If you’re in a situation where you like Bali so much and decided to start open a business here so you can permanently live in this beautiful island, or wanted to have a house or villa in Bali so you know where to go for vacation, or simply wanted to fully relocate here and spent your retirement peacefully, then this guideline of how the structure property ownership works is definitely what you need.
Before purchasing a property in Bali, it is important for you to be familiar with the type of property ownership, what the difference, and what’s suit you best. If you know this already, then it’s worth to read on Pro Tips for Investment in Bali.
According to Indonesia Law and Regulation Number 5 year 1960 (UU No. 5 Tahun 1960) in regards to Basic Regulation on Agrarian Principles (“Agrarian Law”) there are 7 (seven) types of property ownership in Indonesia which includes:
- Freehold (right of ownership)
- Cultivation Rights
- Right of Building
- Right of use
- Land clearing rights
- Right to collect forest products
In property investment, there are only 4 (four) types of property ownership that are most common to use, which are freehold, building rights, right of use, and leasehold. Let’s go through it one by one.
Freehold Title (Sertifikat Hak Milik / SHM)
Sertifikat Hak Milik (Freehold Certificate) title is the highest right of property ownership in Indonesia. This means you can own the property in an unlimited period until you decide to sell or transfer it to someone else.
Freehold title is reserved only for Indonesia Citizen (individually). The law and regulation has clearly stated this, so there will be no way of foreigner can get a freehold title of a property in Indonesia. However, there are a workaround to it which outlined at the end of this article.
Law & Regulation:
Article 20 and 21 of Agrarian Law.
- Freehold title is the strongest and fullest hereditary rights that can be owned by a person over land, taking into account the provisions in article 6.
- Freehold title can be transferred to other parties.
- Only Indonesian citizens can have freehold title.
- The government determines legal entities which can have freehold title with a certain conditions.
- Foreigners who, after the force of this law obtain a freehold title because inheritance without a will or a mixture of assets due to marriage, as well as citizens Indonesia which has freehold title and after the force of this law loses Citizenship is obliged to relinquish this right within one year of obtaining it right or loss of that nationality. If after this period the rights have passed the property is not released, then the right is canceled by the law and the property fall under the state, provided that the rights of the other party that burden them continue.
- As long as someone besides their Indonesian citizenship has citizenship foreign then he/she cannot own land with ownership rights and for him the provisions in paragraph 3 of this article.
Pros: The highest title of property ownership structure in Indonesia. It has an unlimited time period of ownership hence has a higher value on the market for ownership by individuals.
Cons: Only for Indonesian (individual) citizens. Cannot be possessed by foreigner or legal entities.
Rights of Building (Sertifikat Hak Guna Bangunan / HGB)
Hak Guna Bangunan (Rights of Building / HGB) is the right to build and own buildings on land with a maximum term of 30 years and can be extended/renew after the term is expired.
Based on Government Regulation No. 40/1996, the term of extension or renewal will be as follows:
30 Years (Grant) + 20 Years (Extension) + 30 Years (Renewal)
That gives a 80 years in total. Renewal shall be proceeded through Notary/Land Conveyancer and National Land Office (Badan Pertanahan Nasional “BPN”).
HGB is the strongest property ownership that can be owned by all type of legal entity, including a Foreign Investment Company (read more about legal entities in Indonesia here: Key things to establish company in Indonesia).
In a common practice in big city in Indonesia like Jakarta and Surabaya, the Developer Company will register the land and building that they build as HGB (because as a company there is no way to get freehold title). When they sell it, there will be 3 possibilities for the buyer:
- If the buyer is Indonesian, they can upgrade it to Freehold title or just simply transfer the HGB from the developer’s name to the buyer’s name
- If the buyer is a legal entity, then the HGB will be transferred from Developer’s name to the name of the company of the buyer.
- If the buyer is an individual foreigner, then the rights will be change to Right of Use (Hak Pakai) or the developer shall arrange a leasehold agreement.
Due to common business practice in Indonesia, HGB is not considered as a 2nd tier class title, but it is considered to be the strongest property ownership for a company.
After the 30 years renewal process, the HGB holder can then re-submit the application to get a 30 years of Grant. HGB is basically a cycle that keeps rotating. In practical, HGB title is being used as a business purpose, and by creating a time limit it will minimize (albeit not significantly) the chance of a company having an abandoned land.
