Buying land in Bali revisited

Bali News: This Land is My Land, This Land is Your Land
(9/15/2007) A recent article in balidiscovery.com [Freehold Land Title for Foreigners in Bali: Caveat Emptor] generated many comments from readers seeking to clarify the confusion that surrounds foreign land ownership in Bali, particularly as relates to freehold land ownership. To shed more light on the subject, we recently caught up with a leading Sanur-based Notary, Rainy Hendriany, for the following interview.

Rainy Hendriany: The Interview

balidiscovery.com: With the recent surge in property developments in Bali, there has been much discussion regarding the ownership of freehold property by foreigners. Can you clarify?

Rainy Hendriany: Under no circumstances can foreigners own property under Hak Milik (Freehold) title in Indonesia. There is only one semi-exception. If a foreign investor is married to an Indonesian citizen, providing that a Pre-nuptial agreement was entered into prior to the marriage being registered, the Indonesian spouse may hold Hak Milik land title.

balidiscovery.com: If a foreigner wants to invest in a property in Bali, how can this be done in compliance with Indonesian law?

Rainy Hendriany: There are several possibilities. Firstly, the lease of land under Hak Sewa (Leasehold) is perfectly legal and requires only a simple contract between lessee and lessor. Such a contract cannot be longer than 25 years but through various renewal clauses, the lease can be put in place for periods of time which are adequate for the needs of most investors. In this vehicle, the land title remains with the Indonesian owner of the land.

Secondly, as a result of Government Regulation 41 of 1996 (PP41) and several other subsequent changes in other regulations, it is now possible for most foreigners to own Hak Pakai title – the right to use and build a residence on the land. In this case, essentially the land title is returned to the Government and the foreigner would be issued with a Hak Pakai land certificate in his/her name for 25 years which with one extension of 20 years would therefore be valid in total for 45 years.

Thirdly, all Companies in Indonesia, both local and Foreign Direct Investment (PMA), can hold Hak Guna Bangunan (HGB) land title – the right to use and build for commercial purposes. This can also include the use of land under a structure of HGB atas Hak Milik whereby the investor receives a HGB land certificate with an Indonesian land owner retaining the Hak Milik land title. Various side agreements may be entered into between the two parties which can include pre-agreed extensions. A Hak Tanggungan – essentially a mortgage/loan agreement, would also normally be employed between the parties.

Until recently, foreigners were able to register a PMA Company as a vehicle for ownership of a single villa or a small number of dwellings. Some PMA/HGB structures have been very sophisticated and employed back-to-back ownership by an SPV (Special Purpose Vehicle) registered in an offshore tax haven such that the sale of a property in Bali required only the sale of a share in the SPV which, as an offshore transaction, has no tax consequence in Indonesia.

However, having become increasingly aware of the loss of various tax revenues, the Foreign Investment Coordinating Board (BKPM) is no longer issuing such licenses for small scale developments. It should also be noted that the creation of a PMA Company also attracts the attention of the tax authorities and carries other reporting and administrative responsibilities.

Finally, the Hak Pakai atas Hak Milik structure has more recently been widely used. In this structure, the foreign investor is essentially using the Hak Pakai structure mentioned earlier and has the comfort of being issued with a Hak Pakai land title in his/her name for 25 years whilst the Hak Milik certificate remains in the name of an Indonesian citizen not the Indonesian State as in the case of the Hak Pakai structure alone. As a civil law jurisdiction, Indonesia recognizes the right of its citizens to enter into contracts between consenting parties and this provides the basis for the various side agreements to support such a structure, including pre-agreed automatic extensions which must be applied for at least 3 years prior to the expiry of the current certificate.. A Hak Tanggungan is normally also employed between the parties.

It should be noted that in a very recent development, Hak Pakai atas Hak Milik land title has become mortgageable and there are already several banks which will now provide loans against such title.

balidiscovery.com: What about so-called “Nominee” arrangements?

