"Computer generated translation may not be accurate"
Legal Buying Procedures
UbudProperty, Bali Elite Realty, Ubud Royal Realty
Basic Legal and Taxation Guide for buying land in Indonesia
You may already know, that outright land ownership is only available to Indonesian citizen or entities.
However, it is possible and widely practiced to secure a foreigner's interest in property obtained. If done properly, due diligence taken and based on advice of experienced professionals with all documentation carefully completed, you will be able to safely hold your investment.
However, rather than trustfully engaging with Indonesian ‘immediate friends' and unknown legal operators, - when setting out to purchase Real Estate, read up on the basic information available, such as below and then still seek impartial and competent legal council and taxation advice for your transaction.
It is true that some foreigners lost out on their entitlements to their property. This happened due to poor documentation. Compare these exceptions against the vast number of foreign residents who enjoy all rights given to them under Indonesian law. You will then see that it pays to understand the basic land law.
Within the Group of UbudProperty / Bali Elite Realty / Ubud Royal Realty you will receive relevant and detailed information, once you proceed towards a purchase. In any case we recommend to verify this information against at least one other specialized professional source.
We are confident to name independent, experienced and qualified legal and taxation professionals, architects and builders. Ask us for contacts to others who went down the same road earlier. Their recommendations should further assist you in understanding your options.
The Procedure
A Land Title Deed, the Sertifikat Tanah, is stating the details of ownership and the precise description and location of the land. Is is also including a Survey Certificate with drawing.
This document is the basis for any change of ownership. A Land Deed Official, usually a Notary with the title extension PPAT (Pejabat Pembuat Akta Tanah), will legalize the transaction. Fees, even taxation can be to some extent a matter of negotiation.
Within our group of Property Agencies we are working with the leading Notaries in Bali and also directly with the National Land Agency BPN (Badan Pertanahan National). We are proud of our unblemished record of successful and undisputed property transactions.
Also, - their cost and expenses are controlled by us and are same or better than most. Don't hesitate to ask us for our opinion on your purchasing plans, - there is no obligation resulting for you.
Depending on the reason for your purchase, you have a range of -
Ownership Options for Foreigners in Indonesia -
A ) Freehold Title ( Hak Milik)
This title is only available to Indonesian Nationals. To obtain land under Hak Milik means you will have to execute a ‘Nominee Agreement' with the Indonesian Holder of your land to secure your interest.
Your advantage under this form of land title lies in the fact that you directly participate in the capital appreciation of the land.
You may select your Nominee by appointing a trustworthy Indonesian person, ask your Notary to recommend someone, maybe from his own office, or if you trust your property Agent, you may even chose staff from there. It is worthwhile to search for a younger person with a transparent family background, as inheritance issues regarding every ones rights and duties are part of the Nominee Agreement.
The Nominee Agreement is to be legalized by a Notary.
Because there is no ‘official' standard text available, it is absolutely essential to deal with experienced and proven professionals, who have over time eliminated loopholes and uncertainties in the still widely used older text versions.
The text should be in English a n d Bahasa Indonesia, so that in the event of a legal dispute there cannot be misinterpretation.
The Nominee Agreement should be made up of the following sections:
The statement.
Here it is declared who the intended real owner is and why the Nominee is lending his/her name for the transaction.
The obligations of the nominee are outlined – e.g. payment of taxes and contributions when due, applying for power, water and telephone connections, the building approval, further licenses, if commercial activity is planned, etc.
The nominee receives a one off amount at the beginning of the N. Agreement, to compensate for the substantial administrative duties in the first month' of establishing the new property.
(Average one off payment in recent years = USD 1,000.-)
At the end of the Nominee's service, e.g. when the property is sold again, he/she receives a percentage of the sales price (Standard is 1 or 2 %).
The Nominee declares to support the foreign owner by signing all consecutive documents as requested and without delay. Failure in doing so attracts a fine, e.g. forfeiting the final payout.
It is also stated that the rights and responsibilities of the agreement are passed on to the respective heirs.
The loan agreement.
The nominee declares to have received the funds for the property purchase as a loan from the foreigner. A valid loan agreement needs to state the amount. This becomes a matter for your special attention, because as the property increases in value the loan amount should be adjusted periodically in an addendum.
The property becomes the collateral owed to the foreigner “with all improvements at the total value and at any point in time”.
Power of Attorney
The nominee gives to the foreigner an irrevocable and transferable Power of Attorney to sell, sublease or otherwise dispose of or deal with the property and declares to represent the foreigner in any dispute regarding the property.
