This guide is for information purposes solely, please always check with a Notary or Lawyer the current legal implications for buying Property in Indonesia!
Land matters in Indonesia, except for mining and forestry, are under the jurisdiction of the National Land Agency (Badan Pertanahan Nasional-BPN). Under the Basic Agrarian Law (UUPA or Law No. 5/1960) only Indonesian Nationals are entitled to legally own freehold land in Indonesia (even Indonesian Companies may not own freehold land). As such, it is impossible under the UUPA for foreign individuals or foreign legal entities to legally own land in Indonesia.
Therefore these are essentially the main options of property ownership for foreigners:
1. HAK MILIK (HM) – FREEHOLD TITLE RIGHT OF OWNERSHIP (Article 20-27) through a Nominee (Freehold Title under the name of an Indonesian Citizen)
This is the absolute Ownership of Land (freehold title in common law jurisdictions)This Title is held in perpetuity (no time limit). It can be sold, gifted, transferred, bequeathed, and hypothecated.
Subject to zoning restrictions,The holder can use the land for any purpose (except to exploit the natural resources found on or under the land)
Only individual Indonesian Citizens are entitled to own freehold land
By Indonesian Law,neither Indonesian limited liability Companies (PT/Perusahaan Terbatas), domestic or foreign owned PMA, nor foreign individuals may obtain land with an HM Title. Instead they are entitled to leaseholds, rights of use, rights of exploitation or rights to build.
Certain legal entities designated by the Government, such as State Banks, agricultural cooperatives, religious bodies, and social foundations may hold this right subject to certain restrictions.
This Title is very attractive to investors because it gives the benefit of an asset that can capitally appreciate.
For a foreigner to buy Freehold Property, a popular method is to enter into a legal contract with an Indonesian citizen (referred to as the ‘nominee‘) signed with the witness of a notary public, whereby he/she holds the freehold title to the property but signs over practical control to the foreigner through Power of Attorney to use&sell the land and a Loan Agreement with the property pledged and secured as collateral.
Needless to say, the ‘Indonesian Nominee’ must be someone you trust because, according to the law, this person is the “legal owner” since there is no official title to the land in the foreigner’s name. The terms of the agreement are governed by the Nominee Agreement, that should address the following matters:
1.An annual fee payable to the Nominee
2.A percentage of the sale price payable to the Nominee if the land is sold
3.Legal and taxation indemnities in the Nominee’s favor (the Nominee remains the taxation object)
4.Obligations on the Nominee to cooperate in applications for licenses such as building approval, Pondok Wisata licensing for commercial, etc…
5.Statement letter from Nominee where he/she acknowledges the foreigner’s loan and intention to “own” the land.
6.Mortgage over the title set at the transaction value to prevent the owner of the Hak Milik from dealing with the title contrary to your interest
2. HAK SEWA – LEASEHOLD AGREEMENT (RIGHT TO RENT)
This is the right to use land owned by another private party (the lessor who is the Hak Milik land owner) for building purposes.
The right does not exist in Certificate form, however there are strict laws protecting the interests of a lessee in land. It cannot be mortgaged.
This right may be held by Indonesian citizens, Indonesian companies domiciled in Indonesia, by a foreigner permanently domiciled in Indonesia or a foreign legal entity having a representative office in Indonesia.
A lease is only a temporary interest in the land. At the expiry of the lease, the property reverts back to the Indonesian owner of the underlying Hak Milik with all structures built on it.
The length of the lease is critical in terms of transferring the lease if you decide to on-sell during the lease term. 20-30 years is a common lease period in Indonesia (average 25 years).
A very important consideration is that if you may wish to extend the term of the lease beyond the original term, a properly drafted lease agreement should contain provisions for renewal of the lease, the stage of the lease the renewal can be requested, and the price mechanism of the renewal (rent increase mechanism).
This method is popular in commercial property situations where a return on investment can be achieved within the lease period, but less popular with individuals who wish to make longer-term investments.
Leasehold interests in property are often more suited to those looking for a ‘lifestyle’ choice as the asset itself is a limited right to the land for a limited period, and is not guaranteed to appreciate with time.
