Indonesia Expat
Business/Property Featured Info for Expats

Don’t Go Down the Nominee Rabbit Hole

Don’t Go Down the Nominee Rabbit Hole
Don?t Go Down the Nominee Rabbit Hole

For many foreigners, the dream of securing their very own piece of a picture-perfect, sun-kissed oasis in Bali is seductive, to say the least.

Unfortunately, though, it can lead to being reckless, cutting corners and ignoring advice, and before you know it, you can find yourself walking blindly into a risky rabbit hole, where a Mad Hatter’s tea party is waiting to bypass those pesky property laws.

Don’t worry. We can sort it out. Where there’s a will, there’s a way, right?” whispered the slick brokers with Cheshire cat grins … “you know, without the hassle of paperwork or regulations. It’s easy and besides, everyone does it. Nothing to worry about.”

The thing is, it is something to worry about and everyone doesn’t do it. Not any more, because just like falling down that rabbit hole, this seemingly innocent path can twist and turn into a maze of legal limbo and financial headaches, leaving you lost and bewildered, struggling to understand confusing contracts and potential property seizures. This doesn’t just apply to so-called “freehold” ownership, but also to leaseholds having locals operate on behalf of expats as well as expats privately holding a villa and appointing local management thinking that’s OK.

Here’s what you need to be aware of – the nominee rabbit hole has been around for a while, but there’s been increased scrutiny recently of the touchy practice of using local nominees in Indonesian real estate deals and business set-ups, especially in Bali’s Badung Regency. On 18th December 2023, at the socialisation of Law Number 1 of 2022, for example, the Regent of Badung, Nyoman Giri Prasta, declared that the local government intended to take tough measures against nominee structures, citing issues with tax evasion and illicit ownership.

According to Hukum Online, a leading one-stop solution for Indonesia’s legal practitioners with thousands of clients, including companies, well-known law firms, government institutions and universities, “the practice of nominee arrangements is prohibited by Law no. 25 of 2007 concerning Capital Investment (“UUPM”).

Article 33 paragraph (1) UUPM prohibits domestic investors and foreign investors from making agreements and/or statements confirming that share ownership in a limited company is for and on behalf of another person. Article 33 paragraph (2) UUPM further regulates that such agreements are declared null and void by law. In addition, Article 48 paragraph (1) of Law no. 40 of 2007 concerning Limited Liability Companies also explicitly stipulates that shares are issued in the name of the owner. So, the shares must be in the name of the shareholder, the shareholder’s name cannot be different from the actual owner.

Foreign Direct Investment (FDI)

Investigating Foreign Direct Investment (FDI) through PT PMAs is one of the main focuses of this campaign. When nominees are used in investments, Indonesian names are frequently exploited to conceal the true ownership and control by foreign investors. This dishonest practice creates difficulties for tax officials and impedes transparency. To resolve these issues, the Badung Regency Government is working with several partners, including the Prosecutor’s Office, Angkasa Pura, the Ministry of Law and Human Rights, BPN, and the Bali Regional Police.

Tax Evasion and Illegal Ownership

The Regent emphasised that foreign nationals (WNA) who marry or enter into unregistered agreements with Indonesian citizens in order to acquire ownership of properties in Indonesia under their spouse’s name are the main users of nominee structures. But this raises concerns regarding tax evasion and unauthorised ownership. When creating a PT PMA, foreign investors must satisfy capital requirements and tax duties. The goal of the crackdown is to guarantee compliance and stop tax leakage, which negatively impacts Bali’s economy.

Government Initiatives, Local Reaction, and Engagement

The Badung Regency Government’s initiative will establish a task force of officials from several levels, including those in villages, in order to solve these concerns thoroughly. The goal is to stop questionable practices and stop income leaks. The fact that multiple stakeholders are involved in the process shows how seriously the government takes the dangers related to nominees and their potential effects on the area. Regional leaders at all levels are included in the government’s request for broad engagement. The participation of employees all the way up to the village level shows a concerted attempt to prevent the use of nominees in investments and real estate transactions. The goal of this community-wide effort is to prevent any negative economic effects while also preserving the integrity of the financial system in the area.

Seven Stones Indonesia

This is why at Seven Stones Indonesia, we’ve been advising clients against using nominees for years, especially when it comes to foreigners “owning” freehold land. When people ask why, the first answer is really simple – because it’s against Agrarian Law, is why. Article 21, Section (1) and Article 26, Section (2) of Act No. 5 of 1960, clearly stipulate that foreigners are forbidden to own land/property under the Freehold Right and Indonesians are forbidden to transfer their Freehold rights to foreigners.

For many years, nominee agreements were common in Bali (interestingly, not in other parts of Indonesia,) and the way that worked is that nominees were used by foreigners to be able to control land by “borrowing” the name of an Indonesian citizen through a Nominee Agreement. In truth, this is a fraudulent deed between the Indonesian citizen and the foreigner, which supposedly registers land ownership rights in the name of an Indonesian citizen appointed as the nominee, but as far as foreigners were concerned, it effectively exploited loopholes for them to “technically own” freehold property. Please note that this is also against Investment Law and Private Limited Company Law.

We believe that if you plan to start a business in Indonesia then you have to abide by the laws as stipulated in Act No. 25 of 2007 about Investment, and Act No. 40 of 2007 about Private Limited Companies, both of which clearly forbid the nominee arrangement practice. Article 33, Sections 1 and 2, Act No. 25 Year 2007, also mentions sanctions on nominee arrangements that have been used for some time in Indonesia, explaining that domestic and foreign investors who conduct investment in the form of capital sharing are forbidden to create an agreement which allows another party to hold a share in a Limited Private Company for, and on behalf of, someone else’s name.

It’s true to say that there isn’t a specific regulation that governs the Nominee Agreement practice, not yet, but when it comes to disputes, under Indonesian Law, the Foreign Owners/Investors will be the ones who would lose, because the law doesn’t allow for this kind of practice. This means, the nominee would be entitled to the land/property when the court is involved. That’s something the Mad Hatters and Cheshire cats are unlikely to tell you about. But now you know.

The increased vigilance surrounding the use of nominees in real estate deals and investments in Bali, especially in the Badung Regency, is indicative of a dedication to openness, legal observance, and the fight against tax evasion. The impact on Bali’s economic landscape and its capacity to draw in foreign investment will depend on how the government organises different players and puts these activities under control. Nonetheless, the authorities’ prompt action suggests a change towards a more transparent and regulated real estate market.

If you’d like advice or more information about owning property, setting up a business and Indonesia’s investment opportunities, as well as the latest legal updates and regulations, feel free to get in touch with us at Seven Stones Indonesia through [email protected], we’d love to share our insights with you.

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