Legal Facts About Indonesia Real Estate
Many people have made their dreams of owning a place in a tropical paradise like Bali or other parts of Indonesia a reality. Whatever the motivations of buying a property in Indonesia may be –either for lifestyle or Investment – it is important to seek professional help navigating the acquisition process as Indonesia is a unique market. Acquiring a property in Indonesia, especially for foreigners, is not as easy or straightforward as in many other jurisdictions. The regulatory and legal environments complex and require timely, knowledgeable advice to guide a buyer through the paces. Not only is the legal system complex in terms of property right that may impact Investment, but other factors must also be taken into consideration, such as local government regulation, community customs and traditions. The combination of which requires careful and knowledgeable consideration before investing in any size.
The information contained in this article outlines some of the common issues and complications we believe any prospective acquirer of Property in Indonesia should take into consideration. We hope the information provided help you to understand the Indonesia property market better and the Legal Facts About Indonesia Real Estate
Freehold Title (Hak Milik)
Freehold Title ( Hak Milik ) is the strongest form of land ownership in Indonesia considered an unlimited term. Only individuals WNI (Warga Negara Indonesia) who are Indonesian citizens are entitled to own land under the Hak Milik title. A foreigner cannot acquire land under the Hak Milik Title. A foreigner may, however, acquire other forms of entitlements over land such a Leasehold Right (Hak Sewa) or, subject to a certain condition, a Right to Use (Hak Pakai). Note: In general, a Leasehold Right or Right to Use over land is limited in time and upon expiration of the term the possession of the land, including all buildings, would revert to the Indonesian freehold owner.
Leasehold Right (Hak Sewa)
Leasehold Right (Hak Sewa) over land and buildings is widely used in Indonesia to acquire an interest in the Property, especially by a foreigner who, under law, are not legally allowed to hold a Freehold title (Hak Milik). Leasehold Right Title between lessee and lessor can be granted over land currently held under a freehold title, Hak Guna Bangunan HGB (Right to Build title), or Hak Pakai (Right to Use) title or certain other less commonly used forms of title. The lease length generally cannot exceed the term of the underlying land title(i.e. 30 years for a lease granted over Right to Build land since the term of Right to Build under Indonesian law is generally limited to 30 years, plus another 20‐years extension and potentially 30‐years renewal right subject to certain conditions). Subject to the clauses of a lease contract, a foreigner may lease a vacant plot of land, build permanent or semi-permanent buildings on the land and resell the remaining amount of the lease term to a third party by sub‐lease or transfer of Leasehold Right.
In Indonesia, a Leasehold Right can be established either under a notarial deed or in the form of privately drawn up an agreement between the landowner and lessee. There is no formal registration of leasehold rights at the local land office (Kantor Pertahanan) as is common in other jurisdictions.
Sometimes a landlord and lease may pre‐agree to extension rights of the lease term. The strength of such extension right strongly depends on the contract wording and, in any event, for such an option right to be binding the rental price for an extended-term must be pre‐determined in order to be valid. Future rental values are commonly tied to the prices of commodities such as rice or gold.
Right to Use (Hak Pakai)
Right to Use (Hak Pakai) title gives the holder the right to use a parcel of land (including, subject to permitting requirement, the right to contract buildings). Right to Use title may be held by any legal entity established under Indonesian law or by a foreigner who is resident or domiciled in Indonesia. The requirement of being a resident or domiciled may be satisfied, for purposes of obtaining a Right to Use the title, if a foreigner holds a limited stay permit (KITAS) or permanent stay permit (KITAP) issued by the Indonesian immigration office.
Right to Use title over state land (Tanah Negara) may be granted for a maximum period of 30 years with an extension right of a further maximum period of 20 + 30 years. Right to Use title over freehold land (Hak Milik) has a maximum period of 25 years. Any extension beyond this 25 years period requires a new agreement with the Indonesian landowner and registration of a new Right to Use title over the relevant parcel of land with the competent land office.
Under current law, Right to Use is the only registered form of entitlement over land that can be granted to a foreigner individual which would be evidenced by a land certificate reflecting the name of a foreigner and the term on the certificate which servers formal evidence of this form of ownership right.
