Anyone who has been to Bali knows that it takes just a moment to fall in love with this island. The climate, culture, nature, hospitality and tolerance of the people living on this tropical island in paradise are all very appealing. As soon the journey home begins, many people already start planning for next trip to Bali. Many times these so called “returners” are interested to buy property. For residential purposes like retirement or as an investment on the rental market to obtain a return on their investment, and for some even a permanent base in Bali. These dreams may quickly become plans and reality.
But to realize these plans successfully you need to ask yourself if you have enough knowledge about the Indonesian property law and rules. How about the tax rules, visa rules, property laws concerning owning a property? There are many questions and finding the right answers is important to avoid that your tropical dream does not become your tropical nightmare.
On this page of our website we would like to introduce to you some of the laws that apply to foreigners who buy or rent property in Bali, Indonesia.
Foreigners are not allowed to own property in Indonesia. You can discuss this issue forever but the fact is, that it is not allowed by law and there is nothing you can change about that fact. Every now and then a story emerges that the rules are changing and it is possible but mostly there are always certain rules and conditions in which it will make it complicated again, too complicated in many ways.
However since 1996 it is allowed for foreigners to lease properties for periods of 25 or 30 years with extensions for another 25 or 30 years, (depending on the conditions are in the lease contract).
And there are other legal ways to obtain property. You can use constructions in which a nominee is involved, this nominee has to be an Indonesian citizen. Many Property Agents still advise this construction but in fact this construction is not so common anymore due to restrictions of the central Government, later more about this construction.
So first you may have to choose in what way you want to purchase a property, lease or freehold. Many times however, this choice is already made for you by the way the seller is offering his property on the market. Sellers can offer their properties with a freehold title or with a lease contract. We shall give an explanation about these two options.
Until now, and for a very long time, it is prohibited for foreigners in the literal meaning of the word to own property in Indonesia, as all property, land or buildings, are to be registered in the name of an Indonesian citizen.
This means that if you want to purchase a property with a freehold title that you will need an Indonesian citizen as a so called “nominee”. In the land certificate, this Indonesian citizen will be mentioned as the legal owner. To protect your interests as a buyer you will have to make an agreement with this nominee at a notary’s office.
If you are interested to buy a property with a freehold title it is advisable that you already have a relationship with your Indonesian nominee, although in many cases the nominee of the seller can also be your nominee of this person agrees to act as your nominee.
Note that this nominee has to be registered the local tax office, because owning a property like land or a villa means that he or she will be accountable for the tax rules which applies in owning property. Tax has to be paid about the property which is sensible and realistic in every country around the globe.
But in all cases a sales agreement has to be settled with the notary to make it a binding official agreement. The notary can be chosen by the buyer, because this is the right since the buyer has to pay for the services of the notary. The notary fee may vary from 1% up to 2% of the sales price, and is negotiable in some cases. The sales and purchase agreement is to be drawn up by the notary in Indonesian language, else it is not binding. One of the duties of the notary is to conduct a “due diligence”. The notary makes sure that the property is accessible, free of mortgage and most important the property is provided with a land certificate, building license and proof of payments of several taxes.
If the purchase is only land and the objective is eventually to build a villa on this plot of land the notary has to check at the land office (kantor pertanahan) if the land is allowed to build on, in other words if the land is applying correctly to the zoning law. The land has to have the aspect of "residential” so an application for a building permit is possible.
The “security documents” between buyer and nominee:
Between the buyer (you) and the Indonesian nominee will have to be an agreement and we call these the security documents, to protect you and also the nominee. Here is an explanation of what this documents need to contain to make it legally binding
However this construction with a local nominee is still not 100% a secure solution to "own" property in Bali/Indonesia. You can say it is still on shaky grounds. However if there is a 100% trust between you as a buyer and the nominee, it can be done. We as agent prefer for our buyers a leasehold property with a long term period ahead like 25 years or more.
Many potential buyers mix a leasehold and a long term rental property up. Between long term rental and a leasehold there is a significant difference. This difference is the period in which the property will be occupied by the tenant or lessee. To put it more simply ....you “rent” a property for holiday or a longer period of up to a year or even more. When you lease a property you will lease it for the period in the lease contract, commonly 25 years, but can be anything between a couple of years to more than 50 years, depending on the offered lease agreement.
In both cases and in 99% of all rental and lease agreements is that the total sum of money has to be paid up front, before the rental/lease periods starts. It is common practice here in Bali/Indonesia. Basically when obtaining a leasehold (contract), you become the effective owner of that property for the period of the lease period with all obligations and privileges that come with the property. You have the right to sell the leasehold contract and even in case you pass away, it can go to your heirs. If the lease contract does not have an agreed extension condition, the property will be returned to the landlord after the agreed period and he/she can put it on the market again or whatever he/she wants to do with it. It is in all cases advisable that there will be an extension concerning another period to lease in the initial contract. In most cases the purchasing price will be less than a property with a freehold title.
To lease a property gives you the full legal protection during the period of the lease contract. In popular areas like Seminyak and Sanur, properties with a freehold title are rare to find these days and the majority of properties on offer for sale are leasehold.
The lease contract has to be drawn up officially by a notary to protect the interests of the lessee (you) and the lessor (landlord). In this lease contract the period has to be defined and the sum of money to be paid by the lessee to the lessor for this period. As soon as the period has expired the property falls back in the hands of the landlord/owner of the property. Unless one of the conditions is about the extension of this lease period.
