multi-nationals may be precluded from third party ownership by their memorandum and articles, shareholder agreements or trust deed regulations. Those parties looking to purchase a large site and subsequently divide the site into smaller parcels that are individually sold may also wish to utilize a PMA Company. The non-Indonesian investor can effectively control 100% of the shares in a PMA but should bear in mind that only the HGB form of title is available, which is valid for 30 years and a further extension of 20 years and then another 30 years (for a total of 80 years). Please bear in mind that all PMA entities are highly regulated and must submit semi-annual comprehensive reports on the status of the company including payment of taxes, all assets acquisitions and changes in ownership to BKPM, the central administering authority for PMA companies in Indonesia.

Method 3: Leasehold title granted to a foreign individual domiciled in Indonesia

A foreign individual domiciled in Indonesia, satisfying a number of conditions can enter into a 25 or 40 year lease renewable for a further 25 or 40 years. It is the contract agreement between the owner of the land and the lessee. The Lessee can use the land and building (if any) for that certain period. The common type of leasehold is the property used for business or commercial such as rental villas, warehouse, shops, etc. in strategic location where you find it difficult to buy land in the area.

If the property you wish to purchase already has a certificate, the acquisition can be much quicker. The first step in any property acquisition is to have both the buyer and seller sign an ‘akte jual beli' or ‘binding sale agreement'. This document will lock in both parties whilst the certificates are being prepared.

Once you have the certificates copies, several days subject to due diligence and the transfer of funds, is a typical completion period. Our office has escrow bank account allowing monies to be safely held prior to disbursement.

Land purchases in Indonesia must by witnessed by an officially appointed 'Notaris' . The standard contracts are written in the Indonesian language, however, translations can be arranged upon request.Prior to completion the Notaris will arrange for the Government property transfer tax to be paid. This tax is based on 10% of the taxable value of the land, which is assessed by the Land Registry Office and is usually considerably lower than the actual price being paid for the property. 5% is payable by the buyer and 5% is payable by the vendor.

SUMMARY

Under Indonesian law foreigners are not permitted to have property title in Indonesia. This is a summary of the various alternatives.

1. Enter into a legal arrangement with an Indonesian nominee, either an individual or PT company, whereby he/she/corporation holds title to the property. Simultaneously, complete a power of attorney, handing over full rights from the Indonesian entity to the foreign investor.
2. Make a leasehold investment in the property, up to 25 years. Partnerships with Indonesian citizens are not required in leasehold transactions. This method does offer complete protection to the foreigner during the term of the lease, however, once the lease term has expired the agreement can be extended or the property reverts to the Owner.
3. Form a foreign investment company (PMA). Here the foreigner can own the company 100% and the title of the property will be in the company name. However, title in this case could only last for 20 or 30 years as PMA companies have to re-apply to the Indonesian Government to extend their license.

C. Buying The Property

All land purchases in Indonesia must by witnessed in the presence of an officially appointed 'Notaris' (Notary). The standard contracts are written in Bahasa Indonesia language, however, we can arrange for translations upon request.

Simplified, buying land in Bali can be illustrated with the following steps:

Step One	Appoint your Real Estate Agent
Step Two	Negotiate price on your chosen property
Step Three	Make a deposit (usually 10 - 30% of total price)
Step Four	Sign a letter of intent with the seller agreeing to price, final completion date and payment schedule
Step Five	Completion and final payment at the Notary
Step Six	If using a Nominee, simultaneously sign the 'power of attorney' at the Notary
Step Seven	Collect the revised certificate

 
Congratulations! You have now acquired property on the Island of the Gods!

D. Using An Agent Or Consltant

If you decide to go for it, you must choose to check and arrange everything yourself or to contact a reliable agent or consultant to do 'the dirty work' for you. Choosing for an agent has the advantage that an agent has the necessary experience, and you can be sure that really everything will be checked and dealt with so your dream will not grow into a nightmare. If you decide to arrange all yourself, keep in mind that it will take time to check and arrange all necessary, often even up to several months. Properties that are sold via official agents in general have already been checked beforehand, which speeds up the transaction process.

E. Fees

Notary: 1% of the value of the transaction.
Vendor Tax & Purchaser Tax: Both the vendor and purchaser pay 5% tax on the value of land and property sales.

F. Other Documents If Necessary

• Mortgage Certificate Cost (If necessary):
  -> 0.5 % of total mortgage value for BPN land affairs office.
• Power of Attorney - granting exclusive rights to Mortgager to release the Mortgage.
• Financial Loan Agreement. Power of Attorney for all rights to the land.
• Statement Letter - outlining proof of payment for the property.
• Statement of Indemnity (for nominee).
• Power of Attorney for IMB - authority for Building Permit.
• Statement Letter - No second mortgage.
• Lease Agreement - granting the purchaser 25 years lease plus an automatic extension of 25 years (added security) - Cost: 1% of lease value.

 

If you need help or have any question regarding owning property in Bali, please do not hesitate to contact us.
This guide was created by Michael for Ray White Kuta Official Website. Click on the image below for contact informations.

Copyright 2012.