The best legal structure for your rental business in Indonesia
Setting up a transparent rental business in Indonesia starts from having a clear understanding about the available legal structures:
If you setup a rental property in Indonesia, it’s important to get your legal structure right. This protects your investment, and you as a foreigner, from penalty or punishment. Above all, there are a few key rules to help you decide what the right legal entity is for your rental business.
Short term vs. long term rental
The first consideration is the rental period for your business. Essentially, if you rent out a property on a short-term stay or long-term basis, it affects your business structure. In addition, each will require a different type of business to operate. In either case, you will need to register a PT/PMA (foreign-owned limited liability company) to manage your business in Indonesia.
You can register a company for a long term rental business in residential zoning under the real estate business classification. This is your only option if the zoning for your property is residential. For this business type, you can not offer short-term rentals.
You can create a short-term rental business as either a Villa Rental business, or a Homestay Rental business arrangement. However, both types must be on land with tourism zoning. Finally, structure your business as one of these entities if your property is in a tourism zone.
Choosing between a villa and a homestay
If you are creating a short-term stay rental business in Indonesia in a tourism zone, the next decision is whether to set the scope of your PT/PMA as a villa rental company, or as a homestay management company.
The villa rental designation allows your company to manage a single villa property. You can manage multiple villa properties by registering branches of your company or a separate company at each address.
The homestay management designation allows your company to manage smaller properties. This is done by setting up your PT/PMA company with the “hospitality management consultation” classification. Additionally, this requires the cooperation of locals (usually the landlord you acquired the lease from) to register each property as a homestay (“Pondok Wisata”). You apply for a license for each property in the name of an Indonesian person.
Let the structure decide for you
The scale and structure of the buildings on your property will help you decide. If the land is less than 1000m2 (“10 Are”), register your PT/PMA under the “hospitality management consultation” scope for homestays. This setup allows you to register your business immediately out of a virtual office. It means any necessary KITAS applications can be submitted early on. The homestay licenses can be applied in parallel to your company registration and KITAS process. This means faster licensing and registration.
If the land is larger in size and has multiple buildings on the property, you can setup your PT/PMA to operate as a villa rental business. This classification can have up to 25 rooms.
Emerhub provides villa registration services. Contact us to get your limited liability PT/PMA with villa rental classification started quickly and professionally.
Is there a better way
Generally, factors like land, structure and zoning will decide the business structure for your rental business in Indonesia. But if you can choose, it is a safer long-term investment to go with a PT/PMA classified for villa rental.
This structure is your clearest legal option for a villa rental business as a foreigner. There are no potential later conflicts that might arise from having the business license in the name of an Indonesian (as is the case with homestays). It also allows getting IMB business permits under your company name. This is much safer for expats than having local parties register them in their own names.
There are some drawbacks. Obtaining articles of association is a lengthier process. Applying for a new IMB can take 6 months to 1 year. It’s better to find a property with an existing IMB to avoid this. Finalization of the company and any necessary KITAS applications must come after. Your villa rental business must have its physical address and registered address on the same property. This means your office can not be virtual. And if you want to operate multiple villas like this, you will have to create a branch office designation for each one.
The ubiquitous building permit
Whether you setup your PT/PMA to manage short-term homestays, short-term stay villas or long-term rentals, you need an IMB permit for each physical location you setup for your rental business in Indonesia. Not having one is a serious law infringement and it is punishable with serious fines – up to 2 billion rupiah – or even imprisonment. Finding a property that already has a registered IMB for a rental business is often the fastest way to get started. Applying for a completely new IMB can take considerably more time, especially for a rental-villa designation.
If you decide to build a new property, be sure to conduct thorough research on the land first. It can take 4-6 months to obtain such a new license. It is also subjective to the design and construction of the building. Designated local authorities will survey your property to compare the final design with the initial architectural plan.
Each property has its own IMB. If you decide to change villas or homestay properties in the future, the IMB will not follow you to the next location. This means you are required to restart the licensing process from scratch.
Watch out for zoning blocks
The zoning for land in Bali falls into many unique categories. Bali follows a spatial zoning plan, meaning that each regency has their own rules. The local government defines the permitted activities and zoning for each region. These zones can also force a choice on you as to whether you setup your company for short-term stays (villa or homestay) or long-term rentals in the real estate classification. Or not at all.
For example, “Pura” is a special name for land surrounding Pura Uluwatu, a temple on the cliffs of Uluwatu. You can not build within a 5km radius from the temple. Another example is green-zoning, which, as the name suggests, must remain green and untouched.
The land designation required for a short-term villa or homestay business is tourism zoning. You need residential zoning for long-term rentals.
Operating under the radar
Finally, be very wary of running a rental business in Indonesia under the radar. The immigration department is on the look-out for foreigners who engage in accommodation businesses without proper documentation. The prevalence of foreigners operating Airbnb rentals without licenses is increasingly a target.
This also holds true for foreigners running one or more homestays (including the necessary agreements with locals) without registering a PT/PMA with the “hospitality management consultation” scope to manage them formally.
In addition to these points, be aware that enforcement activity is expanding. The government may punish you with hefty fines, imprisonment, or by kicking you out of the country. Many foreigners do not know the rules, or decide to ignore them. Immigration is increasingly targeting these illegal business operators.
Get help with licensing and compliance via Emerhub’s real estate team. Contact us for professional help with your building permit and when conducting land due diligence.
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