It is recommended that one of the conditions in the lease contract is about the extension possibilities, and the price of the extension.
If the lease contract has been drawn up by a notary, this agreement is legal. If buying an existing lease contract for, let us say 16 years, this agreement still has to be conducted by a notary.
To obtain full legal protection it is recommended that the lease contract is drawn up in the official Indonesian language (to be legally binding) and another one in English to help prevent misunderstandings between parties.
To rent a property for a shorter period of time gives you flexibility allowing you to move quickly if you don’t like the property and/or want to move to another location. However, renting a property is significantly more expensive in comparison with leasing a property.
In Indonesia there are no laws like in Western countries to protect the tenant. The landlord can do whatever he/she wants when you want to extend the rental period for like another year. It’s likely that the rental price will go up and you have to negotiate again about the rental price. Don’t forget that Indonesian owners or even foreign “owners” won’t maintain the house while you are living in it and he/she will expect that the tenant will do this.
You are advised to use rental contracts with conditions in it for both parties, normally a receipt of payment will do for Indonesian landlord and on the receipt is written the period of rent. We strongly advise to you to draw up a rental contract and to make it stronger. You can do this at a notary. We recommend you make sure that the person who is offering you the property for rent is the legal owner or is legally entitled to offer this property on the rental market.
It is always recommended to work with a trustworthy and thorough notary if you want to set up a rental contract if there is not a contract offered by the landlord.
Besides the possibilities mentioned above there is still another option for effective ownership.
The Indonesian government realized that many foreign investors were not particularly fond of above mentioned ways to protect legally their property and interests in Bali, Indonesia. Especially for the Nominee construction. So the Indonesian government invented the “Hak Pakai” in other words “ the right of use”.
This way to legalize ownership for foreigners is in many ways similar as in a lease hold, the only difference is that there is no landlord/landowner anymore because the title of ownership is set on the government and the buyer makes an agreement with the government.
It may sound a bit spooky but this is all arranged by the notary and many foreigners see this as the only legal and safe way to protect their ownership and interests. This “Hak Pakai” will be noted in the land certificate and the period of Hak Pakai will be 25 years with guaranteed extensions up to a maximum of 90 years.
However to apply for this option you need to have a permanent license to stay in Indonesia, a so called KITAS or KITAP. If you do not have a permanent license to stay in Bali you cannot apply for this. Also whenever a land has the title Hak Pakai, licenses to operate the property as a commercial object is also not allowed.
The notary will make additional costs for this to arrange this and this will be charged on top of the notary fee.
Many property agent’s advice their potential clients to set up a company to own a property. Companies like a PT (Perusahaan Terbatas) or even an PMA (Perusahaan Modal Asing).
A PT is a company full in hands of an Indonesian citizen and you are a shareholder in this company, it sounds good but it isn’t. First of all you yourself cannot own this PT and again you put your faith into an Indonesian citizen hands. Nothing wrong with that but when the Indonesian owner of this PT has other plans, he or she can just ignore you. Remember the PT is the owner of the property and not you anymore.
Besides all above the PT has to be an up and running business and every year you need to file reports to the tax department. If this is just a phony/fake PT, eventually you will run into trouble as you can understand.
However if you have plans to run the property as a commercial object and you have Indonesian partners and there is a full base of natural trust, this is then a good solution to do so.
However for this “problem” you can start up a PMA, as many agents will also advice. A PMA is a company owned and in hands of exclusively a foreigner of a group of foreigner. So, problem solved. However setting up a PMA is quiet expensive and it will takes a long time to set it up, on top of that the amount of money that has to be invested (one of the conditions to set up this PMA) is quiet substantial.
And again, this PMA has to be an up and running business and every year you need to file reports to the tax department. If this is just a phony/fake PMA, eventually you will run into trouble as you can understand.
If you buy land to build your own villa, again some matters have to be taken care of, in which you need the legal help of a notary.
If the objective is to build a villa on this plot of land the notary has to check at the land office (Kantor Pertanahan) if this is permissible. In other words if the land applys correctly to the zoning law. The land has to have the aspect of “residential” so an application for a building permit is possible. This is part of the Due Diligence is critical and you may need to make this clear to the notary. You are of course free to use the land as agriculture land in that case the land can stay with the zoning title “pertanian”.
If the land is zoned “greenbelt” ( jalur hijau) then you are not allowed to build on that land anyway. We do not recommend bribing officials to get a building permit, although it has been done many times.
If the land meets up to all the legal conditions for building, you can apply for a building permit, called an “IMB”. Do not be mistaken and think this can be done quickly. This is better to be done by a person/specialist who has done this many times before so it can go smoothly. Your building permit application goes with architectural building drawings and estimation of building costs to calculate the construction taxes.
We advise you to consult with acknowledged and legitimate building/construction companies who can assist you through the whole process of applying for a building permit and constructing your dream villa.
In all circumstances we recommend you to do your homework and visit a or some independent lawyers or notary offices who are not attached to a property agent’s office. You as a buyer have to pay the notaris and for that you can choose a notary office of your preference. A notary or a lawyer that is attached to a property agent seems an obvious choice but can be quiet tricky because an agent wants to sell the property and the attached notary is not independent anymore in that case.