This is an excerpt from a recent publication issued by Bali Discovery Tours with some additions and changes made made by Bali Woodworld. 

1. A FOREIGNER CANNOT OWN LAND IN INDONESIA

As the value of property in Bali increases significantly toward International levels, many foreigners wish to buy land in the last affordable paradise on earth, however, any potential buyer of land shall carefully investigate the potential hidden dangers that surrounds foreign land ownership in Bali. 

First and foremost: A foreigner cannot own land in Indonesia unless the person holds A Foreign Direct Investment (PMA) license. which gives him the right to use and build for commercial purposes. This can also include the use of land under a structure of ownership whereby the investor receives a land certificate with an Indonesian land owner retaining the ownership land title. Various side agreements may be entered into between the two parties which can include pre-agreed extensions. A mortgage/loan agreement, would also normally be employed between the parties.

2. FREEHOLD......A FAKE

Be aware that under no circumstances can foreigners own property under a freehold title in Indonesia. However, it is ironic to discover that real estate companies have erected booths in the arrival halls of Bali’s airport, placed ads in local publications and distributed brochures – all advertsing “freehold” land in Bali. Given the state of current property law, the very use of the English language term “freehold” in connection to a local property transaction involving a foreigner is highly suspect and is a tactic that, in other jurisdictions, would form the basis of a criminal prosecution. There is only one semi-exception. If a foreign investor is married to an Indonesian citizen, providing that a Pre-nuptial agreement was entered into prior to the marriage being registered, the Indonesian spouse may hold the ownership land title.

3. UNDER CERTAIN LEGAL RULES A FOREIGNER CAN HAVE THE RIGHT TO USE LAND 

There are several possibilities to own the right to use the land.

Firstly, the lease of land under leasehold is perfectly legal and requires only a simple contract between lessee and lessor. Such a contract cannot be longer than 25 years but through various renewal clauses, the lease can be put in place for periods of time which are adequate for the needs of most investors. In this vehicle, the land title remains with the Indonesian owner of the land.

Secondly, as a result of Government Regulation 41 of 1996 (PP41) and several other subsequent changes in other regulations, it is now possible for most foreigners to own the right to use and build a residence on the land. In this case, essentially the land title is returned to the Government and the foreigner would be issued with a land certificate in his/her name for 25 years which with one extension of 20 years would therefore be valid in total for 45 years.

Thirdly, the right to use in combination with an ownership structure has more recently been widely used. In this structure, the foreign investor is essentially using the right to use structure mentioned earlier and has the comfort of being issued with a right of use land title in his/her name for 25 years whilst the ownership certificate remains in the name of an Indonesian citizen not the Indonesian State. As a civil law jurisdiction, Indonesia recognizes the right of its citizens to enter into contracts between consenting parties and this provides the basis for the various side agreements to support such a structure, including pre-agreed automatic extensions which must be applied for at least 3 years prior to the expiry of the current certificate.A Hak Tanggungan is normally also employed between the parties.

It should be noted that in a very recent development, the right to use/ownership land title has become mortgageable and there are already several banks which will now provide loans against such title.

4. BENEFICIAL LAND OWNERSHIP, THE WORST AN INVESTOR CAN DO

It should be clearly understood that Indonesian law does not recognize any rights of beneficial land ownership. Many of these nominee arrangements come with a series of side agreements which usually include an irrevocable Power of Attorney giving the foreign “Purchaser” the right to sell the land at any time. However, as a result of a 1982 regulation of the Ministry of Home Affairs put in place specifically to deter such arrangements, Indonesian law does not recognize the use of irrevocable POA’s in respect of land transactions and the POA may therefore be revoked at any time by the Indonesian “Nominee” owner of the land.

Such basic nominee structures usually employ a mortgage right as one of the side agreements and this is shown as an encumbrance on the land certificate in the name of the foreign investor. This serves the purpose of making it difficult for the Indonesian land owner of the land to sell it, especially if the foreign investor holds the original land certificate, which is essential. However, as land values increase, there remains the risk that the “Nominee” wishes to settle the mortgage and claim back the property. There are other complications involved in such a structure, including taxation on the “Interest” income on the loan.

It should be understood that the use of nominee arrangements does have high risks. Even if not strictly contrary to the law it is conceivable that in the event of a Court challenge by an Indonesian “Nominee”, the Courts might rule that the sole purpose of such agreements was to circumvent higher Indonesian law and provisions of the Constitution, thereby contravening both the spirit and the intention of the law and making the Agreements invalid.

As the value of property in Indonesia increases toward International levels and if young Balinese find that they can no longer afford land on their own Island, it is possible that such disputes will become much more widespread than has been the case to date.

As a general rule, it is not advisable for foreigners to enter into legal disputes in Indonesian courts.

In advising clients, I often ask if, in their own country, they would entrust the ownership of their house or apartment to someone they did not know and, if not, why would they do so in a country they don’t know?