The Nominee will hand over all original titles and documents to the foreign investor.
He agrees that, should the law change to the disadvantage of the foreigner, the agreement automatically becomes a long term lease with all rights of land usage given to the foreigner and should the law change in favour of the foreigner the nominee co-operates to pass on the ownership titles to the foreigner in accordance with the new law.
No tax is payable on a regular Nominee Agreement, other than the stamp duty fee of a few Rupiah. (Rp 6000.- in 2011).
Exemption: If a lease is taken out as security, 10% PPH taxes become due.
Additional security measures
The foreigner can take out a ‘mortgage' on the property. This is not a mortgage as understood in western banking practice, but a block applied at the National Land Agency BPN, to the effect that the nominee cannot deal in any way with the property until this ‘mortgage' is released by the foreigner. This ‘mortgage' will be entered via a Notary. The fee for this is inexpensive.
No tax is payable on a mortgage.
B ) The Right to Use over Freehold Title(Hak Pakai di atas Hak Milik)
A ‘right to use over freehold' is a certificate which is granted by the National Land Agency BPN over freehold land.
This is giving the most secure way of controlling a property for the foreigner, because the foreigners name is actually stated as title owner in the Hak Pakai Certificate.
However, land taxation will apply to both, the underlying Freehold Title (Hak Milik) a n d the Right to Use (Hak Pakai) title, which is covering the freehold title. Taxes upon obtaining the Hak Pakai title are assessed according to the Government appointed Land Value NJOP (Nilai Jual Objek Pajak), which is considerably less than the actual market value.
C ) Leasehold
A lease is achieving a temporary interest in the land only. The lease period is negotiated with the lessor. Commonly all lease payments for the agreed term are to be made upfront. Still, for a lease term of let's say 35 years, as a rule of thumb you would pay only about half of the money as you would need for purchasing the same block of land.
However, all your improvements on the land revert at the end of the lease term back to the land owner. Excluded are non fixed improvements, such as ‘knock down' house constructions.
The lease can be sub-contracted and in the early years of the lease term a financial gain is feasible. Towards the end of the lease term the contract may be difficult, if impossible to sell.
It will be valuable to have a clause in the lease agreement, stating that you have the right to extend the lease agreement once the initial period has expired. It is utmost important to agree on the lease rate for the extension period at the time of the first lease contract being made.
Often the average price of three comparable properties available for lease in the same area
may become the key to that value. If this is not applicable, the gold price or other standard commodities can be agreed upon to tie the value in.
Lease agreements are usually drawn up and legalized by a Notary, but are not registered with the Government Land Agency. However, strict laws are protecting the foreign or national lessee, making a lease a safe arrangement.
The lease contract is subject to 10% PPH taxation. As it is essentially an income tax, it is to be paid by the lessor who often is unaware of this obligation and may want to come back to the lessee when the tax falls due. If the lessor is a Corporation which has to charge PPN (Value added tax) the obligation to pay PPN also stays with the lessor. The Notary and/or accountant will advise on the best way from the outset to keep your best interest in mind.
D ) Corporate Ownership via HGB title
The foreigner can set up a Foreign Investment Company (PT PMA). This Company does not need any Indonesian shareholder and is entitled to own land under HGB title. This is a somewhat ‘lesser' title than outright Freehold Ownership, because the initial freehold title is relinquished to the Government.
It is then replaced against a period of formerly 30 years, with the right to extend by another such period and so on. These periods are presently (2011) under review and may in future extend up to 75 years.
The HGB title allows the land to be used as per the Corporate Activity and to be built upon.
Before setting up such a PT PMA Company, mainly to facilitate property acquisition under the foreigners name, it needs to be understood, that the Government is regulating and monitoring such Companies closely.
For example, if after a number of years there are no reasonable tax returns reported, the Company may have to close and your search for ownership options starts again.
The PT PMA regulations require regular reporting of the business' development and an annual audit by an approved tax consultant. It is strongly recommended to seek detailed legal and taxation advice before deciding to own property via Corporate Ownership.
Taxes on the transfer of Freehold Ownership are determined by the NJOP (Nilai Jual Object Pajak = Government assessed Object value. The rate is 10%, - 5% to be paid by the vendor and the other half (5%) by the buyer. Again, your Notary and /or tax adviser will tell you about your options and can suggest ways how to deal best with your tax liability.
The above is not intended to replace advice from legal and taxation professionals.
Please chose your advisers carefully and double check all information obtained.
