How Can a Foreigner Buy or Acquire Real Property in Indonesia ? - Course 201

"Brian, I am thinking about buying an investment property in Bali or somewhere in or around Jakarta or Bogor.  What would I need to do and what are the legalities or limitations on a foreigner buying a property in Indonesia?"  --  David

David, thanks for your inquiry. The following is not intended as giving "legal advice" but based on my personal knowledge and research here's how it all basically works. As in any business venture or enterprise in a foreign country GREAT CARE and CAUTION should be exercised to know what the law actually is (Undang Undang No. 5 Tahun 1960 or UU 5/1960), what local prevailing practices or customs are, and to use only HIGHLY reputable professionals in all aspects of the transaction.  One should be EXTREMELY VIGILANT against people who may appear professional but are actually perpetrators of fraud, con or Ponzi schemes.  Therefore, you should only being working with a licensed professional, such as myself, who has years of experience, professional ethics and a proven track record of successes (not in cons or fraud schemes!)   Ok, now that I have given you that "disclaimer" or words of caution, here's some information which should help you make an informed decision about "owning" or buying a property in Indonesia. 

Without using an Indonesian national/citizen as the "nominee" (or the person who actually takes title or deed the property), the foreigner who try's to "buy" the property is not really buying it (with the "full bundle" of property rights; i.e. transfer to their heirs, sell it later, own it for indeterminate amount of time, etc); but they are only given a "leasehold estate" to the property or what is called "Hak Pakai" (right of use) in Indonesian Bahasa and do not really own it in "fee simple" or as a "freehold estate" form of ownership known as "Hak Milik" (right of ownership) which does have all the "bundle of rights" associated with it or a fee simple form of absolute ownership. 

(See my other blog post entitled "Indonesian Property Ownership & Use Laws 101" for a further outline of these principles).

To circumvent or get around the aforementioned laws, or as a "loophole"; a foreign investor can buy a property using an intermediary or "nominee" who then gives a power-of-attorney to the investor so that the investor can have all the rights as if he/she was the actual owner, and could re-sell the property, rent it out, etc, etc.  By virtue of a contract agreement, monetary consideration, and an irrevocable power-of-attorney document between the foreign investor and the intermediary or Indonesian "nominee"; the foreign investor is in essence the actual and true owner of the property and is free to do with it as he deems fit, such as re-sell it later, sell off shares or interests in the property as sub tenants-in-common, or rent or lease out the property.   My wife is Indonesian and we can arrange for her to be the "nominee" or intermediary if you wish to proceed with consummation of a contract on a property.

On the topic of contracts or documents, UU 5/1960 stipulates that real estate contracts and agreements be typically drawn up in the language of Indonesian Bahasa (or both Bahasa and English) or the language of the principal foreign Buyer or Seller so there is no confusion or so that neither party can later assert or claim contract misunderstandings or ambiguity.

Here is a summary of using a "nominee":

The nominee will sign four (4) documents with the foreigner investor as follow:

1. A Loan Agreement: acknowledges that the foreigner has lent the nominee the purchase price of the land or transferred funds to the nominee so that the nominee can purchase the property.
2. A Right of Use Agreement: allows the foreigner to use the land, and establishes a foundation of basic property rights.
3. A Statement Letter: where the nominee acknowledges or ratifies the foreigners loan and his intention to own the land.
4. Power-of-Attorney: the nominee signs an irrevocable Power-of-Attorney giving the foreigner the complete authority to sell, mortgage, lease or otherwise manage the property.  This document, in essence, transfers "ownership" of the property from the nominee back to the nominator (foreign investor).  Although the nominee is on the deed, the nominator now has all the rights as if they were the true and actual owner on the deed.  This allows the foreign investor to in essence "own" the property and do with it as they please; hold it long term as an investment to sell or exchange later, live there as "owner occupied", or rent/lease it out, or flip it for a quick profit depending on market conditions and value of course.      

Caveat on the use of a "nominee" - pursuant to Article 39(d) of Peraturan Pemerintah No.24 Year 1997, a Pejabat Pembuat Akta Tanah (PPAT = Land Title Issuing Officer) shall refuse to issue a title or deed to a real property if  one of the parties or all parties are acting based on a kind of an absolute power-of-attorney which in essence contains a legal transfer of rights.  

In Indonesia, however, nothing with regard to the law is unambiguous or is strictly followed according to intent and purpose, nor the spirit or letter of the law as written. Graft and corruption is ubiquitous as well as "administrative interpretation and application of the law."  While property title or deed conveyed through the use of a "nominee" may not be technically legal, it is in fact done nevertheless.

