How to set up a legal villa operation in Bali as a foreigner without putting yourself at risk with the corrupt or otherwise Indonesian authorities and / or having to register for tax / residency in Indonesia. Please note, this is personal opinion and you need to verify its accuracy for yourself / your circumstances / your country with an appropriate legal advisor there and in Bali. My only objective in sharing this method with you is to put you as much as possible out of the reach of Bali's very nasty and notoriously corrupt police and immigration. This is the same method I basically once used when I was unfortunate and stupid enough to invest in my own Bali villas; never again! If you use this method or variation of it, all I require is that wherever you have your villa(s) advertised for rentals, you state you are using this method by name (see end for details).
Legal Bali Villa “Ownership” / Investment and Rental Income Return for foreigners.
1) Form a company in your home country whose operational mandate extends to;
a) Lending money overseas
b) Providing villa design, construction, operation and marketing services
c) Providing reservation services
It would be better to give your company an appropriate name such as “International villa management, Ltd.”
2) Whenever you want to go to Bali which will involve any business relating to your intended villa project, apply for a business visa from the nearest Indonesian Embassy. Some visa agents can get you a multi-entry visa if you intend making a number of visits over a short time, but make sure the visa submission is 100% accurate, not made using any falsehoods. This will give you the right to discuss all aspects of your foreign company’s operations with your intended business partners in Bali and protect you against retrospective extortion / legal action by the Balinese police and immigration.
3) You will need a truly trustworthy Indonesian friend to own the land in Bali (Hak Milik ownership). You will also need at least one other Indonesian to set up a company in Bali, a “PT”, which can be used to contract the land legally (Hak Pakai right of use) from the intended land owner (you friend). It makes sense for the friend to also be the CEO of the PT company which needs to be formed ASAP / before you do anything else.
4) Decide on what you want to buy and where; buying land to build a new villa on or buying land with a villa already on it. Make 110% sure that building permits for new villa projects are available if you intend building a new villa design and that your will would qualify within the local building regulations at that location (which cover all sorts of things from environmental to religious). If you are buying an existing villa make sure it had a building permit prior to construction commencing (many villas did not and are therefore unlawful) and that all building regulation were met. In both cases make sure there are no land title disputes for the plot of land. This is called “due diligence” and should be carried out by a recognized specialist. Determine the current maximum initial and extension periods in law for a Hak Pakai agreement.
5) When you know the land / villa you wish to buy / invest in, get your friend back to your own country and have them enter into agreements with you there under your own country’s jurisdiction. Do not be tempted to simply have your friend sign an agreement in Indonesia which says jurisdiction will be in your own country. You should physically have them sign everything in your country and get copies of their passport and immigration stamps to show they were there at the date of signing. You should also get a letter (signed by all directors) from the Indonesian PT you / they have set up to acknowledge the purpose of their trip is to secure funding and set up International marketing and reservation agreements with your foreign company, and also giving them authority to sign such agreements while they are there on behalf of the PT. The agreements you need them to sign are;
a) A loan agreement between your company and the Indonesian PT, guaranteed by the Indonesian friend personally for all the money required for the project. Use a standard but higher end fixed rate of interest. Include in the agreement exactly what the money is to be used for, and nothing else, unless agreed by you first in writing. Set the term of the agreement to be the maximum initial term of a Balinese Hak Pakai agreement. Put into the agreement provisions for non-payment of any or the full amount by the end of the term. Typically this provision would include a renewal clause if the total amount plus due interest is not paid back to your company within the initial term; this should be specified as the then current maximum renewal / extension option for Balinese Hak Pakai agreements; so that if you get paid back the capital plus good interest within the initial term, then the loan is repaid, but if you / they are so much as a dollar short, it then gets renewed.
Your loan agreement with the PT should include provision and definition for the agreements they will need to legally enter into with your Indonesian friend personally in Bali. Irrespective of whether you are going to build a new villa or are buying one that already exists, only the land should end up in your friend’s personal name; this may well mean he has to buy the land and an existing villa in his name and then sell the villa to the PT for a nominal amount.
