INDONESIAN OWNERSHIP AND PROPERTY LAW
Owning and purchasing property in Bali
If you are considering investing in property in Bali, you will find that there are numerous opportunities. The relatively new concept of owning a well-managed, well-maintained villa – which is rented out on your behalf as up-market holiday accommodation – can offer premium returns.
The following information offers some guidelines towards purchasing land and property in Bali. For exact information please consult a lawyer or notary in your area, and seek advice from foreigners who have already been living in Bali for some time. There are certain exceptions and regional variations to the information that is supplied here, rules in Batam and Jakarta, for example, are different. There are also "decrees" with exemptions. Despite anomalies and unclear areas within the Indonesian law, it is generally safe to acquire property.
Can a foreign person or other foreign entity legally purchase property in Indonesia?
The Indonesian government issued Law 5 of 1960 on the "Basic Regulation of Land in Indonesia" ("UU 5/1960"), which came into force on 24 September 1960. This law explicitly and implicitly revoked many older laws. As a result, it can be said that UU 5/1960 established revolutionary new rules and principles concerning rights in land. UU 5/1960 recognised and regulated several rights over land and houses, including the: Right of Ownership (Hak Milik), Right to Cultivate (Hak Guna Usaha), Right of Building (Hak Guna Bangunan), Right of Use (Hak Pakai), and Right of Building Lease (Hak Sewa Atas Bangunan).
Acquiring property in Bali
Under Indonesian law, foreigners are not allowed to own freehold property title in Indonesia. However non-Indonesians can legally acquire property and enjoy full beneficial rights of property and land ownership through various alternatives.
The Freehold (Hak Milik) property option for foreigners
This refers to absolute ownership of land and corresponds to freehold title in common law terms. This right can only be held by an Indonesian citizen and not by a corporate entity whether local or foreign. To obtain freehold title the investor must enter into a legal agreement with an Indonesian nominee - either an individual or a company - whereby they hold the title to the property. This Indonesian nominee simultaneously enters into a legal power of attorney with the foreigner. The power of attorney gives the investor beneficial rights on the property and waives all rights of the nominee. The investor is then free to build on the land, sell or lease the property and transfer the title to next of kin. This is the most used (and unfortunately for the unwary, misused) option. We cannot stress enough that these contracts should be checked and double checked. No matter how friendly the people are that offer their help, it is essential to enlist the help of a well known legal company in Bali.
Right of Ownership
Right of Ownership is the most comprehensive and complete form of individual rights over land. There is no time limit, and the holder has the right to use the land, including the earth underneath and the water and air above. It does not, however, include the right to obtain wealth from resources underneath the earth. Right of Ownership may only be held by Indonesian citizens.
The Right to Cultivate
This is the right to cultivate State-owned land or to use it for other agricultural purposes for a certain period of time. There are two kinds of Right to Cultivate: for farming enterprises that are smaller than 25 hectares and for enterprises that are 25 hectares or more. Government Regulation 40 of 1996 on the Right to Cultivate, Right of Building, and Right of Use ("PP 40/1997") states that the period for Right to Cultivate must not exceed 35 years initially but can be extended for another 25 years. When the extension period expires, the Right to Cultivate shall be renewed over the same land. The Right to Cultivate may only be owned by Indonesian citizens and companies established under Indonesian law and domiciled in Indonesia.
Right of Building
Right of Building is a right over land, either State-owned or private, with which the holder may erect and possess buildings for a certain period of time, which must not exceed thirty years but may be extended for another twenty years. When the extension period expires, Right of Building shall be renewed. There are no limitations on the size of the holding. Right of Building may only be owned by Indonesian citizens and companies established under Indonesian law and domiciled in Indonesia.
Right of Use
Right of Use is a right over land, either State-owned or private, which gives the holder the right to use and obtain the product of a certain piece of land. The land to which Right of Use is applied may be used as a building site or for agricultural purposes. PP 40/1997 states that the initial period for Right of Use must not exceed 25 years but can be extended for another twenty years or even indefinitely if the land is still in use for a certain reason. Right of Use may be owned by Indonesian citizens, resident foreigners, Indonesian companies domiciled in Indonesia, and foreign companies that have a representative office in Indonesia. Currently it is easy for foreigners in Bali to obtain right of use.
Right of Building Lease
Land owned by another private party, or the state, can be leased for building purposes. This right may be held by a foreigner permanently domiciled in Indonesian or a foreign legal entity having a representative office in Indonesia. The leasehold agreement is in the foreigner’s own name, and the term is up to 25 years, which is extendable. This method does offer full legal protection to the foreigner during the term of the lease; however, once the lease term has expired the property reverts to the owner unless extended. The payment could be one-time or periodical as mutually determined between the parties. Right of Building Lease may be owned by Indonesian citizens, resident foreigners, Indonesian companies domiciled in Indonesia, and foreign companies that have a representative office in Indonesia.
Property Rights of Foreigners
UU 5/1960 only allows foreigners to obtain Right of Use or Right of Building Lease. However, UU 5/1960 only provides very general information on how to obtain either of these rights, the maximum time period, or the legal assurances provided. As a result, many foreigners in Indonesia are not willing to engage in such transactions.