Should a Land Title Issue Officer (or PPAT) refuse or question the transaction they can be "persuaded" to reconsider their administrative or enforcement position with an "incentive."   Should the issue of the use of a "nominee" with an irrevocable Power-of-Attorney ever become a "cloud on the tile" in a subsequent transfer or conveyance of the property by the foreign "owner", then this too can likewise be overcome through "persuasive" dialogue or discourse with a land agency official.

There is also another way to [legally] circumvent the Indonesian property law restrictions for allowing a foreigner to buy real property.  The most significant change in Indonesian investment law came in 1997 when the government introduced the "PMA" (Penanaman Modal Asing or "FDI" - Foreign Direct Investment Company). This allows foreign investors to set up a company or "corporation" in Indonesia, without having to have Indonesian principals or partners. The PMA can be 100% owned by the foreign investor. PMA or FDI companies are allowed to own the title of the property for a period 25 years and have to be renewed by the government.

Here is a summary of using a PMA, in which you will be required to:

1. Submit a detailed "corporate" or business entity business plan which shows structure, organization and some information on the financial structure of the business entity or "PMA."
2. Demonstrate by your business plan that your PMA will operate in an environment or way that adds value to Indonesia in terms of foreign skills, employment and environmental benefit. (the mere fact that you are investing in all this business entity enterprise and will be spending $$$ in Indoor hiring local nationals to any repairs, maintenance, etc on the property can demonstrate how your PMA owning and holding property in Indonesia is beneficial to its economy and to its people)
3. Make an appropriate cash deposit in an Indonesian based Bank. The amount varies and is calculated from the capital employed in the business.
4. Show the property investment as an asset of the company.

The process takes approximately 3 to 4 months and once its completed; the company can apply for work permits for the foreign directors, 3 permits in the first year of operation. The cost of setting up the PMA is approximately between 30 to 40 Million IDR or $4,500 USD.   Of course this method is very involved and is not intended for your first time investor and involves many other legal and tax consequences and you would need to be a very savvy business owner with either a great deal of experience of have your team of professional lawyers, financial or investment advisers, CPA's etc to set this all up correctly and legally so you do not run into problems with the Indonesian authorities, which regrettable to say can be corrupt.  I just mention it here as another possible or viable option to make you aware of.

Indonesia Considers Allowing Foreign Investors to Buy/Own Real Estate

"Proposed changes to property ownership laws for foreigners: Mixed messages are still coming in regarding the government’s intentions with possible changes to the property ownership laws for foreigners. One recent report indicated that the government wants to make Indonesia more attractive for foreigners to retire and are therefore considering allowing foreigners aged 55 years or older [retirees] to be able to purchase property here. However because with every ‘pro’ there needs to be a ‘con’, the eligible foreigners will only be able to borrow up to 50% of the properties [sic] value and the loan must mature in a maximum of three years. Hmmm.. " -- Article from What's New Jakarta

This seems very and overly restrictive and also raises the following questions:

1) What is the definition of an "eligible" foreigner ?

2) The 50% Loan to Value (LTV) ratio applies where the property land records reflect a "deed of trust" loan or mortgage on the property. What if the financing is obtained outside of Indonesia ?

To require that the mortgage loan term be a maximum of three years means that if financed in Indonesia, the banks will make far less money in interest than if the mortgage loan was for the typical 15 year (180 months) or 30 year (360 months) loan period typical of real estate financing in the US. Furthermore, mortgage interest can generally be an itemized Federal income tax deduction on IRS Schedule A, so by only having a 3 year loan period this also makes the prospects for a [US] foreigner less likely to buy property in Indonesia since they cannot "write off" or deduct mortgage interest from their gross income thereby lowering their final or overall net taxable income. This will definitely not serve to stimulate the Indonesia economy by making it overly restrictive and financially burdensome for a retired person [over 55 years of age] on a pension or fixed income to take out a 3 years mortgage loan on a second or vacation home or investment property; not unless of course the elderly retired person was very wealthy. This would be a highly counter-intuitive move by the Indonesian Government to even consider such a measure.

The US imposes a "FIRPTA" (Foreign Investment Real Property Tax Act) which basically works like this. A foreigner can own US real property; however, if they ever sell it or plan on "cashing out" on the appreciation of an investment property; not only will they be subject to Capital Gains taxes (unless a "1031 tax exchange" is done), but will also be subject to the FIRPTA tax at closing or settlement on the sale of the property as well. The underlying philosophy behind this is the US says, "sure you can come here and buy and own property here, but if you plan on "cashing out" and running back to your country with the money you made here in the US, then "Uncle Sam" and the IRS is going to take their cut first. Indo could do something similar...