Even though the Indonesian Law clearly states that foreigners are not allowed to hold a 'freehold' land title, there are ways commonly in practice so foreigners can control a freehold title "indirectly" or to hold leasehold title. Let's take a look into the options for a foreign individual in Indonesia.
LEASEHOLD TITLE (HAK SEWA)
This method does offer full legal protection to the foreigner during the term of the lease, as this agreement and its terms will not be affected by future governmental changes In Indonesian property law. In popular tourist areas such as Seminyak where Hak Milik (freehold) titles have become increasingly rarer to find, leasehold is
sometimes the only option.
A lease agreement is a reasonably straight forward contract between lesser & lessee and gives the foreigner (lessee) the right to use the land for a defined period. Once the lease term has expired the property reverts to the owner unless extended. What is important to note here is that this agreement is a legally binding contract
between the two parties that cannot be registered at the Indonesian land office and therefore does not exist in certificate form. However, this non-registered contractual, leasehold agreement will take priority over subsequent claims of right on the Hak Milik (freehold) title.
If you do choose to do this, it is best to seek professional legal advice before entering into a contract. The right to lease property in Bali may be held by a foreigner permanently domiciled in Indonesian and held in the foreigner's own name, with the most common agreement usually being 25 years with a 25 year extension. To offer full legal protection, it is important this agreement be done in the presence of a registered notary and written in both English and Indonesian language to avoid any miss-interpretation at a future time.
NOMINEE SYSTEM FOR HAK MILIK (FREEHOLD)
A foreigner nominates an Indonesian to hold the title of land. Ownership of land is transferred from the previous owner to the Indonesian nominee The foreigner and the Indonesian nominee sign a number of agreements recognizing the Indonesian nominee as the 'legal owner' while declaring the foreigner as the 'rightful owner'.
It must be noted here that a purchase via this process involves an element of risk embedded upon the foreigner. Considering that Indonesian law clearly states that foreigners cannot hold Hak Milik (freehold title), it is a debatable topic whether or not a nominee agreement will be recognizable by Indonesian law. Generally speaking, it is considered that if a good healthy relationship is appropriately maintained with the Indonesian nominee then there should never be any reason to test the validity of these agreements in court. However, the fragility of human relationships must be taken into consideration when calculating the level of risk involved in this process.
HAK PAKAI (RIGHT TO USE)
As part of the interest from increased pressure for foreign investment, the Hak Pakai (right to use) title was developed as the government sanctioned method for foreign purchasers to acquire the exclusive right of use over Hak Milik (freehold) land. This is registered in a separate certificate of title issued in the name of the foreigner. In essence, this is a government sanctioned lease agreement available to foreigners. This title allows for 25 years with consecutive 25 year renewals up to 100 years.
HAK PAKAI (RIGHT OF USE) ABOVE HAK MILIK (FREEHOLD LAND)
What is very exciting news for foreign investors is the option to choose the combination of purchasing a property through the nominee Hak Milik structure and then applying Hak Pakai title. In this structure the foreigner maintains control of the freehold title, and the subsequent right of use is held in their own name. This is known as a Hak Pakai atas Tanah Hak Milik which effectively gives the foreigner full rights under their name for a fixed term up to 100 years.
It should be noted that the Hak Pakai must be renewed with the government at least three years before its expiration and the renewal costs are presently government transfer taxes of 10% of the government designated value of the property (This is usually well below the market value or sale price) Additionally, the Hak Pakai title held by a foreigner is capable of being mortgaged which gives rise to future financing options for foreign buyers in Indonesia. It is important to hire the services of an Indonesian lawyer to assist with the transaction, especially with the monetary exchange. All land transactions must take place at the Indonesian Notary's local office, Pejabat Pembuat Akta Tanah (PPAT), where the land is located.