Rainy Hendriany: It should be clearly understood that Indonesian law does not recognize any rights of beneficial land ownership. Many of these nominee arrangements come with a series of side agreements which usually include a Kuasa Mutlak (An irrevocable Power of Attorney) giving the foreign “Purchaser” the right to sell the land at any time. However, as a result of a 1982 regulation of the Ministry of Home Affairs put in place specifically to deter such arrangements, Indonesian law does not recognize the use of irrevocable POA’s in respect of land transactions and the POA may therefore be revoked at any time by the Indonesian “Nominee” owner of the Hak Milik land title.

Such basic nominee structures usually employ a Hak Tanggungan as one of the side agreements and this is shown as an encumbrance on the land certificate in the name of the foreign investor. This serves the purpose of making it difficult for the Indonesian Hak Milik owner of the land to sell it, especially if the foreign investor holds the original land certificate, which is essential. However, as land values increase, there remains the risk that the “Nominee” wishes to settle the mortgage and claim back the property. There are other complications involved in such a structure, including taxation on the “Interest” income on the loan.

It should be understood that the use of nominee arrangements does have risks. Even if not strictly contrary to the law it is conceivable that in the event of a Court challenge by an Indonesian “Nominee”, the Courts might rule that the sole purpose of such agreements was to circumvent higher Indonesian law and provisions of the Constitution, thereby contravening both the spirit and the intention of the law and making the Agreements invalid.

As the value of property in Indonesia increases toward International levels and if young Balinese find that they can no longer afford land on their own Island, it is possible that such disputes will become much more widespread than has been the case to date.

As a general rule, it is not advisable for foreigners to enter into legal disputes in Indonesian courts.

In advising clients, I often ask if, in their own country, they would entrust the ownership of their house or apartment to someone they did not know and, if not, why would they do so in a country they don’t know?

balidiscovery.com: So what structure do you usually recommend to your clients?

Rainy Hendriany: There is not really any one ideal solution for all investors. Different investors have different circumstances and different levels of tolerance to risk and ambiguity.

What I do recommend, however, is that all potential investors should seek independent advice before committing to a property investment in Bali. I have been amazed by how easily normally rational people – who would be very careful about buying a used car in their own country, can commit to a substantial real estate transaction in Bali without having a true understanding of the facts. It is also important that the advisor selected should be truly impartial and obviously should not have any financial interests in or from the recommendations made.

It is also very important that potential problems with the selected structure are anticipated and that various “Backup” provisions are included in the legal documentation to protect the interests of the investor in the event of a dispute. Potential future changes in the law, both positive and negative, should also be anticipated.

Professional due diligence on the particular property selected is also very important to check the legal land ownership, which can be very complicated in Bali where frequently multiple children may inherit land under local law usually without a will and often without any documentation. There are also conventions to be considered, including local law or Adat. Just as important in Bali are local customs, such as communal water usage – which need careful consideration to avoid later problems.

balidiscovery.com: Does maintaining a property in Bali have any benefits in terms of residence?

Rainy Hendriany: No. Irrespective of the structure of property interest, the immigration rules apply as normal, except to the extent that the creation of a PMA Company could allow the Company to sponsor a one year KITAS (temporary resident permit) for the investor.

balidiscovery.com: Does the new 2007 Foreign Investment law change anything?

Rainy Hendriany: Not directly on the rights of foreigners to own land but there might be some indirect impact. The new investment law does, for instance, extend the period of HGB land usage for foreign investors to 80 years. My husband, as a member of the Board of the International Business Chamber, was able to get a question onto the list of official questions for clarification by the Government. This question was whether these new limits applied only to a PMA Company or did they also apply to foreigners wishing to invest in a property in Indonesia outside a PMA? Also, under the new law all investors, local and foreign direct investment will be treated the same. This means that the minimum capital investment required for a PMA should reduce to IDR 50 Million, the existing limit for a local PT Company.

I stress that the new Investment law is still not complete and awaits various clarifications and extensive implementing regulations.

balidiscovery.com: Any other final thoughts?

Rainy Hendriany: I strongly believe it is important to balance investment decisions with an understanding of and sensitivity to the local culture which is what has, after all has attracted people to Bali over the generations from all over the world.