Legal Opinion

Nasdion Chadir  SHMKN
Law Office
Jl Kesatria No6
Padang, West Sumatra

Like most of South East Asia , foreigners are not permitted to have outright title to property here. They can however, legally acquire property in Indonesia and enjoy full beneficial rights to the property by leasing, entering into legal contracts with an Indonesian citizen for the freehold or by establishing a Foreign Investment Company (PMA).

We strongly recommends that potential customers seek impartial and independent advice from an accredited legal firm specialising in property acquisition.

There are 3 different ways that foreigners can acquire property in Indonesia :

1)  The most popular method is to enter into a legal contract with an Indonesian citizen (‘nominee' as they are  referred to), whereby he/she holds freehold title to the property but signs over power of attorney and practical control to the foreign investor.

2)  Acquiring the leasehold of a property is the most straight forward approach for a foreigner. However at the expiry of the lease, the property would revert back to the Indonesian owner. 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. Lease periods vary and extensions are often agreed in advance; 20-30 years is a common lease period in Indonesia.

3)  Forming a foreign investment company (PMA) is the preferred choice of those intending to operate a business in Indonesia . Here the foreigner or a foreign company can own 100% of a PMA company and the title of the property will be in the company name. However, there are tax implications to be considered. The Department of Trade will review PMA companies after 25 years so it may be necessary to re-apply for the PMA license.  The PMA format is accepted by  the international business community as the only vehicle for investments of $1M or more.

NOMINEE METHOD

You will need to identify an Indonesian individual who is willing to act as your nominee. Quite often a fee is required by the nominee, either at the start of the arrangement and/or at the end, if and when you sell the property. In any event your legal adviser should draw up a written agreement between you and your nominee covering the terms of your arrangement.

Further agreements will be created covering power of attorney, right of use and mortgage/loans which collectively will give you the beneficial rights to the property.

PMA

In 1997 the Indonesian Government introduced the PMA program (Penanaman Modal Asing or Foreign Investment Company) to encourage overseas investment. A PMA allows foreigners to set up a company in Indonesia which can be owned 100% by the foreigner and which can in turn own property as part of its assets. To establish a PMA company you will be required to:

•  Submit a detailed business plan

•  Make an appropriate cash deposit in an Indonesian based bank as working capital. (The amount of deposit is calculated from the total capital employed)

•  List the property investment as an asset of the company

•  Pay the PMA start up fee, which at the time of this publication was between Rp. 40 – 50 million (approx US$5,000)

If more than one  foreigner is involved it is a simple matter to register the shares in a PMA in the name of an off-shore company. The off-shore company can then issue shares to all parties who have an interest in the property. This simplifies the buying and selling of the property rights assigned to the shares and is very tax efficient for shareholders.

STATUS OF PROPERTY IN INDONESIA

Land parcels for sale in Bali fall into one of two categories:

•  Pakai  : Land that has been passed down over the years through a local family but has never been formally registered with the Land Registry Office.

•  Sertifikat : Land which has been registered with a certificate by the Land Registry Office. Only land which has this certificate can be sold.

Properties are usually advertised as a certain number of ‘Hektars'. or in the cities sizes are quoted in square metres equivalent. 1 Hectare is 10,000 Sqms, 1 Acre is approximately 4,040 m2.

If you intend to acquire ‘pakai' land you will first need to have the Government measure the parcel and create a ‘sertifikat' before a transaction can be completed. Your legal adviser will co-ordinate this process, which usually takes 4-6 months.

If the property you wish to purchase already has a certificate, the acquisition can be much quicker.

The first step in any property acquisition is to have both the buyer and seller sign an ‘akte jual beli' or ‘binding sale agreement'. This document will lock in both parties whilst the certificates are being prepared.

Once your lawyer has the certificates, 1-2 weeks, subject to due diligence and the transfer of funds, is a typical completion period. All of our offices have escrow bank accounts (set up with international foreign banks) allowing monies to be safely held prior to disbursement.

Land purchases in Indonesia must by witnessed by an officially appointed 'Notaris' . The standard contracts are written in the Indonesian language, however, translations can be arranged upon request.

Prior to completion the Notaris will arrange for the Government property transfer tax to be paid. This tax is based on 10% of the taxable value of the land, which is assessed by the Land Registry Office and is usually considerably lower than the actual price being paid for the property. 5% is payable by the buyer and 5% is payable by the vendor.

The information above is provided without obligation and the author accepts no responsibility or liability in connection with any specific land transaction.

Sincerely



Nasdion Chadir  SHMKN
October 2004