Nominee Agreements in Bali: Insights from a Real Estate Agency

Bali is one of the most popular destinations in the world for tourists and expats alike. The island offers a rich and diverse culture, a stunning natural beauty, and a vibrant lifestyle. It’s no wonder that many people dream of owning a property in Bali, whether as a holiday home, a retirement plan, or an income-generating asset.

However, buying a property in Bali is not as simple as it may seem. Indonesia has strict laws and regulations that limit the ownership of land and property by foreigners. One of the ways that foreigners can circumvent these restrictions is by using a nominee agreement.

A nominee agreement is a legal arrangement that allows a foreigner to acquire a property in Bali through a local individual, known as a nominee, who holds the legal title to the property on behalf of the foreigner. The nominee acts as a temporary holder of the property, while the foreigner retains the beneficial ownership and the right to use, lease, sell, or inherit the property.

Nominee agreements are widely used in Bali, especially for freehold properties, which are the most desirable and valuable type of property in the island. Freehold properties offer the highest level of security and control, as they grant the owner the full and permanent ownership of the land and the property.

However, nominee agreements are also controversial and risky, as they involve a high degree of trust and reliance on the nominee. There are many cases where nominees have abused their power and betrayed their foreign partners, resulting in disputes, losses, or even frauds.

In this article, we will explore the pros and cons of nominee agreements in Bali, and provide some insights and tips from a real estate agency on how to use them safely and effectively.

What is a Nominee Agreement?

A nominee agreement is a legal agreement between two parties, where the nominee (a third party) is appointed to hold legal ownership of the property on behalf of the real owner. The nominee signs an agreement with the real owner, which outlines the responsibilities of the nominee and the rights of the real owner. The agreement stipulates that the nominee has no rights to sell or dispose of the property without the written consent of the real owner. The nominee is only a temporary holder of the property and has no right to claim ownership of the property. In return for holding legal ownership of the property, the nominee is paid a fee or commission by the real owner.

Nominee agreements are commonly used in Bali to allow foreigners to own freehold properties, which are otherwise prohibited by Indonesian law. According to the Agrarian Law of 1960, only Indonesian citizens can own freehold land in Indonesia. Foreigners can only own leasehold or right-to-use properties, which are valid for a limited period of time, usually 25 to 30 years, with an option for extension.

By using a nominee agreement, a foreigner can have full legal ownership of a freehold property, which can then be leased to them for a long period of time, usually 80 to 100 years. This way, the foreigner can enjoy the benefits of freehold ownership, such as security, control, and appreciation, while complying with the Indonesian law.

Why are People Doing It?

There are many reasons why people are using nominee agreements to buy properties in Bali. Some of the main reasons are:

• To access the freehold market: Freehold properties are the most sought-after and valuable type of property in Bali, as they offer the highest level of security and control. However, freehold properties are also the most restricted and regulated type of property, as they are only available for Indonesian citizens. By using a nominee agreement, foreigners can access the freehold market and acquire the best properties in the island.
• To save money and time: Buying a property in Bali can be a complex and costly process, especially for foreigners. There are many legal and administrative procedures, fees, and taxes involved, which can vary depending on the type and location of the property. By using a nominee agreement, foreigners can save money and time, as they can avoid some of the expenses and hassles associated with buying a property in Bali.
• To have more flexibility and options: Buying a property in Bali can also be a limiting and challenging process, especially for foreigners. There are many rules and regulations that affect the availability and suitability of properties for foreigners, such as the minimum price, the zoning, and the land size. By using a nominee agreement, foreigners can have more flexibility and options, as they can choose any property that meets their preferences and needs.

Is Nominee Agreement Legal?

The nominee agreement made by the notary, which contains an over control of foreign citizens toward lands belonging to Indonesian citizen, has no legal power and is null and void when it is promised that foreigners can control the freehold land juridically and have a bad faith when making the nominee agreement. Read more about this on the International Journal of Sosiological Jurisprudence by Warmadewa University.

Illegal Based Based on the Investment Law (UUPM)

Article 33 paragraph (1) of the Investment Law expressly stipulates that domestic investors and foreign investors engaging in capital investment in a Limited Liability Company (PT) must make an agreement and/or statement affirming that the ownership of shares in the limited liability company is on behalf of and for the benefit of another person.