Include in your agreement the right for your friend to pay off the loan at (not by) the end of the initial loan agreement term (to correspond with the Hak Pakai term) as is right and fair. Include in the agreement that if they do not so repay the loan amount plus agreed interest back on the exact very last day of the initial term, everything will renew for another period equal to then maximum allowed for Indonesian Hak Pakai agreements at that time.
b) An agreement (for as long as you like / are legally able to) between your company and the Indonesian PT giving your company the full marketing and reservation coordinating rights to the PT and the villa(s). That is, your company has the sole marketing and reservation rights; so you decide who (which agents) offers the villa for rent and which people stay at your villas. Include a commission agreement and, if you like, marketing fee agreement. For example, your company gets 30% commission on every guest booking which you have to handle and are entitled to take in advance from the guests as a deposit for their stay; so you take their deposits and keep it. Be aware the villas will need to pay tax locally (currently 10%), so you will need to set the rates, as per your marketing agreement to include this but the deposit your company takes will not be able to take a commission of this. So the commission / deposit you take will need to be on the gross amount. For example, you decide you wish to charge US$100 a night plus tax (plus service charges if you wish). If your agreement is for 30% commission and someone wants to stay 10 nights (total US$1000 plus tax and service charge), you would take just US$300 deposit / commission. The guest would pay the remaining US$700 PLUS 10% tax (plus any service charge you ask for) on the whole US$1000 at the villas.
Include in your marketing and reservation agreements the right for 2 months (minimum) complimentary accommodation for designated directors (you) and family of your company. Why 2 months? Because if you stay in Bali any more than that, the Indonesian authorities can and will deem you to be an unlawful resident; this could mean either being deported or being required to become legally resident and pay personal taxation in Indonesia on your worldwide income (not good). That is right; currently you should only spend a maximum 2 months in any 12 month period in Bali / Indonesia as a non-registered / resident foreigner. If you intend to allow friends and family without you being present to use the villa(s), you can make the complimentary accommodation period longer of course just as long as no one person stays in Indonesia longer than the current minimum used to determine whether they are legally are resident or not.
c) You need your friend to sign a personal agreement. Include in this agreement the fact your Indonesian friend contracts to work for the Indonesian PT company for the same (Hak Pakai) initial term as the operations director for which they will receive a salary (specified with provision to rise perhaps according to percentage rises in the Indonesian minimum basic wage) plus bonuses for performance / profit share. Make it a condition that if they terminate their contract prematurely they agree to hand over title to the villa(s) / land to a new (Indonesian) owner of your designation for a nominal amount. Specify that the friend is going to receive funding from the Indonesian PT you have set up to buy the land and villa (if appropriate) in their name for the same term and interest rate as between your foreign company and the PT. Specify that if they repay the full amount plus interest by the end of the term, the land is theirs without lien, claim or charge but that they acknowledge they will not own the villa(s) / anything on the land at such a time / event. Include in the agreement that if your friend repays the loan to them from the PT within the initial term, they agree to allow the PT and villas to operate for the minimum extension period allowed by Hak Pakai at the end of the initial term for a nominal (specified amount). Also include that of your friend does not make full repayment during the initial term, they are able to do this in any subsequent extension / renewal term if they wish to on the basis they will allow the PT use of the land for the same nominal amount for the next / following extension / renewal period.
Have your agreements signed and notarized in your home country.
6) Under business visa go to Bali and also have the papers translated into Indonesian (by a qualified and registered English to Indonesian translator, not anyone else), signed, notarized and recorded as charges / liens against the land, friend and Indonesian company. Also draw up the agreements between your friend and the PT you have formed specifically regarding the employment, loan and actual Hak Pakai agreement between them to reflect what you already have agreed outside Indonesia. Transfer the money to the Indonesian company. The Indonesian company then transfers what it needs to your Indonesian friend in return for the “Hak Pakai” agreement. Make sure the PT registers for tax and obtains all necessary permits, including operational permit for accommodations before you accept your first paying guest.
7) Your foreign company controls the marketing (so any rental agents you appoint have to pay you the deposit overseas) and reservations allowing you to legally take the deposit as commission whenever someone books with you. All you have to do is obtain Indonesian business visas if you want to be involved in the villas operation (stress: indirectly through the PT) while you are in Bali; this will cover you for even taking reservations while you are there because you are doing this for your foreign company. You get the maximum time allowed by Indonesian immigration law to be able to stay in Bali without becoming a resident. If the villas make a profit, the PT can legally pay you this money as loan repayments. If you make a lot of money and your bonus scheme for your Indonesian friend was generous enough, they will be able top afford to pay off their personal loan one day and own the land outright without any lien or charge (you will still be entitled to, at the very least / minimum, the next Hak Pakai renewal period and are of course free to negotiate what happens at the end of that with your friend.
This method is called the "ABN method". The date of it being published has been recorded / documented. Anyone is free to use this method (or variation thereof) as long as they place / ensure are placed on any and all web pages offering accommodation rentals for villas the expression / link "ABN Method", such as "These villas have been legally set up using the ABN Method". Villa sales agents may likewise use this method to help their customers again as long as they make a prominent link (not robots limited in any way) / reference on their main page and any appropriate villa sales page that they are offering the villa for sale / investment using the "ABN Method". The link syntax for this is ABN Method. You may use the ABN method or variation thereof without displaying the reference / expression / link for US$1,000,000.
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