(12/26/2008) 15 months after an initial overview of the rules affecting foreign property ownership in Indonesia and Bali, Sanur-based notary Rainy Hendriany recently made time from her busy practice to help bring Balidiscovery.com up to speed on the state of the law for foreigners wishing to rent or own land in Bali.

The Interview: Rainy Hendriany SH, M.Kn.

Balidiscovery.com: There has been a lot of media coverage recently about proposed changes to the regulations governing property ownership by foreigners. Since our last interview in September 2007, have there been any significant changes in the laws?

Rainy Hendriany: In a word: "no." While it is true that there has been a lot of discussion and speculation in the media about possible changes in the law as regards foreign ownership and reforms have been proposed, these changes have largely been put forth by commercial interests and, as in the past, they continue to be strongly opposed by nationalistic interests. The debate both for and against liberalizing foreign land ownership rules rages on with little evidence of any consensus developing on what remains a heavily charged and controversial issue. Even with the added pressures of the current global recession, I don't see any significant change on the horizon and, in my opinion, Hak Milik (Freehold) land title will remain closed to foreigners.

Let me try to bring you up to date on the changes that have occurred since we last spoke.

Firstly, the BKPM (Foreign Investment Coordinating Board) now requires a new Foreign Direct Investment Company (FDI/PMA) wishing to invest in commercial or residential property to submit a business plan specifying the number of units to be developed. BKPM now requires a minimum number of units to be developed, together with a commitment of a commensurate amount of investment capital. Single unit or small scale developments are no longer being encouraged.

Secondly, the Capital Investment Law of 2007 (UU25/2007) had originally incorporated a longer grant of land tenure for both domestic and foreign investment companies under "Hak Guna Bangunan" (Building rights) and "Hak Pakai" (Right to Use) land titles.

"Hak Guna Bangunan" (HGB) building right title may be held by Indonesian nationals or by both Indonesian or foreign investment companies. HGB title cannot be held in the name of a foreign individual. Hak Pakai or right to use title may be held by foreign individuals. In the hierarchy of Land titles HGB falls below Hak Milik (Freehold) - which remains strictly unavailable to foreigners, but above Hak Pakai. Both HGB and Hak Pakai are granted for an initial period and may then be extended and thereafter possibly renewed.

The 2007 Investment law, as approved by Parliament (DPR), provided for the extension of land titles granted at the time of the initial land grant with the approval of the investment by BKPM. However, an appeal against this stipulation was lodged with the Constitutional Court arguing that these provisions were in contradiction with the existing Agrarian law (UU5/1960) and the Hukum Dasar (The Indonesian Constitution). That appeal was upheld and so the existing regulations limiting the validity period of land titles remain in effect. Back to square one.

Finally, the new Company Law (UU40/2007) has a number of significant changes affecting businesses, including stipulations forbidding beneficial ownership arrangements of a Company through the use of nominees.

After some initial differences of opinion as to whether or not this applied to a PT Biasa Company (essentially a company not formally incorporated under the investment laws and fully owned by Indonesians), the consensus is that the law applies to all companies, including PT Biasa Companies. Since direct foreign shareholding in a PT Biasa is not allowed, this has raised various issues where nominees have been used by foreigners to establish beneficial ownership of a PT Biasa Company, which sometimes also involved the ownership of property (with HGB title) by the company.

Balidiscovery.com: Don't changes to the Company Law restricting the use of nominees seem to mirror previous regulations regarding use of a nominee for an individual foreign property investor?

Rainy Hendriany: Although there are important practical differences in terms of the legality of associated documentation, the law's intent to confine foreign investment to those areas not restricted by Indonesian investment law and other relevant laws remains unchanged.

In short, Indonesian law does not recognize rights of beneficial ownership of property. Therefore, the use of an Irrevocable Power of Attorney (POA) seeking to convey rights of beneficial ownership is, in general, legally unenforceable; subject to revocation at any time and may raise other legal issues in the event of a dispute.

In addition, it should be remembered that, as is the case in most legal jurisdictions, a Power of Attorney automatically terminates with the death of the person granting it.

So, as we discussed last time, entering into a nominee arrangement, now also including one involving a PT Biasa Company, is not a trivial matter as some parties would have potential investors believe. The notion that a nominee arrangement (also referred to in some circles as a “Name giver” arrangement) is just an inconvenience of Indonesian law and which is somehow legally accepted, is a complete misrepresentation. There is a need for great caution, and professional legal counsel should be obtained.

Balidiscovery.com: Following our last interview there were some comments that a Public Notary is not qualified to provide such legal advice?

Rainy Hendriany: Yes, I'm aware of the misunderstanding on that point in some quarters, so thanks for raising it.

The confusion is based on a lack of understanding of the differences between the roles of a public notary in common law jurisdictions - such as the UK, USA, Australia and New Zealand, and civil law jurisdictions- such as Indonesia, France, Holland, and Germany.