Furthermore, under Article 33 paragraph (2) of the Investment Law, it is stated that if the investor enters into such an agreement, the agreement will be null and void as a matter of law. This is in line with the provisions of the Civil Code (KUHPer). Article 1337 of the Civil Code declares that a cause is prohibited, meaning that if an agreement is made based on a prohibited cause, the agreement is not valid and is considered null and void as a matter of law.

Illegal Based Based on the Company Law (UUPT).

In line with the Investment Law (UUPM), Article 48 of the Company Law (UUPT) also regulates that shares of a Limited Liability Company (PT) must be issued in the name of the rightful owner. Therefore, it is not allowed for shares to be issued in the name of someone other than the actual owner. There are potential risks associated with creating a nominee agreement, including:

1. In the event of a dispute, the court may not recognize the nominee agreement, making it ineligible for legal proceedings.
2. The name of the shareholder stated in the company’s deed of establishment will be acknowledged by the law in Indonesia
3. Additionally, a nominee agreement can be legally challenged by third parties on the grounds of fraud.

Reasons Why You Shouldn’t Do It

Despite the advantages and popularity of nominee agreements in Bali, there are also many reasons why you shouldn’t do it. Some of the main reasons are:

• The risk of losing your property: The biggest and most obvious risk of using a nominee agreement is that you may lose your property, as you are entrusting the legal ownership of your property to someone else. There are many cases where nominees have abused their power and betrayed their foreign partners, by selling, mortgaging, or transferring the property without their consent, or by refusing to renew the lease or the agreement. There are also cases where nominees have died, disappeared, or become incapacitated, leaving the foreign partners in a legal limbo, as they have no legal rights or claims to the property.
• The difficulty of enforcing your rights: Another risk of using a nominee agreement is that you may have difficulty enforcing your rights, as you are relying on a contract that is not recognized or supported by the Indonesian law. If you have a dispute or a problem with your nominee, you may have limited or no legal recourse, as the courts may not accept or uphold your agreement. You may also face challenges and obstacles from the authorities, such as the land office, the tax office, or the immigration office, as they may not acknowledge or respect your agreement.
• The cost and hassle of maintaining your agreement: A third risk of using a nominee agreement is that you may incur additional costs and hassles, as you are maintaining a complex and fragile agreement. You may have to pay fees or commissions to your nominee, as well as taxes and charges to the government, which can reduce your profit and return on your investment. You may also have to deal with paperwork and bureaucracy, such as renewing the lease or the agreement, updating the power of attorney, or registering the property, which can consume your time and energy.

Insight from a Real Estate Agency

As a real estate agency, we have extensive experience and knowledge in the Bali property market, and we have witnessed the benefits and drawbacks of nominee agreements. We understand that nominee agreements can be a tempting and convenient option for foreigners who want to buy a villa in Bali, but we also advise caution and prudence when using them.

We believe that nominee agreements are not the best or the only option for foreigners who want to invest in Bali. There are other alternatives and solutions that are safer and more reliable, such as:

• Leasehold properties: Leasehold properties are properties that are leased by the owner to the tenant for a certain period of time, usually 25 to 30 years, with an option for extension. Leasehold properties are legal and secure for foreigners, as they are regulated and protected by the Indonesian law. Leasehold properties are also cheaper and easier to acquire and maintain than freehold properties, as they involve fewer fees and procedures.
• Hak Pakai properties: Hak Pakai properties are properties that are granted by the state to the holder for a certain period of time, usually 25 to 30 years, with an option for extension. Hak Pakai properties are similar to freehold properties, as they offer the holder the full and permanent ownership of the land and the property. Hak Pakai properties are also legal and secure for foreigners, as they are regulated and protected by the Indonesian law. Hak Pakai properties are also more accessible and affordable than freehold properties, as they have lower minimum prices and sizes.
• PMA company properties: PMA company properties are properties that are owned by a foreign-owned company, known as a PMA company, which is registered and licensed in Indonesia. PMA company properties are legal and secure for foreigners, as they are regulated and protected by the Indonesian law. PMA company properties are also more flexible and profitable than freehold properties, as they allow foreigners to own multiple properties, to conduct business activities, and to benefit from tax incentives and exemptions.

Frequently Asked Questions