Holding Property under a foreign investment company
Right to Build – Hak Guna Bangunan or HGB certificate gives the titleholder the right to build and develop buildings on the land and to possess the land for a specific period of time. Right to Build title can be owned by an Indonesian citizen or by a legal entity established under Indonesian law that has its domicile in Indonesia, including a PMA (Perusahaan Penanam Modal Asing ) company. Under certain condition and subject to approval by the investment coordinating board (BKPM), a PMA company may be owned by foreigner up to one hundred per cent. Note: Right to Build certificate is not available to foreigner individuals.
A Right to Build title over state land (HGB Atas Tanah Negara) is valid for an initial period of 30 years and can generally be extended for an additional period of 20 + 30 years. Subsequent extensions are at the discretion for addition the state and may be renewed for another 30 years. Right to Build title must be recorded on the land certificate in the local land office.
Right to Build title over freehold (Hak Milik) land is valid for a period of 30 years. Any extensions above 30 years would be subject to a new agreement between the landowner and registration of a new Right to Build title over that privately owned land.
Note: Establishing a PMA company requires minimum share capital pursuant to government regulations and the requirement of the BKPM. As the general purpose of a PMA company is to conduct an operative commercial business and a PMA is subject to the certain reporting requirement, it is neither advisable nor feasible to establish a PMA company with the intention to solely hold and individual residential property.
Apartement Unit Ownership Title (Hak Milik Atas Satuan Rumah Susun or Strata Title)
Indonesian law also provides for a specific form of ownership over an apartment unit – often referred to as Strata Title – which may be acquired by foreigners. A foreigner is entitled to acquire, and apartment unit Strata Title (Hak Milik Atas Satuan Rumah Susun ) always provided that the underlying land title of the land on which the apartment building is developed is Right to Use over state land (Hak Pakai Atas Tanah Negara). Similar to the registration of a Right to Use over a parcel of land, the foreigner may be required to produce a limited or permanent stay permit issued by the Indonesian immigration office (e.g. KITAS or KITAP) to obtain registration of strata title in his personal name. The land office would then issue a Strata Title certificate reflecting the name of the foreigner which serves as evidence of apartment unit ownership.
General Process of Acquiring Property in Indonesia
After a seller and buyer have agreed upon the price and all other term and conditions for a property transaction. The parties usually enter into a Binding sale and purchase Agreement or Binding Leasehold Right Agreement (Perjanjian Pengikat Jual Beli or Perjanjian Pengikatan Sewa Menyewa) to formally agree and reflect the terms of the proposed transaction. It’s recommended that a buyer or seller engage independent legal counsel to act on their interest and in order to ensure their agreed terms and conditions are firmly reflected in the Binding Sale and Purchase Agreement (PPJB) or Binding Leasehold Acquisition Agreement, respectively. Following the execution of this binding agreement, the acquirer would, through a legal representative or notary conduct due diligence on the Property. Important: It is recommended that satisfactory due diligence should be stipulated as a condition for completion of the transaction under the binding agreement.
In order to formally conclude the purchase of the Property as explained under the binding agreement, the two parties would enter into notarial documents reflecting the purchase of the Property either in the form of a Leasehold Agreement Deed (Akta Sewa Menyewa) or in the form of a sale and purchase agreement/deed (Akta Perjanjian Jual Beli or AJB)). As the case may be, until final payment of the price is made and any other terms for completion are met, the notary would hold the land certificates or deeds relating to the property transaction in escrow.
Once the seller has received complete payment and all taxes accruing from the transaction have been paid, the title of the Property is transferred and copies of the deeds released to the respective parties. In case of a formal transfer of title over a land plot, i.e. Hak Milik, Hak Pakai or HGB Title, the transfer will be effectuated and concluded upon the issuance of the land certificate by the competent land office reflecting the name of the acquirer on the certificate. Note: For Leasehold Right (Hak Sewa) acquisitions there is no formal registration at the land office and only the respective lease deed copies will be circulated to the parties.
Recommended Property Due Diligence Checks
Conducting due diligence checks prior to concluding the acquisition of a property is of utmost importance. The primary goal of due diligence is to check the authenticity of the title and to ensure that no encumbrances, mortgages or other lines are attached to the Property. In addition, thorough checks should include investigations whether it is possible to build on the land ( if undeveloped) or whether the current building has a valid building permit, verifying unhindered access right, and detecting potential legal issues relating to the Property including (e. g any outstanding tax liabilities).
