The main concern of investors is to avoid scams in Bali when buying a property. The last few months have seen uncontrollable developments in Bali properties, leading some local governments and some locals to request a ban on construction. Indeed, this development has been uncontrollable, and everybody knows what has been happening.
How to advise foreigners to follow the regulation when, in more than half of the transactions, the local seller requests the foreigner not to declare the tax? How to advise foreigners to follow the building regulations in Bali when the local community advises foreigners to not apply for the building permit before construction?
Bali is navigating these issues on two fronts, making it difficult for foreigners to understand what to do and how Bali scams might affect their property or business.
Leasehold under personal name
The pressure of the third parties
When it comes to purchasing a villa, real estate agents, sellers or some contractors always advise their clients to go through a leasehold under their personal name. This solution has the following objective:
- Fasten the transaction as they do not have to wait for the creation of a structure
- Avoid paying VAT
- Reduce or avoid the leasehold tax
This mechanism is offered to foreigners who arrive in Bali and have the impression of buying a villa while, in reality, the leasehold is a Hak Sewa, meaning the contract is a long-term rent.
This distinction is important between owning a property and owning a leasehold. Indeed, this difference has consequences on how the tax office will classify the overseas investment and how the money will be returned and taxed in the country of residence.
Implications of reducing the leasehold tax
Indeed, Indonesia has a tax facility with only 10% on leaseholds based on the seller’s charge. However, it is common practice to have notaries sign an agreement with a value lower than the real price. This is done in order for the local person to pay less tax. The consequences for the foreigner can be dramatically important with the tax office in its country of residence. Indeed, if the foreigner is not able to justify the amount that has been transferred with a supporting document with a correct value.
In fact, some foreigners have had to pay fines due to their inability to show a contract with the proper value because the real contract had disappeared. These scenarios are often a part of real estate scams that target unsuspecting buyers.
Implication when it comes to selling the leasehold
Again, to be clear, purchasing a leasehold is not purchasing a property. A leasehold itself is not a lease to build, and the foreigner has not its name on the land title. This is important when it comes to selling the leasehold. Indeed, some foreigners on some advice think that selling the property will subject them to only 10% leasehold tax. However, when it comes to bringing the money back, the tax office in the home country can requalify the amount as an income taxable on the personal income tax as this amount is not related to a property purchase or a lease to build as it is simply an income from a contract.
Implication when it comes to renting out the property
To be clear, a foreigner cannot rent out a property in Indonesia under their personal name. Having a leasehold under a personal name does not allow the foreigner to rent their property on Airbnb in Bali or Lombok. It is possible to have some investment mechanism, but the personal name is not part of the legality. Understanding these implications can help avoid falling victim to real estate scams in bali and ensure a smoother investment experience.
Also read: Can Foreigners Rent Out Property in Bali?
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The scams on construction in Bali
Leasehold and Right to Build
For people looking to build a villa or apartment, the leasehold does not allow foreigners to build a villa or any apartment. For foreigners, the only possibility of building is to have a right to build on top of the leasehold or to purchase a freehold property and convert it into an HGB.
Building permit PBG and SLF
Most of the current in Bali are illegal and do not have a right to build. By law, the regulation requires the developer to apply for a building permit before the construction. The building permit has to be under the applicant, which a foreigner is not allowed under a personal name. This right to build is octroyed to foreigners if they have a company called PT PMA.
As an individual, if the foreigner has no company, he will not be able to apply under its name for the building permit and will always be dependent on the local person.
The building permit is required to apply for licenses like hotels or villas to rent out property. Always check the building permit before any transactions, especially for off-plan projects, to ensure they have building authorization.
The consequences can be important, such as:
- An important fine
- Destruction of the property
- Impossibility to have the proper licence to rent out the property or run the business
Common mistake
Deposit payment
We have seen a lot of foreigners losing their deposit due to a lack of an unsecured contract or for payment paid to a notary without having made a proper contract before paying a deposit. A deposit has to be paid with certain conditions, and the deposit can be refunded if the contract is strong.
Local Nominee in Bali
It happens to have clients explaining having deposited money in the bank account of a local friend they met during their vacation and who is going to help them. Nobody helps for free. Using a nominee or buying land under a local person is illegal and can have big consequences. No contract can help the foreigner to get their money back in case of issues.
There are several mechanisms to use to purchase a property, and we invite foreigners to contact us to find a safe way to purchase a villa in Bali and Lombok and avoid scams.
Also read: How to Invest in Property in Bali & Lombok
