One of the recurring questions of people buying a property in Bali or Lombok is whether they should invest under their personal name or under a company. The article has the objective to reply to this question and give some clues on how to invest in a property in Bali and Lombok and if it is better to invest under a PT PMA or under a personal name.
Legal considerations
One of the most important points when it comes to investing in a property in Lombok or Bali is the legal considerations. First of all, an individual cannot own a land under its own name or a villa.
Building permit (PBG)
For anyone considering Bali and Lombok property investment, it’s important to note that it is impossible to build a villa under a foreigner’s name. The ability to build a villa and get the building permit PBG and SLF is only the name of a company if this company has obtained an HGB (Right to Build). Bali has a lot of illegal construction due to the lack of rights for developers on the land. Having a lease without an HGB on the top doesn’t allow the developer to build under its name, and they often use a local person or local company (PT PMDN) to get a building permit if they have one.
Licence to Rent out a property in Bali and Lombok
The licence to rent out a property in Bali and in Lombok is only available to a foreigner under a company (PT PMA) despite it being available under local Indonesian under their own name. However, renting out a property can be under certain conditions and circumstances depending on the following licence:
- Villa
- Apartment hotel
- Hotel
- Pondok Wisata (guest house)
Some of those short-term rental licences are not open to foreigners, and some mechanisms might be necessary to make it legal. Again, a foreigner cannot legally rent out a property under its own name.
For long-term rental, PT PMA can lease out on a monthly basis or more a property. It is important to note that a building permit is necessary to obtain the appropriate licence.
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Tax considerations
The second aspect to consider is the tax exposure of the foreigner by having a property under their own name or under a company. The section considers the scenario of an investment done properly with all the legal aspects fulfilled.
Withholding tax on revenue sent aboard on daily rental income
As mentioned earlier, a foreigner cannot rent out a property under its own name. However, some property management offers to use the name of a local person to pay the tax under the local person and send the money overseas to the foreigner. The withholding tax on this transfer should be 20% for non-residents, with an additional VAT.
In this scenario, the person will pay 10% local tax with an additional 20% and 11% tax. By investing under their own name, foreigners are exposed to a personal tax heavier than under a company. Indeed, the revenue sent cannot be entered under the double tax treaty as this income cannot be classified.
Reselling the property
When it comes to reselling, how the investor initially chose to invest property in Bali and Lombok can significantly influence taxation. The country of residence of the foreigner can impose heavy tax, especially on a leasehold. Indeed a lease is not considered as an investment in property as a lease is a long term rent. Reselling or subleasing is similar to receiving a long-term income from rental and not reselling a property. Some countries tax heavier revenue issued from short and long-term rentals than dividends.
In the case the foreigner resells the property and takes a dividend, the tax office will apply the double tax treaty on dividends between Indonesia and the country of residence.
Another way to optimise is also to resell the shares of the company instead of paying a lease tax and a dividend.
To summarise, buying a leasehold under the personal name:
- Do not fasten the process, as 5 days are usually necessary to open a company.
- Expose the foreigner to heavy taxation in their home country after reselling the lease
- Expose the foreigner to heavy taxation on daily rental by sending the money outside the country
By handling a company, the foreigner can:
- Get tax benefit with the double tax treaty with Indonesia
- Protect its assets under a company
- Get a residence permit to live in Bali and in Lombok
- Get options on the way to resell the property
- Get all documents under the company name
- Make the process legal with optimal taxation
Also read: How to Start a Company for Property Investment in Lombok
