MAYANG BALI

This is a general overview of the legal structures in Indonesia as it relates to land and property investments. It is always a good idea to seek reliable legal advice, which can be arranged by Mayang Bali Property if requested.

Hak Milik – The Right to Own Land

Freehold land can only be owned by an Indonesian citizen. However, an Indonesian citizen can give a foreign national right to use the land by way of a mortgage and all improvements on the land can then be owned by the foreign investor. These improvements include houses, trees, structures of all types and excavations such as swimming pools, so long as they are deemed "movables".

Hak Pakai – The Right to Use Land

The right to use land is similar to a leasehold title and is technically, the right of utilization of state land. The maximum length of lease is debatable but the stated maximum lease terms vary between 20 years plus an additional 20 years renewal; 20 years plus 30 years plus another 20 years; 25 years plus 25 years up to 60 years and then plus another 60 years.

Hak Guna Bangunan (HGB) - The Right to Build on Land

The right to build on land is a type of leasehold that includes the right to build or construct on land. This form of title is available to Indonesian individuals, Indonesian companies, and Indonesian companies controlled by foreigners, known as PMA's. This type of title must be renewed every 20 years by payment of an HGB tax. The level of taxation is not fixed and is at the discretion of the local Government.

Ways to Purchase Land for Foreign Investors

There are three basic ways for foreigners to own land in Indonesia.

The most common way for foreigners to "acquire" land in Bali is to use the name of an Indonesian individual, i.e. to use an Indonesian nominee to purchase the property. This method has been used for many years and a clear process has now evolved with legal precedents being established.

Once the appropriate site has been selected, the nominated Indonesian purchases the freehold land from the previous owner. At the same time as acquiring the land the Indonesian individual completes three additional agreements with the foreigner:

a) A loan agreement which acknowledges that the foreigner has lent to the Indonesian citizen the purchase price of the land. This is then registered on the land exactly the same as a first mortgage or caveat and it is noted on both the title at the Land Department and the copy held by the owner. There can be no dealing in the land until the loan agreement is cleared from the title. With the foreigner's loan details registered on the title, it also prevents the reissuing of new title deeds without the foreigner's consent.

b) An irrevocable power of attorney is signed giving the foreigner complete authority to sell, mortgage, lease or otherwise deal in the land. Without notice to the Indonesian Citizen, the foreigner can sell or otherwise deal in the land.

c) A permanent right of use agreement is completed, giving the foreigner rights to use and occupy the land.

To cover the event of death of the nominee, the Power of Attorney is drafted in such a manner so that the governing conditions are passed on to the heirs. In the event of subsequent dispute with the nominated Indonesian, the Power of Attorney allows the foreigner to sell the land to another Indonesian.

Some foreign investors may find the first method unacceptable due to third party ownership. Those looking to purchase a large site and subsequently divide the site into smaller parcels that are individually sold may also wish to utilize a PMA Company.

A foreign investor can effectively control 100% of the shares in a PMA but should bear in mind that only the HGB form of title is available, which is valid for 30 years and a further extension of 20 years and then another 30 years (for a total of 80 years). Most hotels in Bali have used this form of ownership. Developments which require subdivision, such as golf course villas, shared villa developments or a small apartment building are usually held by a PMA, where the stock of the Company is sold, with the subdivided titles representing the capital asset of the stock.

Please bear in mind that all PMA entities are highly regulated and must submit semiannual comprehensive reports on the status of the company including payment of taxes, all assets acquisitions and changes in ownership to BKPM, the central administering authority for PMA companies in Indonesia.

A foreign individual domiciled in Indonesia, satisfying a number of conditions and holding a KITAS working visa can enter into a 25 year lease renewable for a further 25 years. This form of ownership is a direct lease between a foreigner and a local owner where the foreigner is either domiciled in Indonesia permanently or where the foreigner stays in Indonesia only at particular times. The actual house and all property built on the land can actually be owned by the foreigner and removed at the end of the lease term.

When entering this agreement, the foreigner will need to complete a written agreement confirming the right to use the land with the land title holder, which is drawn up in a "deed of a land conveyance (PPAT)" and which is subsequently recorded in the land book and in the certificate of land title. A foreign individual can only own one house under this type of agreement.

We believe this form of ownership should only be considered by those retiring to Bali on a permanent basis or by those corporations requiring long term accommodation for foreign workers, due to the fact that if the foreigner is no longer domiciled in Indonesia, they must transfer the land and house to another domiciled foreigner within one year or the land will revert to the state or land title holder.