Can foreigners own property in Indonesia? What about freehold? I hear I must use a nominee or an Indonesian citizen to purchase in Lombok? These are some of the most common questions we hear from overseas purchasers who want to buy property in Lombok. Google these questions and you will often find conflicting and outdated information, often from people trying to sell you property. As simple Real Estate Agents we are far from experts on matters legal, it’s time to chat with a real expert.

Triin Tigane heads up the Bali office for Emerhub, a consulting firm across the region that specialises in Company Setups, Land Due Diligence and all types of Legal and Taxation consultancy for foreigner’s investing in Indonesia. Triin previously worked as a lawyer dealing with Mergers and Acquisitions in her native Estonia before making a sea-change and now calls Bali home.

1. Reef Property: Hi Triin, thank you for taking the time to chat to us. Firstly, it would be great to know your top tips for someone buying a property in Indonesia that will ensure a smooth process.

Triin Tigane: Land and building due diligence is a must. We see so many people skipping the due diligence because they are in a hurry with the transaction or don’t want to spend on legal matters. Considering the information and security the due diligence gives, and the expense in comparison to the land value, this step should never be skipped.  Also, many people believe that notaries do the due diligence but in fact, the notary is not obliged to do any checks besides the ownership check. The most common issues found during the due diligence:

1. Ownership issues – the land documents are old, and the land has gone through (several) inheritance processes. Thus, it is essential to make sure that you enter into agreement with the right persons. This can mean that the land is subject to dispute.

2. The land zoning is not suitable for the planned activities. E.g. you are not allowed to build in green zoning, you cannot get the company licenses in residential zoning etc. Notaries often don’t ask or check what is the purpose of the acquisition of the land.

3. Land taxes are not paid – you won’t get the building permits or company licenses unless the taxes are settled.

The findings of due diligence can be used as a tool for price-negotiations. If the tax has not been paid for 15 years, it is easy to calculate how much is the potential liability. Thus you can ask the owner to choose whether to decrease the price or take care of the taxes prior to the transaction.

Other items to ensure include;

Using a credible notary to ensure that the agreement is done following the laws. The quality of notaries varies greatly.

Translate the agreement so you know what you are signing.

Use an advisor who can tell you what the market practice is when entering into the agreements e.g. who usually pays the relevant taxes. Lease tax is income tax according to the law, i.e landlord must pay it. However, if you do not know it, and the agreement states that the lessor pays the tax, you must pay the tax.

2. Reef Property:  We get asked this question all the time: “Can foreigners buy property in Indonesia?”. As an expert in this area, can you set the record straight and tell our readers how they can safely and legally buy property or land in Indonesia as a foreigner?

Triin Tigane: Yes, foreigners can buy property in Indonesia. There are two main ways:

– Right to build (HGB) which is the safest way to acquire land. The pros of this title: 1) a foreigner can hold land through a 100% foreign owned company for 80 years which is the longest the Indonesian law allows; 2) the foreign-owned company name goes on the land certificate, thus the foreigner has a full control over the land. The cons of this title: 1) you must set up a company; 2) you must have commercial activities, and report taxes 3) there are fees for changing the title from freehold to HGB if you acquire the land from an Indonesian individual

– Right to use certificate (Hak Pakai) for residential purposes. Pros of this title: 1) you can acquire land for personal use. Cons: 1) valid for 25 years; 2) must have stay permit (KITAS) – if you lose the KITAS, you don’t have right to hold the land anymore; 3) the land must have a building on it, thus you cannot buy land first and then build yourself

If you are interested in reading further on this subject, please see more detailed information from Emerhub here.

3. Reef Property: What about leasehold title? We know this is common in Bali, but we also see it gaining popularity in Lombok.

Triin Tigane: Leasehold is called Hak Sewa, and this is a notarised lease agreement. Lease agreement can be signed for 25 years with the right to extend the lease.

Leasehold is one of the most popular ways to acquire rights to the land. The process is easier, cheaper and faster compared to “Right to build” or “Right to use” titles as there is no need to change the land certificate.

However, leasehold is also the least safe – you will have only the rights to the land that you set out in the agreement on the land certificate. In some rare cases there have been several leases signed by the landowner, and there is a dispute who is actually entitled to use the land. There is no central notary system for lease agreements to check if any leases have been signed.

4. Reef Property: We often hear of foreigners who have bought land or property in Indonesia via a local Indonesian nominee. Why is this not recommended? What are some of the risks of doing it this way?

Triin Tigane: Using a nominee structure is illegal, and the nominee agreements are void. The only agreement from the set that is legal is lease agreement. If the nominee agreement is detected by the government, the government can confiscate the land, and the foreigner may have tax as well as criminal liability.

It is prohibited by the Agrarian Law of Indonesia for a foreigner to own a Freehold Certificate (SHM). Freehold certificates are only available for Indonesian physical persons. When using a Local Nominee Ownership structure a foreigner “owns” a land with a freehold certificate by registering the certificate under a Local Indonesian name and making a set of agreements to make sure that the local Indonesian nominee cannot sell or transfer the land.

5. Reef Property: It’s also worth noting we find when it comes time for a foreigner to sell their property in Lombok, that if the property is already in HGB title or other legal forms of ownership this adds value to the property as there are less costs for a foreign purchaser vs other property that is still in freehold title.

Triin Tigane: Yes, this is correct, the process of transferring the PT PMA along with the property in HGB is simple and has less costs involved, and the process is faster.

6. Reef Property: So, imagine we have found the property we want to buy, how long does the whole process normally take?

Triin Tigane: The process of signing Binding Sale and Purchase agreement, taxes, final Sale and purchase agreement until Certificate title transfer will take approximately 4-6 months. For more information on the set-up steps of a PT PMA you can read further here.

Reef Property: Thank you Triin, we have seen what a smooth process the purchase of land can be when our clients and purchasers appoint quality consultants. It certainly makes our job easier.

Also, when we are selling property for foreign owners if they have previously gone through the proper process in their purchasing process it adds value to their asset and leads to a quicker sale.

At Reef Property we strongly recommend anyone who is purchasing property (anywhere in the world) have a lawyer or consultant that is acting on their behalf only. We often talk with people who purchased property and relied solely on the legal advice from the developer (seller) or the developer’s legal team and did not do their own independent due diligence.

Independent advice on your behalf is important in any major transaction, and with the right advice investing in a beautiful place like Lombok can become a rewarding experience.