INVESTING IN BALI REAL ESTATE THROUGH A COMPANY; THE PROS AND CONS
It’s become quite a trend (and for very good reason). But is it right for you?
The biggest trend that’s taken place during my time in the Bali property market is the shift to people buying properties within companies.
Up until 2014-2015, it was very much a minority choice: there was no compelling need for many people, and the Indonesian government did not favour opening a PT/PMA (Perseroan Terbatas Penanaman Modal Asing; Foreign Investment/Limited Liability Company) for the sole purpose of owning and operating a real estate asset in Bali.
But then President Jokowi stepped in and with the help of the Minister of Finance and the Foreign Investment Advisory Board, the landscape of dormant companies was swept clean and the new horizon expanded – which made the company route far more appealing.
It still won’t be for everyone, but it’s now something that every investor should consider. Getting the ownership structure right could make a huge different to the amount of tax you pay over your lifetime (and beyond) – so let’s take a look at the pros and cons…
Before we do though, a quick disclaimer: this is not tax advice. I’m just sharing general information, not making any kind of recommendation. If you want expert tax advice, I recommend you book a consultation with a proper tax consultant. There are a handful who work primarily with property investors, and they have advised hundreds of people about whether they should invest through a company or not.
ARE YOU A INVESTOR OR A TRADER?
The first important distinction to draw when making this decision is whether you’re a property trader or investor.
If you buy a property to make value-adding improvements and sell on for a profit, you’re a trader. In this case you’re likely to be best off buying as a limited company.
Why? Because when trading properties as a limited company you will pay corporation tax on your profit. If you’d bought a property to “flip” as an individual, your profit would be taxed as income – which, if you’re taxed at the higher rate, will be a whole lot more than what a PT/PMA would be liable to pay.
(As an individual you might be able to get the profit treated as a capital gain rather than
If you buy a property to collect the rent and watch its value creep up over the years, you’re an investor. This is where we get into “it depends” territory: most investors have historically operated as sole traders, but many will now benefit from using a limited company.
WHY MIGHT INVESTORS WANT TO USE A LIMITED COMPANY?
From a purely financial perspective, there are three obvious reasons why you might want to hold property as a company rather than yourself.
1. TAX TREATMENT OF PROFITS
If you own a property in your own name, the profits you make from renting it out will be added to your other earnings (such as from your job) and taxed as income tax. But if instead you hold it within a company, the profits will be liable for Corporation Tax instead.
The rate of Corporation Tax tends to be around half of the higher rate of income tax – which is an enormous saving.
You will still be taxed on the dividends if you take profits out of the company (which we’ll come to later), but there’s flexibility: you may be able to time your dividend payouts for maximum tax-efficiency, or distribute them to family members who are only basic rate taxpayers – or just leave the profits rolling up within the company to buy the next property.
2. TAX TREATMENT OF MORTGAGE INTEREST
Under the ever changing tax laws in your home country, it may be the case that mortgage interest will no longer be an allowable expense for individual property investors (they’ll claim a basic rate allowance instead) – but it will continue to be allowable for companies that hold property.
3. OPPORTUNITIES TO MITIGATE INHERITANCE TAX
Property held within a company gives more options when it comes to planning for Inheritance Tax. It’s all far beyond my pay grade (and you should take advice from a specialist tax advisor if passing properties on forms an important part of your plans), but you can make use of trust structures, different types of shares, and all kinds of clever methods that you wouldn’t otherwise have access to.
So if there’s an income tax advantage and potentially an Inheritance Tax advantage, why wouldn’t you invest through a limited company?
Because of course, there are downsides too…
WHY NOT INVEST THROUGH A LIMITED COMPANY?
1. DIVIDEND TAXATION WHEN YOU TAKE THE MONEY OUT
If you’re leaving your rental profits in the company, no issue: you pay corporation tax, then leave the post-tax income to roll up – maybe to buy more properties.
But if you’re taking the money out (to spend on your own living costs, for example), you’ll be taxed on the dividends you take. That means you’ll be paying corporation tax first, then you may also end up paying a hefty whack in dividend tax on what’s left in order to take it out.
So if you want to live off your property income rather than leaving it to accumulate, it could be a bit of a toss-up. You’ll save tax in some ways, but you may incur extra tax in others. You’ll have to run the numbers to work out which will work out best in your situation.
2. EXTRA COST AND HASSLE
Not a biggie, but there are higher accountancy costs associated with filing annual company accounts – so that’s an expense to factor in, and your life will be full of more paperwork than it would otherwise have been.
HOW TO DECIDE IF USING A LIMITED COMPANY IS RIGHT FOR YOU
Which side of the fence you come down on when it comes to buying through a limited company is going to largely depend on three factors:
1. HOW MUCH INCOME DO YOU HAVE?
If you’re paying the higher rate of income tax, and you don’t have a lower-earning spouse whose name the property income could be put into, the lure of paying the much lower rate of Corporation Tax is going to be strong.
2. DO YOU WANT THE PROPERTY INCOME TO LIVE OFF?
Leaving it rolling up in the company (for future purchases, or just until your non-property income falls) will leave you better off than if you need to take it out to spend.
3. DO YOU USE MORTGAGES?
The ability to claim the entirety of your mortgage interest as operating expenses (once the new rules take hold) will be a major argument for using a company for higher-rate taxpayers.
WHO ARE YOU BUYING PROPERTIES FOR?
Initially of course it’s yourself, but what’s your exit strategy – do you plan to sell them off to finance your expensive wine and cheese habit in your later years, or is it important that you pass your portfolio on to your children or grandchildren?
If passing your properties on is important to you, holding them within a company (if structured correctly) could result in huge Inheritance Tax savings.
SO THE ANSWER IS, OF COURSE…”IT DEPENDS”
Yikes…1,000 words in and we’ve still really only scratched the surface of this whole debate.
If there’s one thing we’ve learned, it’s that there are a lot of different factors in play – so you need to realise that compromise is inevitable, and weigh up all the pros and cons before deciding which side of the fence to come down on.
Before doing so, you should absolutely speak to your accountant back home and use the tax advice that is on offer here in Bali: rather than this post being the end of your research, just use it as a way of getting up to speed with the facts so you can have a productive conversation with an expert.
If you want expert tax advice, I recommend you book a consultation with an expert; we know a handful upon whose advice we rely to advise clients on the basics as they begin their research. They only work with property investors, and have advised hundreds of people about whether they should invest through a company or not.
Stay tuned for an upcoming instalment which will look at how your newly formed company can acquire real estate in Bali and get the highest level of legal protection and security.
2020 is already off to an amazing start for Bali Nirmana Property and we are grateful to our supporters – buyers and sellers alike. Our loyal client base has enjoyed some wonderful decisions made in the last couple of years and we look forward to doing our part to continue to connect investors with the right properties to fulfill their Bali Property dreams, whatever they may be. Keep an eye on this spot for more and more ideas about how to best actualize your vision with us!