In common law jurisdictions the function of a Public Notary is largely a clerical role intended to verify the existence of a document prepared by a professional. However, in a Civil law jurisdiction a Public Notary is first and foremost a qualified lawyer, or Sarjana Hukum, with a post graduate qualification required to serves as a Public Notary. In Indonesia, only a qualified notary with a further qualification, authorizing the preparation of land ownership titles (PPAT) for the conveyance of land titles As such, a Notaris/PPAT spends a good deal of his/her time dealing with land matters.

Balidiscovery.com: Based on your comments, it appears the rules affecting foreigners wishing to invest in property in Bali have actually become more restrictive. Could you summarize what, if any, fully legal options are available for foreigners wishing to establish a property in Bali?

Rainy Hendriany: The legal options remain largely unchanged except that the route of ownership of a single residential property investment via a foreign-investment or PMA company many no longer be available,

Firstly, “Hak Sewa” (Leasehold) remains perfectly legal. But because the Constitution and the basic Agrarian Law both restrict the "Control" of land by foreigners to specified periods, notaries in Bali can only create leaseholds of 25 years. However, there can be options included in the original lease to extend that period.

As leasehold conveys no ownership rights, either direct or beneficial, so the interpretation of what constitutes "Control" is rendered a moot argument. If sometime in the future a consensus is achieved allowing the liberalization of foreign "ownership," a longer period of leasehold might represent an easy and less controversial approach, simply because it does not convey any land ownership rights.

In fact, long lease periods have provided the basis for allowing foreigners to acquire property in many countries. For instance, if one were to "buy" an apartment in London, most properties are subject to a 99 year lease and this arrangement has been proven to work well over time.

Secondly, Hak Pakai or the "right to use and build" on land, both for "Hak Pakai atas tanah Negara" (Use of Government lands) and "Hak Pakai atas Hak Milik" (Use of Freehold Lands) is legally available to foreigners, under certain fairly straightforward conditions. Such use can only be for one residential property per individual foreigner.

"Hak Pakai atas Tanah Negara" essentially transfers the land from an Indonesian "Hak Milik" (Freehold) property owner to the Indonesian State which then grants "Hak Pakai" rights to the foreigner, who receives a Land Certificate in his/her own name. However, the initial period, consistent with everything discussed earlier, remains 25 years with options to extend and then renew possible.

Hak Pakai atas Hak Milik, on the other hand, involves the owner of the land granting Hak Pakai on top of the Hak Milik title, with the Hak Milik certificate remaining in the name of the Indonesian owner. In this instance, a separate Hak Pakai certificate issued in the name for the foreign investor and noting the Hak Milik ownership by the Indonesian ownership, again for an initial 25 year period. This structure involves the use of various side Agreements to cover extensions and other matters.

Balidiscovery.com: The number of apartment and condominium developments in Bali have dramatically increased. Are there any differences when it comes to ownership regulations for apartments and condominium units?

Rainy Hendriany: Again, the short answer: "no." Having said that, there are a great number of variations involved with apartments, some of which do not involve "ownership." If we are talking about foreign ownership, then the same general principles discussed earlier apply.

Apartments may be offered to foreigners on a leasehold basis, again subject to the same principles of leasehold already covered.

In Jakarta, most apartment developments make use of the "Strata Title Law" with an underlying HGB land title. However, as we discussed earlier, units sold with HGB title would not be available to foreign individuals but could be held by a local Company, including a foreign investment company (PMA), although not one established solely for this purpose.

Actually, while apartments may be developed and legally sold to foreigners using Strata Title over Hak Pakai land title this practice remains rare because the law does not permit the underlying land title to be both HGB and Hak Pakai. So, should a project be developed using Hak Pakai as the underlying land title, the developer would need to sell all the units to foreigners because, in general, Indonesians are less interested in Hak Pakai title due to the lower status of the title and an initial grant period that is less than HGB. However, perhaps the high demand for property by foreigners in Bali will make this approach more feasible than is the case in Jakarta.

I don't know how the misconception arises, but I am frequently asked by clients if a legal exception exists allowing the freehold purchase of an apartment/condominium unit by foreigners. This is not correct and the general principles discussed apply to all properties. There are no specific differences or exceptions for apartment units.

Another area in which there is great confusion is taxation. The sale of a new unit for the first time, and incidentally this applies to all new properties not just apartments, may be subject to both 10% PPN (VAT) and 20% PPnBM (Luxury tax), depending on the size of the property and/or the total cost. The potential liability for such taxes obviously makes a material difference to the total purchase price, meaning that this aspect needs careful examination and documentation.

The quality and applicability of transaction documentation can also vary considerably. It is important in buying a property that the purchaser appoints an independent notary to represent their interests and take responsibility for completing the transaction.

The potential tax liability for a new property does not apply to the resale of an existing property taking place between private individuals. In these instances a separate 5% tax is levied on both of the buyer and seller, based on the taxable value of the land and property (NJOP).

Finally, a word of caution: my comments are of a general nature. Every transaction and the associated documentation is different and professional legal advice should always be obtained.

Editor's Note: Rainy Hendriany is married to a retired British businessman recently award the OBE for his service to the British and International communities in Indonesia. Rainy maintains a notarial practice in Sanur and can be contacted via telephone at +62-(0)361-7800532 or +62-(0)361-780051 .

[www.rainyhendriany.com]

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