Renewal of rights on expiry of the initial term is via an application to the National Land Agency and is subject to payment of a fee. An application must be submitted one year before expiry of the term. Although the law is silent in regard to the period after the expiry of the extended terms, the consensus is that a land right can be extended if there has been no infringement of the conditions attached to its usage.
Land for sale in Bali is either land that has been passed down through a local Balinese family but has never been formally registered with the Land Registry Office (Pipil), or Land that has already been registered with the Land Registry Office. Only land that has a certificate can be sold.
The conversion of 'Pipil' land into certified status normally takes 4-6 months. Once the required land has a certificate, a transaction is normally completed within 1-2 weeks.
All land purchases in Indonesia must by witnessed in the presence of an officially appointed 'Notaris' or lawyer.
Procedures for Property Acquisition
All transactions of land rights must be via deeds executed before a land deed official at the local office of the Pejabat Pembuat Akta Tanah (PPAT) where the land is located. It must be registered in the regional office of the National Land Agency. The PPATs are privately managed offices (usually run by a notary) authorised by the National Land Agency to handle land acquisition matters. Although there is no regulation that contracts have to be in Indonesian language, it is recommended having contracts and agreements always drawn up and executed in Bahasa Indonesia (or two languages) to prevent later disputes caused by the local partner not filly understanding the content.
Property Sales Tax
When property is sold there is tax to be paid by both the selling party and the buying party. This is 5%, for each, over the amount that is on the sales contract. Please note that the amount on the sales contract can be different from the actual price agreed upon. The tax has to be paid to the notary who is handling the transaction. Project developers usually include all of this within their pricing schemes, but when negotiating it is essential to establish the method in which the sales tax will be handled.
Documents drawn up by the Notary
There are four documents needed: Number one states that the foreigner gives money to the Indonesian nominee to buy land and property and the Indonesian gives this land and property to the foreigner to use it, out of his free will. The document also states that the nominee gives the foreigner permission to sell, to rent out, or to rebuild a house or property. It states that the agreement, if necessary, passes automatically to the heirs, of the foreigner and the nominee. It states that all of the property costs (electricity, water and taxes) have to be paid by the foreigner. The official 'Sertipikat' will be in the foreigner’s possession as well as the statement of cession, signed by the nominee. Only with this 'Sertipikat Hak Milik' it is possible to sell the land. In the second document the selling of the property is granted to the foreigner. The nominee gives his explicit permission to do so. In the third document the nominee gives permission to rent out the house or property. The fourth document commits the nominee to co-operate – should the time ever come that foreigners can own land and property in Indonesia – in converting the status of the foreigner to nominee on the 'Sertipikat'. Should the law change to the disadvantage of foreigners, the nominee will co-operate in changing the agreement into a lease-contract of 50 years with option for another term.
This can be done by forming a foreign investment company known as a PMA, which can be solely owned by a foreigner and allows foreign investors to set up a company in Indonesia without having to have Indonesian partners. The title of the property will be in the company name, but can only last for 25 years, after which period the title has to be renewed by the Government.
To set up a PMA company you will be required to:
- Submit a detailed business plan.
- Operate in a business environment that adds value to Indonesia in terms of foreign skills, employment and environmental benefit.
- Make an appropriate cash deposit in an Indonesian based bank. (The amount varies and is calculated from the capital employed in the business).
- Show the property investment as an asset of the company.
The process takes approximately 3 to 4 months and once completed the company can apply for work permits for the foreign directors, and allows three permits in the first year of operation. The cost of setting up is 30 to 40 million Indonesian Rupiah.
Hak Pakai for foreign investors
This has been effective in Bali since March 2004 and offers foreign investors land rights that are relevant to the nature of their business. Prospective buyers of land for any purpose should consult the local government authorities on land use, planning and zoning. Based on a Presidential Decree issued in June 1996, foreigners domiciled in Indonesia are allowed to own one residential property. To meet the regulations of ownership of a house or an apartment, a foreigner must be deemed to be "beneficial to national development"; and must be either:
A foreigner can purchase or construct a house built only on land with the right of use (Hak Pakai), the right of use with the right of proprietorship, or the right of lease (Hak Sewa). An apartment can only be purchased by a foreigner on land with right of use (Hak Pakai). Foreigners are not, however allowed to purchase houses or apartments classified as "low cost housing" or "very low-cost housing".
- An Indonesian resident (domiciled permanently in Indonesia) in possession of a permanent resident’s permit
- A non-resident (domiciled in Indonesia only at particular times) in possession of the appropriate immigration stamps in his/her passport.
Ownership is limited to 25 years, and is extendible for another 25 years provided that the foreigner remains an Indonesian resident or meets the status requirements. If the foreigner departs from Indonesia, the property must be sold or transferred within one year after departure. If the foreigner or his family do not use the house for more than 12 consecutive years, then the foreigner forfeits the "being domiciled" status, for the purpose of owning residential property.