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Foreigner Ownership of Land In Indonesia

Bali villa

Can Foreigners Buy Land In Bali - No but they can Lease

Many foreigners (non citizens of Indonesia) have been buying land and property in Bali and other parts of Indonesia under an arrangement known as "Nominee Ownership" in which land is purchased by a nominee (a nominated person) on behalf of the foreigner.

This is an illegal arrangement created by lawyers and Real Eastate agents to get around the laws of Indonesia which clearly state that land can only be owned by Indonesian citizens.

It is estimated that thousands of people have bought property in this way and that they face the risk of losing their property either to the nominee or to the Indonesian government.

It is also understood that, because the nominee ownership arrangement is illegal, the Indonesian nominee's ownership is also illegal.

See also:

The Legal Aspects of Buying Land Using a Nominee

Let us start at the very beginning. The law of Indonesia says that foreigners are not allowed to own land in Indonesia. A foreigner is defined as anyone who has citizenship of a country other than Indonesia. Under Indonesian law Indonesian citizens are not allowed to have dual citizenship so if they do hold citizenship of any other country they are considered and cannot own land.

Land Ownership and the Indonesian Constitution

It all goes back to article 33 section 3 of the Indonesian constitution which states "The land, waters and natural wealth contained within them are controlled by the State and shall be utilised to increase the prosperity of the People" in other words the land and seas of Indonesia are for the benefit of Indonesians.

Land Ownership and the Agrarian Law Act

The situation is further detailed in article 9 of the Agrarian Law Act of 1960 which says "Only Indonesian citizens may have the fullest relation with the earth, water and air space."

Article 21 is clearer:

  1. "Only Indonesian citizens can have a hak milik (freehold land title)." - Foreigners are not allowed to own land in Indonesia
  2. "The Government is to determine which corporate bodies can have a hak milik and the conditions for it." - Corporate bodies can own land but must be approved by the government.
  3. " A foreigner who, following the enactment of this Law, acquires a hak milik by way of inheritance without a will or by way of joint ownership of property resulting from marriage and an Indonesian citizen holding a hak milik who, following the enactment of this Law, looses Indonesian citizenship is obliged to relinquish this right within one year following the date the hak milik is acquired in the case of the former or following the date upon which Indonesian citizenship is lost in the case of the latter. If following the expiry of the said time period, the right is not relinquished, then the said right is nullified for the sake of law and the land falls to the State with the proviso that the rights of other parties which encumber the lands remain in existence."
    - Foreigners who somehow acquire ownership of land in Indonesia or Indonesians who own land and give up their Indonesian citizenship, must dispose of the land within one year or it will become the property of the state.
  4. "As long as one with Indonesian citizenship concurrently holds foreign citizenship, he/she cannot have land with a hak milik status, and the provision as meant in paragraph 3 of this article should apply to him/her." - Indonesians holding dual nationality cannot own land in Indonesia.

Hak Milik or Title of Ownership (Freehold)

The nearest thing to freehold title in Indonesia is defined in the Agrarian Law as Hak Milik (hak - title, milik - ownership)
Real estate agents, taxi drivers and parrots may offer freehold land ownership to foreigners which, as shown above, is illegal. In fact they are not offering freehold title to the foreigner, they are offering an arrangement in which an Indonesian citizen acts as a nominee and his ownership is controlled by the foreigner.

Foreigner "Ownership" of Land in Indonesia using a Nominee

This is a mechanism used to get around the law and usually involves four steps:

  1. A loan agreement is established between the foreigner and the nominee for the price of the land which states that the money is for the purpose of buying the land.
  2. A full and irrevocable power of attorney is signed by the nominee which waives the nominee's rights over the land. The power of attorney allows the foreigner to use, sell, transfer or lease the land without the need for permission from the nominee. The power of attorney must be ongoing and must also be fully transferrable so the foreigner may pass the ownership on to someone else and may change the nominee if he/she wishes.
  3. An agreement is made which gives the foreigner permanent rights to occupy and use the land. This also must be transferrable.
  4. The original land certificate is held by the foreigner.

Pitfalls of the Nominee "Ownership" arrangement.

This arrangement is a way of getting around the law of Indonesia and so, while very common, is very risky for a number of reasons. Some of the risks can be avoided by carefully crafted documentation. Here are some of the grey areas:

  1. A court may consider this is an arrangement to avoid obeying the law and so, in any dispute, may tend to support the nominee and not the foreigner.
  2. This arrangement may be considered as "controlling" the ownership of land. The Agrarian Law Act states that only the Indonesian government can control the ownership of land in Indonesia.
  3. Who is your nominee, do you know him well, who are his family and do you know where they come from. It is very important to find someone trustworthy. Some people will say that they totally trusted someone (often their driver) who turned out to be untrustworthy in the end sometimes demanding money or even the property itself.
  4. The nominee is still the legal owner of the land and so must sign any transfer document if the foreigner wishes to sell the land. This can be difficult if the nominee and the foreigner fall out with each other.
  5. The nominee may become sick or die (this is highly likely at some stage in the future) and whoever inherits the nominee's property may not wish to honour the agreement. While the foreigner may get on very well with the nominee, he or she may not get on well with the heirs. The situation can become even more complicated where the nominee's property is inherited by several siblings - a common stumbling block in land ownership issues in Indonesia.
  6. If the money is paid by the foreigner directly to the original land owner the nominee will not have officially received the money so the loan may not be considered valid.
  7. What if the money is paid to the nominee who then decides not to pay the land owner? - all transactions and signatures need to be done simultaneously.
  8. What happens to any capital gain on the land. The loan to the nominee is a certain amount but several years later the value has increased but it is still owned by the nominee. Who gets the profit?
  9. What happens if, after several years when the land is far more valuable and perhaps a house has been built, the nominee decides to repay the loan.
  10. You will need an IMB (building permit) allowing you to build on the land and this has to be in the name of the land owner. If you buy land under a nominee arrangement this will be the nominee.
  11. All nominee arrangements need to be fully transferrable to the next of kin or anyone else the foreigner wishes to sell or give the land to.

Do you make a payment to the nominee? I came a cross a case where the foreign partner has to pay the nominee a large sum of money each year - not that much less than the annual rent for a house on land.

There are many people having all sorts of problems with nominee arrangements and, as the value of land increases, we can only expect the problems to increase. It is a barrel of parrots and foreigners are strongly advised not to use this mechanism to circumvent the law and buy land in Indonesia.

So what can you do as a foreigner? Firstly avoid real estate agents who offer you freehold land title.

In fact there is a way that foreigners can perfectly legally hold title over a piece of land. These are leasehold land titles and we will look at this in part 2 with other pitfalls and other issues to consider when buying or leasing land or talking to in Indonesia

See also:

Copyright © Phil Wilson March 2015
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