Pros: Can be owned by legal entities. Safest way if the property is used for business or investment by a legal entity. The right shall fall to the company and registered as the asset of the company. Also, by owning the HGB title, the company can use it for financial purposes (for example: mortgage).
Cons: The rights have a validity period which need to be extended and there will be a cost on doing the extension.
Rights of Use (Sertifikat Hak Pakai)
Hak Pakai (Right to Use) is the right to use and/or collect products from land that is owned by the State or other people. Based on Agrarian law, previously, Rights to Use is granted for a maximum period of twenty-five years and can be extended/renewed, but as per the article 6,7, and 8 of the Decree of Agrarian and Spatial Minister No. 29/2016 (Peraturan Menteri Agraria dan Dinas Tata Ruang No. 29/2016), the term of Right to Use will be the same as HGB (30+20+30) which gives a total of 80 years.
Law and Regulation:
Article 41 of Agrarian Law:
- Right of use are rights to use and / or collect produce from the land under control directly by the State or land owned by other people, which gives the authorities and obligations determined in the decision to grant by the official authorized to give it or in an agreement with the land owner, which is not a lease or rental agreement cultivation of land, and so on as long as it does not conflict with the soul and the provisions of this law.
- Rights of Use can be granted:
a). for a certain period of time or as long as the land is used for different purposes certain;
b). free of charge, with payment or provision of services of any kind.
- Granting Rights of use must not be accompanied by conditions that contain elements of extortion.
Article 42 of Agrarian Law
Those who can have use rights are:
- Indonesian citizens;
- Foreigners domiciled in Indonesia;
- Legal entity established under Indonesian law and domiciled in Indonesia
- Foreign legal entities that have representatives in Indonesia.
Pros: Can be possessed by foreigners under their own name. Good option for foreigner who wants to start investment / owning a property if they don’t have legal entities or trusted local partners.
Cons: Considered as a 2nd tier right due to it’s nature is for residential purpose and not for investment, doesn’t have strong commercial aspect to it (for example: the Bank usually reject mortgage of Right to Use title).
Sewa Menyewa (Leasehold)
For avoidance of doubt, the provision of Leasehold has a minimum information in the Agrarian law. Lease is considered to be a different type of right rather than the “ownership” that belongs to Freehold, Right to Build, and Right to Use.
The main difference is in all previous 3 rights, there will be a certificate issued by BPN to the holder of such right. However, Leasehold basically an agreement between Lessor and Lessee to lease a land (and-or building) in a specific plot of land, which made privately or notarized. The ownership of land shall not be transferred to the Lessee.
Law and Regulations:
Article 44 of Agrarian Law
- A person or legal entity has lease rights over land, if he is entitled use other people’s land for building purposes, by paying to the owner a sum of money as rent.
- Payment of rent can be made:
a. once or at any given time;
b. before or after the land is used.
- The land lease agreement referred to in this article may not be accompanied by such conditions contains elements of extortion.
Article 45 of Agrarian Law
Those who hold of lease rights are:
- Indonesian citizens;
- Foreigners who are domiciled in Indonesia;
- A legal entity established under Indonesian law and domiciled in Indonesia;
- Foreign legal entity that has a trust in Indonesia.
Pros: Can be possessed by foreigners without any specific permit required. Perfect option for a foreigner who wants to start investment / owning a property without worrying about setting up legal entities or working/stay permit, practically easy in the execution of this transaction.
Cons: Price and validity period is totally depending on the deal with the property owner. The owner can decide if he/she didn’t want to extend the lease after the period is exceeded.
As mentioned earlier, there are “workaround” solutions which brings foreigners slightly closer to owning a freehold title. Here is how:
- Appointing a trusted local partner to act as your “nominee”. Technically the freehold title will be transferred to your partner and create a nominee agreement in place, declaring that you own the land.
- Setup a foreign company in Indonesia (known as “PT PMA”). You can put your name as the shareholder of the company and buy the land through your company name. However, this will change the land title to the Right of Building or known as “HGB” in Indonesia.
- Structure a leasehold agreement with a longer period which is 80 years. This comprises a lease made between yourself under your name directly (the lessor) and us as the landlord. No license, company, or work permit is required to lease a property in Indonesia.
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