How to legally rent out your villa in Bali?

If you’re considering investing in Bali’s booming real estate market, you may be wondering how to navigate the complex legal landscape. The vibrant growth of this tropical paradise presents exciting opportunities, but operating a business here requires strict adherence to local laws and regulations. 

This is where establishing a Foreign Owned Company (PT PMA) can be a game changer. By setting up a PT PMA, you can unlock significant advantages, ensuring that your investment is not only profitable but also compliant with Indonesian legal requirements. This strategic approach allows you to manage leasehold properties effectively while enjoying various protections and operational benefits. Let’s dive into why a PT PMA is essential for foreign investors in Bali and explore its purpose and usage.

Why It Is Used in Bali:

1. Foreign Investment: Bali is a prime location for tourism and real estate investments, drawing substantial international interest. The PT PMA structure allows foreign investors to legally own and operate businesses.
2. Legal Framework: PT PMA provides a clear legal framework for foreign investment, including protections for investors and compliance with Indonesian laws. This structure is necessary for foreign entities to operate legally and manage business operations effectively.
3. Operational advantages: Establishing a PT PMA allows foreign businesses to issue work permits for foreign employees, lease office space, and engage in economic activities typically restricted to local entities.
4. Long-term presence: Having a PT PMA facilitates a long-term business presence in Indonesia, enabling sustained investments and the potential for expansion into other parts of the country beyond Bali.

 Purpose of PT PMA:

1. Legal framework for foreign investment: This framework allows foreign investors to establish and fully own a business within the country, with up to 100% foreign ownership permitted in numerous sectors. This enables investors to maintain complete control over their operations and strategically position themselves within Indonesia’s growing and diverse market.
2. Regulatory Compliance: Using a PT PMA ensures compliance with Indonesian regulations regarding foreign ownership, investment, and business operations. This helps mitigate risks related to legal and regulatory issues.
3. Market access: This structure not only simplifies the investment process but also empowers foreign investors with full control over their business operations, ensuring a streamlined entry into the markets.
4. Lower tax payments: The tax on capital gains, such as those from asset transfers, can be lower for a PT PMA. For example, the capital gains tax might be 10% compared to foreign individuals or entities without a PT PMA might face higher capital gains tax rates of 20%.
5. KITAS (Limited Stay Permit) Access: Establishing a PT PMA provides the legal framework needed to sponsor and manage KITAS for foreign investors, includes obtaining the appropriate visas and permits for expatriates, which are crucial for legal employment, investment and residency for a specific period.

 

Included in the Process:

1. Deed of Establishment: This legal document prepared by a notary, outlines the establishment of the PT PMA, including details about the company’s name, structure, shareholders, and business activities.
2. Company Registration Decree: Recognition and legal approval of the company by the ministry.
3. Business Identification Number: Company’s primary identification number for business and administrative purposes.
4. Tax Identification Number: Required for tax reporting and compliance.
5. Company Domicile Letter: This letter confirms the company’s registered address.
6. Company Profile: Provides information about a company, including its history, structure, services, market position, and other key details.
7. Standard Certificate Permit: Generally refers to a certification that a company must obtain to meet certain industry or regulatory standards.
8. KBLI Independent Statement: Statement related to the company’s adherence to the specific Indonesian Standard Industrial Classification.
9. Environmental Management and Monitoring Feasibility Certificate: Required for businesses to demonstrate their ability to manage and monitor environmental impacts.
10. K3L Independent Statement: This document might be required to show compliance with health, safety, and environmental regulations.
11. Environmental Management Statement: Confirms that a company has fulfilled its environmental management obligations.
12. State Gazette: Official announcements or information about the establishment, registration, or changes related to the foreign investment company.
13. Limited Stay Permit (KITAS): Indonesian temporary residence permit that allows foreigners to stay and work in Indonesia for a specific period.