Besides checking the legal documentation, due diligence may also include a physical inspection of the land/property, verification that a property has adequate insurance coverage and checks with the local authorities (Desa and Banjar) regarding the Property and neighbourhood.
Certain specific inquiries can be conducted at the respective local land officer and district court and the spatial layout office. Upon request, the land office will examine whether a property is clear from any mortgage and also verify the identity of the currently registered owner of the Property based on their database. Upon request, the district court will issue a letter informing whether the owner of the Property is registered and involved in any civil or criminal cases at the local court. It is recommended that such formal checks are undertaken as part of due diligence.
Right Of Access
The importance of unhindered access to any property acquisition is clear. In Indonesia, where there are fast‐developing regions and areas, it is even more important to thoroughly check that unencumbered, and unrestricted access right exist to and from a property. This is due to the fact that public infrastructure and master planning often lag behind the pace of development. Public access is generally provided through government roads that are constructed as a public facility and managed and maintained by the government.
Access to newly developed areas might be granted across privately owned land plots or communal village land. In such cases, in order to establish whether there is access and under which conditions, it is recommendable to make investigations in the local community and with the head of the village. If access is provided through private land, it is strongly recommended to formally execute an access agreement which may provide for compensation in return for granting of an access right. If an access way is communally used or owned by a village, it might be recommendable to obtain a formal confirmation letter from the respective head of the village confirming such access. In that regard, it is common for certain communal roads that cost for maintenance and improvement are shared by the adjacent neighbours and local community using such road.
Location and Zoning (Spatial Layout)
May provinces and regions in Indonesia have implemented and issue local spatial layout plans. Under a local spatial layout plans, areas are specifically allocated for certain purpose or usage. e. g . for use a residential area, tourism area, industrial area, forestry area or green belt area when acquiring a property. It is therefore important to check with the relevant authorities the specific zoning of the land ensure that the intended use of the Property is in line with the public zoning. In the process of locating a possible location for a project, the buyer or its representative should therefore in advance contact the competent local city planning office to obtain official information pertaining to the spatial layout plan where the land is located. This is important as the Regency. The municipality or Provincial Government may otherwise refuse to issues permit, including building construction permit (Ijin Mendirikan Bangunan or IMB ) in case that a project is not in line with the designated user under the spatial layout plan.
With regard to zoning, it is also important to ensure that a parcel of land that shall be acquired is not located in a green belt area Green belt areas are designated by the local government and strictly preserved for ecological, social and esthetical purposes. No permanent building area allowed to be constructed in such areas.
Beachfront Land and Setback Rules
Beachfront plots are often sought‐after prime properties. Generally, beachfront land can always be acquired provided that the specific land plot has a legal title and is certificated, i.e. Hak Milik or HGB. It is, however, crucial to note that the use of land located adjacent to the beach and coastal areas must comply with certain technical requirements, especially setback requirement. Current national regulation stipulates a setback line of 100 meters from of the highest tide towards the mainland. Sometimes provincial or local government regulations may stipulate a lower setback line or allow for dispensation under certain conditions. Within such setback lines, no permanent building is allowed. Furthermore, prior to the management and commercial use of beachfront Property, an environmental permit, namely an environmental Impact Assessment (Analisis Mengenai Dampak Lingkungan or AMDAL ) may be required. Approval of the AMDAL would usually be obtained from the regional government. Specific setback rules also apply for land plots located adjacent to rivers.
Process of Certification and Registration of uncertified Land
In Indonesia, there are vast areas of land which have not yet been registered and certified under the Agrarian Law. Proprietary right or right of possession to such land plots are commonly governed by the traditional law known as adat law. Possession and indication of ownership of uncertified land are often evidenced by proof of tax payment, such as a “Surat Girik or Surat Pipil/Persil. “
Uncertified land, also known as sporadic land, can only be lawfully transferred and acquired‐outside the adat law system – if a certificate of title has been formally issued. This process usually involves the provision of proof of adat law based proprietary right by the original processor and formal measurement and certification of the land which is conduct by the relevant land office prior to insurance of registered title. In practice, depending on the type of entitlement and certificate that shall be issued and registered over sporadic land, the registration process may take between a few weeks up to several months. Once a certificate is issued, the land plot may be acquired and transacted in accordance with general legal procedures.
