Freehold Property in Indonesia
When it comes to purchasing property in Indonesian as a foreigner, there are quite some obstacles to overcome. You can choose from two options: Leasehold or Freehold (Ownership Titles in Indonesia are explained here). If you are a foreign property investor, whether you choose to buy a leasehold or freehold property will depend on your particular needs.
Purchasing freehold property allows you to gain from the increasing land value over time, which has been fairly dramatic in Bali in past years. With this structure, any appreciation in the value of the property, either through improvements you have made to it, or through the rise in land prices, goes completely into your own pocket. Many foreign investors opt for this option for obvious reasons, despite it is announced as illegal by Indonesian law & land regulations to purchase property in Indonesia by foreigners.
Leasehold, on the other hand, means that after your agreed lease period is over, the property and whatever improvements you may have made, revert to the owner if you are not extending the lease further.
As said that it’s basically illegal to purchase freehold as a foreigner in Indonesia, there are still ways you can make it happen – So how does it work to buy freehold property as a foreigner in Indonesia?
There are two options that allow you to own freehold property in Indonesia – buying through a PMA or using an Indonesian entity (nominee) as titleholder for the certificate. Both options have their own pros & cons.
This article is simply for informative purposes and to explain those options to interested clients. We are not suggesting to take those options unless you are 100% sure and had legal counseling regarding this.
Purchasing freehold through a PMA
Property acquisition through a PMA (Penanaman Modal Asing or Foreign Investment Company) structure enables Foreign Corporations to own land in Indonesia, without having to have Indonesian partners. The PMA can be 100% owned by the Foreign Investor. This was originally established for large Multinational Corporations but has been extended to land holdings by smaller off-shore companies.
Audited accounts must be regularly furnished to the Government showing the PMA trading position, and operating taxes must be paid. The cost of setting up a PMA structure varies depending on the line of business and can take 4 months or more to set up. Once completed the company can apply for work permits for foreign directors, with a total of 3 work permits in the first year of operation.
The disadvantage of a PMA Company property acquisition is that the property should be used for company projects only, and that a PMA Company, like any other corporate entity (Indonesian or Foreign), is not eligible for ‘Freehold’ (Hak Milik) Title. Whenever freehold land is transferred to a corporate entity, the property title is changed to Right to Build (Hak Guna Bangunan – HGB).
It is also possible to enter into a legal agreement with an Indonesian Nominee, who secures the title to the property on behalf of the foreigner. While the Indonesian Nominee is the registered owner, the Foreign Investor holds the land certificates as security. In Indonesia land cannot be sold without an authentication procedure which includes sighting of the original land certificates.
At the time of the property purchase, the Indonesian Nominee and the Foreign Investor simultaneously sign a legal Power of Attorney. The Power of Attorney waives all rights of the Indonesian Nominee and gives full beneficial rights of the property to the Foreign Investor. The Foreign Investor is then able to build on the property, onward sell or lease the property and transfer the property to their next of kin. Additionally it is possible to specify that if the laws in Indonesia change allowing Foreigners to own land, that the titles will automatically be transferred into the Foreign Investor’s name.
The Indonesian Nominee may receive a pre-agreed fee for their responsibilities as the titleholder. The amount largely depends on the relationship the Foreign Investor has with the individual Nominee.
Furthermore there will be a Lease agreement in place, which legally leases the property to the Foreign Investor for 30-90 years and a Loan agreement that proofs that the Investor borrowed the money for purchasing to the nominee. Those two agreements are setup to double secure the Nominee structure and make sure that the Nominee can’t sell the property before the mortgage is fully paid.
There is also an option to enter a mortgage directly into the land register, however it is not advisable, as it points to the strong possibility of a Nominee structure and authorities will look into it further.
If you want to know more about Ownership Titles in Indonesia and are interested in purchasing property, our agents are happy to assist you. Please don’t hesitate to contact us!
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