 

What does the agent need from you to set it up:

1. Company Name – Must consist of three unique words.
2. Shareholders – Must have at least two shareholders, a Director and a Commissioner.
3. Shareholders Identity – Scanned copy of the passport for each shareholder.
4. Capital Structure – The specification of the distribution of capital owned by each shareholder Minimum Capital Requirements:   -For PT PMA (Foreign Investment Limited Liability Company): >IDR 10 billion / EUR >580,440    

-For Individuals Requiring a KITAS (Limited Stay Permit): IDR 10 billion / EUR 580,440 /person

1. Business Purpose/Type – Specific details on the nature and type of business activities (to be discussed).
2. Company Address – Company address and local telephone number (if any).

(could also be done by renting a virtual office if you don’t have a permanent local office)

 

KITAS Overview

Purpose: The Investment Kitas allows foreigners to reside in Indonesia while they are actively involved in managing or overseeing their investment. It is primarily designed for investors who are looking to establish or run a business in Indonesia.

Benefits:

• Extended Residency: The Investment KITAS is valid for two years and is extendable, facilitating the possibility of long-term residency in Indonesia.
• Employment Authorization: The visa grants the holder the right to work within the company in which they have invested.
• Family Inclusion: Immediate family members of the investor may qualify for dependent visas, enabling them to reside in Indonesia alongside the primary visa holder.

Corporate Tax Overview for a Foreign Investment Company (PT PMA) in Bali

When operating a PT PMA in Bali, particularly one involved in short-term villa rentals, it’s crucial to understand the tax implications to manage your financial commitments effectively. 

Indonesian Tax Resident

Individuals who are subject to domestic taxes are Indonesian citizens or foreigners who:

1. Residing in Indonesia;
2. Stay in Indonesia for more than 183 (one hundred and eighty three) days within a period of 12 (twelve) month, either continuously or intermittently; or
3. In a Fiscal Year are in Indonesia and have the intention to reside in Indonesia. Individual tax subjects are deemed to have the intention to reside in Indonesia can be proven by documents in the form of:

• Permanent Stay Permit Card (KITAP);
• Limited Stay Visa (VITAS) with a validity period of more than 183 (one hundred and eighty three) days;
• Limited Stay Permit (KITAS) with a validity period of more than 183 (one hundred and eighty three) days;
• A contract or agreement to carry out work, business, or activities carried out in Indonesia for more than 183 (one hundred and eighty three) days; or
• Other documents that can indicate an intention to reside in Indonesia, such as a rental contract residence for more than 183 (one hundred and eighty three) days or documents showing transfer of family members

Tax Reporting for Indonesian Tax Residents

As an Indonesian tax resident, you are required to adhere to the following tax obligations:

1. Tax Identification Number (NPWP) Registration: Obtain and register a Tax Identification Number (Nomor Pokok Wajib Pajak – NPWP) with the Indonesian tax authorities.
2. Worldwide Income Declaration: Report all sources of income, including income earned globally, to the Indonesian tax authorities.
3. Tax Payment and Reporting: Ensure timely payment of taxes and accurate reporting of income and tax obligations in Indonesia.

Personal Income Tax Rates:

• 5% for income up to IDR 60 million / EUR 3,480
• 15% for income between IDR >60 million – 250 million / EUR >3,380 – 14,515
• 25% for income between IDR >250million – 500 million / EUR >14,515 – 29,030
• 30% for income between IDR >500 million – 5 billion / EUR >29,030 – 290,310
• 35% for income exceeding IDR 5 billion / EUR >290,310

However, Indonesia has agreements with several countries to avoid double taxation, known as Double Taxation Agreements (DTAs).

If you have incurred tax liabilities overseas, you may be eligible to claim a foreign tax credit when filing your taxes in Indonesia. It is designed to mitigate the risk of double taxation by allowing you to offset the taxes paid abroad against your Indonesian tax obligations. This mechanism ensures that you are not taxed twice on the same income by different jurisdictions.

Here’s a concise overview:

1. Global Income Taxation: Indonesian tax residents are generally taxed on their worldwide income, which includes income earned worldwide.
2. Double Taxation Agreements (DTAs): To mitigate the risk of double taxation (being taxed on the same income by both Indonesia and another country), Indonesia has DTAs with numerous countries. These agreements often allow taxpayers to credit taxes paid abroad against their Indonesian tax liability or exempt certain types of foreign income from Indonesian tax.
3. Foreign Tax Credits: If you have paid personal income tax on your overseas income, you might be eligible to claim a foreign tax credit in Indonesia. This credit can offset the tax you owe in Indonesia, potentially reducing or eliminating double taxation.
4. Tax Residency and Reporting: Your tax residency status in Indonesia plays a crucial role. If you are considered a tax resident (which typically means spending more than 183 days a year in Indonesia or having a permanent home in the country), you must report all global income.
5. Tax Relief: Specific provisions under the DTA or Indonesian tax regulations may provide tax relief or exemptions for certain types of income or under certain conditions.

