If you’ve been living under a rock and somehow missed the memo, Bali’s property market is packed with potential, particularly in the short-term rental business.
But there’s a catch: taxes, regulations, and compliance are anything but straightforward, and if you’re either blissfully unaware or deliberately trying to avoid reality, the complexities can turn dreams into costly nightmares if you don’t manage things correctly.
A recent podcast on the Seven Stones Indonesia channel is worth listening to for valuable industry insights into this, where Terje H. Nilsen, CEO and co-founder of Seven Stones Indonesia, emphasises the importance of tax planning in addition to a solid investment strategy. “It’s not just about planning the investment; it’s also about planning the tax. Many buyers focus on the dream but overlook the risks, which can turn into serious financial issues later,” he explains.
Recent developments, including increased government scrutiny, underscore the importance of understanding and adhering to local laws, and while not directly related to tax issues, the ongoing PARQ Ubud story is a case in point. So, let’s look at some of the key things to consider for leasehold property investment.
Understanding Leasehold Tax Obligations
Leasehold properties in Indonesia are subject to a 10% tax on the total transaction value. This tax is typically the responsibility of the seller, but buyers need to ensure it is properly accounted for during negotiations to avoid unexpected liabilities. But as Nilsen warns, buyers should be proactive in ensuring it is properly handled. “The tax office doesn’t focus on the legal position; they look at the operational business and tax it accordingly,” he says. Buyers should discuss tax liabilities upfront to avoid unexpected costs later.
It’s worth noting here that rental properties in Bali are taxed differently depending on the length of stay. Short-term rentals (daily or weekly) are subject to local tourism taxes and strict regulatory compliance, while long-term leases (monthly or yearly) fall under different tax categories. Many investors overlook these distinctions, potentially facing penalties if the business model isn’t structured correctly.
Foreign Investment and PMA Limitations
Foreign investors often establish a Penanaman Modal Asing (PMA), or foreign-owned company, to legally own and operate real estate in Indonesia. However, PMAs face significant limitations when it comes to short-term rentals. Nilsen points out, “Many will be surprised to learn that no PMA can legally offer short-term rentals, as they cannot obtain the necessary permit.” To navigate this, foreign investors often partner with local management companies that hold the proper permits.
This arrangement allows them to stay compliant while still generating income from their investment and capitalising on Bali’s booming tourism industry. And, as the Indonesian government has been tightening regulations to prevent foreigners from directly engaging in rental businesses without the appropriate permits, this makes a lot of sense. Nilsen advises investors to focus on structuring their businesses to meet legal requirements while optimising profitability.
“The important aspect is to always be in compliance with the tax that you should pay,” Nilsen states. “Working with the right management company can ensure that taxes are properly reported and paid.”
Government Initiatives and Compliance
The Indonesian government has been trying to be proactive in regulating tourism and property investments to preserve Bali’s culture and environment. In February 2024, Bali introduced an Rp150,000 (approximately US$10) levy on foreign tourists to fund environmental and cultural preservation efforts. Jakarta Globe, quoting the then-Tourism and Creative Economy Minister, Sandiaga Uno, clarified, “What happens in Bali is not a tax but a levy for waste management and the preservation of the purity and sustainability of Bali’s culture.”
It has to be said, however, that there are arguments that funds generated from this tax are not being allocated to effectively deal with these pressing and very public issues.
Additionally, the government is conducting audits to reform tourism in Bali, aiming to improve tourism quality and preserve local culture and jobs. Coordinating Maritime Affairs and Investment Minister Luhut Pandjaitan stated, “We don’t want to see paddy fields become a villa or become a nightclub,” highlighting over-tourism concerns and unplanned development, according to reporting from The Jakarta Post. These government measures highlight the growing importance of adhering to regulations and ensuring tax compliance in the property market.
The Risks of Non-Compliance
One of the biggest mistakes investors make is underreporting property values or failing to comply with tax regulations. According to Nilsen, this can lead to severe financial penalties. “If you’re caught in non-compliance, penalties can be as high as 600%, turning what seemed like a good deal into a major financial burden,” he warns.
Furthermore, Indonesia has tax treaties with several countries, meaning undeclared rental income can lead to double taxation when the funds are repatriated. Nilsen advises that “investors need to comply not just with Indonesian law but also consider tax obligations in their home countries.”
According to the Jakarta Globe, Indonesia’s government has been increasing scrutiny of tax compliance within the property sector. Recent audits have revealed significant underreporting of income, prompting authorities to issue stricter enforcement measures to ensure compliance.
Structuring Deals for Maximum Savings
To minimise tax liabilities legally, investors can utilise strategies such as splitting contracts into separate agreements for land purchase, construction, and furniture acquisition. This allows for better tax optimisation, with potential savings of up to 5%, and is fully legal if you do this correctly.
However, as Nilsen cautions, “Cutting corners with under-the-table agreements may seem appealing, but it’s considered tax fraud and carries significant risks, including potential money laundering charges.”
The Future of Property Investment in Bali
Looking ahead, Bali’s property market is growing, but as it does, expect to face tighter regulations and increased tax enforcement. With increased government focus on tax collection, compliance is becoming more critical than ever. The new administration has emphasised stricter enforcement, particularly in the real estate sector. As Nilsen puts it, “The market will normalise, and those who invest with proper compliance will thrive, while those who take shortcuts may face serious challenges.” Investors should stay informed and work with experienced professionals to navigate these changes effectively.
Staying Ahead of the Game
Investing in Bali’s leasehold property market presents incredible opportunities, but long-term success lies in careful planning, compliance, and working with the right advisors. Investors should prioritise working with experienced legal and tax professionals to ensure that they fully understand their tax obligations and structure their investments correctly from the start.
As Nilsen summarises, “If it sounds too good to be true, it probably is. With proper planning and the right approach, investors can achieve realistic returns of 8-15% … but not by cutting corners.”
For those considering property investments in Bali, understanding the leasehold tax landscape is essential. By staying informed and compliant, investors can maximise their profits while avoiding costly pitfalls. By staying informed and compliant, investors can maximise their profits while contributing positively to Bali’s cultural and environmental preservation efforts. If you’d like more information or a private consultation on how you can do this, get in touch with Seven Stones Indonesia via hello@sevenstonesindonesia.com today.
Sources: Seven Stones Indonesia, Jakarta Globe, The Jakarta Globe