3. HAK GUNA BANGUNAN (HGB) – RIGHT TO BUILD/USE BUILDINGS (Article 35-40) through a Company Structure
This is only the right to construct and own buildings or other structures on a piece of land that is state-owned land (Tanah Milik Negara), private Land HM (Hak Milik), and HPL (Hak Pengelolaan) Land.
The Right is granted for an initial period of 30 years maximum that can be extended for another term of 20 years. When the extension period expires, new Right of Building Title may be granted on the same land. The terms of extensions and renewals are dependent on whether the HGB is established over Hak Milik land or over State land.
This right can be sold, exchanged, gifted, transferred, bequeathed and mortgaged,
This is very common title for residential, commercial and industrial properties. Indonesian Individuals and Indonesian legal entities including Foreign Capital Investment (PMA) and Domestic Capital Investment (Penanaman Modal Dalam Negeri-PMDN) companies can own this Title. Thus any legal entities such as limited liability companies (PT) which are established under Indonesian Law and domiciled in Indonesia may obtain HGB.
Forming a foreign investment company (PMA), with approval of the Indonesian regulatory authorities, is the preferred choice of those intending to operate a business in Bali. A foreigner can fully control a PMA company and the title of the property will be in the company’s name in the form of a right to build (HGB) (corporate ownership) registered with the Indonesian Land Office. As long as the land is being used for whatever purpose, then the title is secure.
4. HAK PAKAI – RIGHT TO USE TITLE (Article 41-43)
This is the right to use land directly owned by the State, or private land by the agreement with the owner of the land for a definite period or occasionally for an indefinite period. Hak Pakai entitles the holder to use the subject land for specific purposes described in the deed of conveyance.
A Hak Pakai is a certificate that is granted by the Indonesian Land Office, and operates as an interest that ‘floats above’ the Hak Milik title of an Indonesian citizen, and is recorded as an encumbrance on it.
The Hak Pakai title differs from a lease in that it is a registered proprietary interest in the Hak Milik land rather than an unregistered interest.
This right may be held by an Indonesian individual or legal entity, certain resident foreign individuals or a foreign legal entity with a representative office in Indonesia.
Under the former Basic Agrarian Law foreigners were eligible to obtain a Hak Pakai for for an initial 25 years term extendable for additional sequential increments 20 years and 25 year, adding up to a total tenure of 70 years (25+20+25 years). At the end of the total tenure period, the land will revert to the Government of Indonesia unless it is sold to an Indonesian Citizen (therefore it becomes Hak Milik again).
A foreigner is entitled to only one “Hak Pakai” title for a property not exceeding a certain size (50are)
The “Hak Pakai” can be mortgaged and is transferable or renewable if sold to another foreigner.
The land to which Right of Use is applied may be used as a building site or for agricultural purposes.
A Hak Pakai, or right of use, is an alternative to a simple Nominee Agreement, and is a mechanism specifically designed by the Indonesian government to allow foreign ownership of land.
The most prevalent commercial use of Hak Pakai titles is in connection with the sale of modern condominium units and other strata title projects aimed at attracting direct purchases by foreign individuals or companies (both commercial and residential property). An apartment can only be purchased by a foreigner on land with right of use (Hak Pakai).
5. HAK GUNA USAHA HGU – RIGHT OF EXPLOTATION/CULTIVATION (Article 28-34)
This Title gives the right to exploit/cultivate a state-owned land for the purposes of agriculture, in particular plantations, fishery or cattle-raising.
Such title is granted for periods of 35 years maximum, and may be extended for another 25 years if the land is deemed to be managed and utilized. When the extension period expires, the Right to Cultivate shall be renewed over the same land.
This right can be held by Indonesian individuals/entities as well as government approved Foreign capital investment companies (PMA companies) established under Indonesian Law and domiciled in Indonesia. Foreigners and foreign legal entities, in principle, can not be granted HGU.
The certificate can be bequeathed, mortgaged or, with the approval of the government, transferred to a third party.
HGU titles can not be granted on areas less than 5 ha in size and special rules apply for areas over 25 ha.