Monthly salary 

In Indonesia, you have the option to receive a monthly salary instead of taking dividends from your PT PMA. Here’s a brief overview of how this works:

1. Salary: If you choose to pay yourself a salary, it will be treated as a business expense for the company. This salary is subject to personal income tax (PPh 21) and must be reported and withheld according to Indonesian tax regulations.
2. Dividends: Dividends are typically paid out of the company’s profits after tax and are subject to a different tax treatment. They are usually taxed at the shareholder level.
3. Tax Implications:
   • Salary: As a salary is an expense for the company, it reduces the taxable income of the company, potentially lowering corporate tax liability. However, the salary you receive will be subject to personal income tax, which you must report and pay accordingly.
   • Dividends: Dividends are distributed from profits after tax and are subject to dividend tax, which is generally final and withheld at the source.
4. Regulatory Compliance: Ensure compliance with Indonesian labor laws and tax regulations when setting and paying the salary. It’s also important to maintain proper documentation and accounting records for both salary and dividends.

Choosing between a salary and dividends involves considering tax implications, cash flow needs, and overall financial strategy. 

General Tax Responsibilities for Companies

1. Financial Reporting:
   • Profit and Loss Statement: Detail revenue, costs, and expenses.
   • Balance Sheet: Outline assets, liabilities, and capital.
   • General Ledger: Provide a detailed ledger of all financial transactions.
2. Corporate Income Tax:
   • General Tax Rate: Apply a tax rate of 11-22% on net profit.
   • Small Business Rate: For businesses with revenue up to IDR 4.8 billion, a reduced rate of 0.5% on revenue applies, with a maximum period of three years.          

Initial Three Years: For PT PMAs established since 2018 and engaged in specific business activities like short-term villa rentals, there is a favorable tax rate of 0.5% applied to Gross Revenue. This reduced rate is available for the first three years of operation, providing a significant tax advantage to newly established companies. From the Fourth Year: Starting from the fourth year of operation, the tax regime shifts from gross revenue to net profit, with the applicable corporate tax rate being 22% on Net Profit. 

• Other Taxes: Adhere to any additional specific tax obligations as required.

1. Customer Tax:
   • Value Added Tax (VAT): A mandatory VAT rate of 11% applies to businesses with annual revenue exceeding IDR 4.8 billion.
   • Local Government Taxes: Comply with applicable local government tax regulations.
2. Withholding Tax:
   • Employee Payments: Withhold tax on salaries, wages, allowances, bonuses, commissions, fees, BPJS insurance, and other compensations.
   • Dividend Payments: Withhold tax on dividends, interest, royalties, gifts, bonuses, and rental payments.
   • Service Payments: Withhold tax on all types of services rendered.
   • Other Payments: Ensure compliance with withholding tax requirements for any other applicable payments.
3. Investment Reporting:
   • Maintain and report accurate records of investments as required by Indonesian tax regulations. Proper record-keeping of all real estate transactions, expenses, and tax payments is essential for accurate reporting and audit purposes.

Conclusion:

legally renting out your villa in Bali requires a thorough understanding of local regulations and the establishment of a Foreign Owned Company (PT PMA). This framework allows for full foreign ownership and ensures compliance with Indonesian laws, providing significant operational advantages such as the ability to hire foreign employees and engage in activities typically limited to local entities. Additionally, being aware of the tax implications, such as reduced rates for new businesses can enhance the profitability of your investment. By strategically setting up a PT PMA, you can navigate the complexities of Bali’s real estate market effectively, maximizing your investment potential while enjoying the benefits of this tropical paradise.

Start your journey with Estate Delima and unlock your perfect slice of paradise in Bali with us!