This chapter describes methods to invest in land as a foreigner from a legal and practical point of view. The nominee method is usually the preferred method.
4.1 Foreigners cannot own land in Indonesia
Foreigners cannot own real estate in Indonesia. When real estate companies states that foreigners can own real estate in Indonesia, they are lying to you.
Foreigners cannot hold a Right of Ownership title (Freehold/Hak Milik) to a parcel of land in Indonesia. Actually the Indonesian law states that no amount of manipulation with either civil contract or corporate law can give a foreigner ownership rights.
4.2 Foreigners invest and occupy land in Indonesia
We all have seen or heard of numerous foreigners living in Indonesia, claiming to own land. What is behind that claim? The foreigners do not own land in the legal sense. More accurate terms are “to invest” and “to occupy”.
The method you use to invest in land and to occupy land depends on your situation.
4.3 The Nominee Method and Right of Ownership
Are you intending on buying property as an investment and thinking of building a villa? Then the nominee method is almost always preferred. The nominee method is also the only way you (and your nominee) can buy a large parcel of land, make various improvements and sell off smaller plots at a later date.
The exact procedures for establishing a nominee relationship are not generally agreed upon. At the most basic level, the foreigner provides the financial resources and the nominee will legally own the purchased land 100% in his/her name. The Indonesian partner usually receives a 5-10% commission when the land is sold and the partnership is terminated.
To enter into a nominee partner agreement with an Indonesian citizen as a way to invest in property has never been addressed by Indonesian law. The nominee partner agreement is created by a civil contract between two people, similar to what you would establish when you loan someone money. Obviously, entering into a partnership agreement relies heavily upon trust between the two parties. The foreigner obviously has more to loose than the Indonesian nominee so choose your nominee carefully.
The civil courts have actually recognised that the foreigner has the right to be compensated if the contract is breached, but the compensation cannot be in the form of land. Since use of the land is what the dispute is usually about it can be difficult to find a satisfactory solution. In many cases a third party ownership agreement is set up, where a promissory note is issued to the foreign investor. The foreign investor gives the note to a new nominee who in turn buys the land from the original owner at a pre-established price. A new nominee partnership agreement is signed with the new nominee and the foreigner continues to use the property. Not the neatest solution, but it accomplishes the purpose.
Throughout the years, lawyers have created various agreements in an effort to seal the contractual relationship between the nominee and the foreign investor. Lately, the nominee partnership agreements have been created through several increasingly complex agreements. In one case, the investor loans money to the nominee to buy land, where the loan is written in the form of a mortgage with monthly payments. A second agreement states that the foreigner agrees to rent the property from the nominee. The rent and the mortgage payments are exactly the same amount and cancel out each other.
Complex agreements like the one described above intend to create a remaining debt obligation if the Indonesian nominee fails to uphold his/her part of the partnership agreement. The basic issue with such an agreement is that they implicitly give the foreigner beneficial ownership rights, which is not allowed by Indonesian law. Every document, including the irrevocable power of attorney, is subject to revocation if the purpose is to transfer any land ownership rights away from the nominee. Lawyers call such agreements “raping the law”.
Lawyers constantly debate what are the best provisions to include in a partnership agreement. Complex nominee agreements must be used with great caution. Property investors should not feel calmed by signing a nominee agreement whose only intent is to limit the rights of the Indonesian owner; often the agreement creates a false sense of security. The most important thing is again to choose your Indonesian nominee carefully.
4.4 Foreign Direct Investment and Right to use Building
If you intend to open a business, build apartments, villas or some other advanced use, then you will need to form a company or a PT (Perseroan Terbatas). Foreigners are by Indonesian law allowed to form a special type of company for Foreign Direct Investment known as PT PMA (Penanaman Modal Asing).
The PMA still does not allow a foreigner to buy and own land with a freehold title. It is a method foreign investors can start a company in Indonesia without involving Indonesian partners. The PMA can be 100% owned by the foreign investor, but when the PMA intend to buy land, the company must bring in an Indonesian citizen to hold the title.
The legislation regarding a PMA does not allow a formal method whereby a foreign company can acquire the rights to build on and use a piece of property. An Indonesian citizen must still hold ownership rights of the underlying property, but the PMA can acquire all rights to use and build upon the property. This right is formalized with the issuance of a second subordinate title of the land, known as Right to Use Building (Hak Guna Bangunan).
The Hak Guna Bangunan (HGB) title is only effective for a specified period of time, usually 30 years with an option to extend for another 20 years. In many ways, the PMA is simply leasing the land for 50 years, which is one big difference. The HGB title is held as an asset and can be used as collateral for a bank loan.
Setting up a PMA takes abut 3 to 4 month. Once it is completed, the company can apply for work permits for the foreign directors, three permits in the first year of operation. The cost of setting up the PMA is around 4k USD. An operational PMA is required to file extensive financial and operational information to the government each year plus paying personal and corporate taxes.
Because of your status as a government permitted, your PMA will always be under close government control and subject to future changes in the federal laws.
If you do not intend to operate a business, then a PMA is not the preferred way to own property.
4.5 Right to Use (Hak Pakai)
The Hak Pakai title (HP) is valid for 25 years initially and can be extended by another 20 years, which makes 45 years in total. This title allows a foreigner to own one property (not land!) in Indonesia at any time and is similar to the HGB title but limited to one property. Foreigners typically prefer using HGB since it allows them to own more than one property (not land!).
4.6 Land Lease with Civil Contract
Any type of land lease agreement can also be detailed in a civil contract with an Indonesian landowner, similar to a Nominee Partnership Agreement. It is possible to agree on more specific requirements such as for example occupying the land on a part-time basis or paying rent for the use of the land during the contract life cycle. This can many times be an advantage compared to the HGB title and a large lump sum of money is not required at the beginning of the contract.
If you make a civil contract to lease land and start a successful business, the land lease contract and the business can be sold to another foreigner in the future. If your business is very profitable and its value increases, the land lease contract value also increases.
4.7 Lombok Property & Land External References
We strongly recommend that you read two highly informative interviews with a woman named Rainy Hendriany who is both a Notary Public and Lawyer in Bali. The first interview lays down the fundamentals and the second interview is a follow-up with more details.
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