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Foreign Property Investment
 

EXECUTIVE SUMMARY

Under prevailing Indonesian law, Foreigners may NOT under any circumstances own Freehold (Hak Milik) land title. Rights of beneficial land ownership are not recognised under Indonesian law. A foreign investor should, therefore, seek to secure rights to use a property and the underlying Hak Milik land.

The basic Indonesian agrarian law (UU5/1960) and its implementation, limits the use of land by individual foreigners to a period of no more than 25 years, which may be extended and/or renewed. Companies, both local and foreign (PMA) may only hold land only under HGB (Hak Guna Bangunan) title for an initial period of 30 years, which can also be extended and/or renewed. The 2007 Capital Investment law (UU25/2007), when implemented, provides that the extensions may be approved from the outset.
It is perfectly legal for foreigners to Lease land or to secure rights to use land for a limited period through either a registered foreign investment (PMA) Company or through a Hak Pakai Structure.

There are other Legal Structures which have been employed incorporating the use of an Indonesian citizen or Company as Nominee owner together with various Contracts, Side Agreements and Powers of Attorney to secure usage rights over a property and the underlying Hak Milik land. To varying degrees, these structures are legally defensible; however, they could all be challenged in Indonesian courts on the grounds that they seek to circumvent higher levels of law (Including UU5/1960 and the Constitution) regarding the National Interest, Public Policy and the intention to restrict land ownership by foreigners. It must be understood that other than the fully legal options noted above, all other Structures involve risk and depend on the goodwill of the nominee(s).

This having been said, there have been remarkably few instances where a local nominee has attempted to take control of property under such a Structure. Perhaps this is because in Indonesia it is virtually impossible to sell property without the Original land certificate, possession of which by the foreigner, therefore, is essential. However, as the value of Bali property continues to increase and becomes less affordable to young Balinese, there is no guarantee that such problems will not occur in future. The Indonesian legal system can be unpredictable. Some observers have suggested widespread corruption and that foreigners do not receive equal treatment.

1. LAND TITLES IN INDONESIA

There are several different categories of land ownership in Indonesia at the National level, although these can be complicated at the local level under the local (Adat) land law and tradition. The major categories of relevance to this discussion are as follows:

1.1 Hak Milik (Freehold) This is the highest land title and may be held only by Indonesian citizens. Foreigners may not hold Hak Milik land title under any circumstances and Indonesian law does not recognise rights of beneficial land ownership. The only semi-exception to this is that should a foreigner marry an Indonesian citizen, providing that a pre-nuptial agreement (Usually referred to in Indonesia as a Separation of Assets) is entered into PRIOR to registration of the marriage, then the Indonesian spouse may hold Hak Milik land title. Nominee or “Name giver” structures are frequently employed in an attempt to circumvent the law and these are discussed in more detail later in this report.

An Indonesian citizen may own land under Freehold (Hak Milik) title anywhere in Indonesia, subject only to Constitutional provisions that one individual should not own so much land as to cause “Social disharmony”. This limit is 5000 SqM according to the law but implementation appears to be flexible.

1.2 Hak Guna Bangunan (HGB) (Rights given only to a registered Company, both local and foreign investment (PMA) to use and develop land for commercial purposes)

1.3 Hak Pakai (The right to use and develop land by individuals)

1.4 Hak Sewa (Leasehold)

 2. LEGAL PROPERTY OPTIONS FOR FOREIGNERS.

The Constitution and the basic Agrarian law (UU5/1960) as implemented, restrict control of land by foreign individuals to periods of no longer than 25 years. There are Structures within land title categories 1.2 – 1.4 above, which represent legal ways in which foreigners may occupy land in Indonesia.
Beyond the latter Structures, the use of a Nominee Structure has been widely employed. Although there have been very few problems to date, this does involve risk, the degree of which can vary according to how it is constructed. This Structure also highly depends on the ongoing cooperation of the nominee.

All of these are discussed in detail in the full 17 page version of this Report together with the various associated legal Structures employed to prolong control of the land by a foreign investor beyond 25 years. The full Report is available to our clients.

 
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