Nominee agreement for land ownership are prohibited if the basis is to transfer restricted land rights to foreign parties. For foreigners, you are only entitled to land under a right to use (Hak Pakai) or leasehold. More specifically, the Agrarian Law number 5 of 1960 has expressly stated that freehold land can only be owned by Indonesian citizens or legal entities as determined by the government.

Based on the above, the Agrarian Law operates such that the following parties must release their freehold land:

• Foreigners who inherit freehold land or obtain such land due to a marriage with an Indonesian citizen; 
• Indonesian citizens who lose their Indonesian citizenship; or 
• Indonesians with dual citizenship. 

You must realize the release of a freehold right under the above within one year. Calculated after a party obtains land (point a), loses his citizenship (point b), or secures foreign citizenship (point c). If not, the freehold rights will be deemed as removed by law and the land will be taken over by the state. 

Further, the Agrarian Law also prohibits any sale and purchase, exchange, grant, or activity. In which directly or indirectly transfers freehold land to a foreign citizen or legal entity. Any such transfer will be deemed as null and void. It results in the respective land being returned to the state. 

As a consequence, any nominee agreement that provides transfer of freehold land to a foreign party will be deemed. It is caused by not having an admissible and violates the above provisions. 

Nominee Agreement for Land Ownership

The types of agreement that are usually used to materialize nominee arrangements to obtain land for foreigners are as follows:

• Land ownership agreement including a power of attorney: The nominee will acknowledge that land registered under his name actually belongs to the beneficiary who provided the funds to purchase the land. In addition, the nominee will provide an irrevocable power of attorney to authorize the beneficiary to conduct any activities on the land. 
• Option agreement: The nominee will provide the beneficiary with options to purchase the land that was purchased by the nominee with the beneficiary’s fund.
• Lease Agreement: The nominee will lease the land to the beneficiary for a certain lease period, with an option for an extension.
• Grant with Testament (Hibah Wasiat): The nominee will grant his land and properties to the beneficiary. 
• Loan Agreement: The beneficiary will provide certain funds as a loan for the nominee to purchase the land. Following the loan agreement, the beneficiary and the nominee will enter into an agreement which uses the respective land as collateral for the loan under a mortgage mechanism. 

Binding Power of Nominee Agreement

Based on above, it can be reasonably concluded that there are serious questions about the validity of nominee arrangement. The general nature of such arrangement is to circumvent applicable laws and regulations. Therefore, nominee practices are expressly prohibited under the Investment Law and Agrarian Law which deems them null and void. 

In this regard, some foreign parties (beneficiaries) go as far as formalizing nominee agreement by having them made into an authentic deed before a notary. The intent is that a notarial deed will provide more legal certainty and may be used as a powerful instrument to evidence their rights over the agreement’s objects (shares or land). Particularly if there is a dispute between the beneficiaries and the nominees.

Noteworthy, however, is that a notarial deed does not necessarily provide a better position for the beneficiary. As there are still many potential issues regarding the validity of the nominee agreement itself. That in which, leans in favor of the nominee, despite the agreement being drafted using a notarial deed. 

Conclusion

There is little doubt that nominee arrangements raise serious questions about their validity and enforceability. Despite such concerns, and for historical and other reasons, the fact remains that many nominee arrangements currently exist for both investment and land ownership purposes. 

The question then becomes, “what should be done about existing arrangements and also going forward? Are there a number of serious time bombs waiting to explode, will practical considerations solve the problem, or can more refined arrangements be formulated that properly accord with the law?”

To be safe, there is an option called leasehold title of ownership. It is legal for foreigners that you may own a property for certain period of lease, and you may possibly extend in future market price before the lease ends.

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