Property Acquisition ‐ Taxes and Duties
In a sale and purchase of Property, buyer and seller should consider the taxes and duties levied on the transaction. Generally, for a transfer of title, the applicable taxes and duties are, on the side of the buyer, the land and building acquisition duty (Bea Perolehan Hak Atas Tanah dan Bangunan or BPHTB) and income tax on the side of the seller. For leasehold acquisitions, there is the final income tax of 10%, and such tax is to be withheld and paid by the lessor. If a seller or lessor is regarded as a taxable entrepreneur, Valued Added Tax (VAT) may also apply. When buying & selling Property in Indonesia, you will encounter NJOP value; this is set by the local government for land and building. If the agreed price is higher than NJOP, you can propose to the other party to follow NJOP value to save on the tax implementation, see a visual table below on the scenario. It is suggested to speak with a tax consultant and your notary before moving forward on that matter.
When it comes to resale of a property, generally the same rules and procedures apply as outlines above in “General Process of Acquiring Property in Indonesia”. In addition, it is recommended that the reseller of Property makes specific preparations in order to facilitate and possibly expedite the resale, and due diligence process. This would include preparing a comprehensive set of copies of properly maintained property documents which may be handed over to a buyer and the notary who would be overseeing the resale.
Such documentation should include copies of the land certificate, lease agreements (if applicable), building permit, and land building tax payment receipts and other documents. If available, it may be advisable to include a copy of any land due to diligence reports as this would likely allow a buyer to expedite his own due diligence process.
In Indonesia, a special luxury tax is applicable for certain goods, including first-time transactions of newly constructed properties of a certain size. Currently, the luxury tax applies to the transaction of houses with a size of 300 m2 or more and for apartment units with a size of 150 m2 or more. As of 2012, the current luxury tax rate is 20 % of the purchase price of the Property. The luxury tax applies only once on the first transfer of title over the Property, usually from a developer to the buyer. Therefore it’s important to a developer that this potential additional tax is taken into account when determining the price of a property.
Building Construction Permit (IMB)
A building construction permit (Ijin Mendirikan Bangun) issued by the municipality or regency government serving as a legal permit to construct a building based on the drawings submitted and provided to the authorities. The IMB must generally be obtained prior to commencement of any construction work. On the IMB the size of the building, its purpose (e.g. residential or rental use), as well as certain technical requirements of the building, will be stipulated. Any actual building should be in compliance with the IMB, e.g. the built area should not exceed the are stated on the IMB. If it is intended to modify an existing building or to change the function of a building, then an application for amendment should be submitted to the relevant authority. Note: Usually an IMB is issued without time limitation, however, if an IMB is granted for a leasehold property, the competent authority may limit the timely validation of the IMB to the expiration date of the current lease term.
With regard to building permit, it is also important to check specific local regulations. In Bali, for example, the building should be in line with and reflect traditional Balinese building style and design and the maximum height of a building shall not exceed 15 meters.
Adat Law and Local Culture
Indonesian is a country with a multitude of an ethnic group with different traditional ruler and local customary laws are of importance today and should be complied with and honoured. Therefore, when acquiring land, apart from the written national or provincial legislation, a buyer should also mind local traditions and customary (adat) law. In Bali, for example, there are certain areas which may form part of or are adjacent to religious places, such as land adjacent to a temple. Depending on the purpose and significance of the temple, any development or commercial use of properties within a certain radius from the temple may be severely restricted or even prohibited.
In Indonesia, the influence of the local traditional rules or adat law should not be underestimated as it maintains a strong influence. Apart from regulating the general use of properties in certain traditional areas, adat law may also provide may regular contributions of a property owner to the local community (known in Bali as iuran Banjar).
Licenses for Commercial Property Use
Whenever a single property shall be used for any other purpose than purely residential use, namely for commercial use, a specific license is required. A residential property may be used as a public accommodation facility under operational licenses known as Pondok Wisata if a building construction permits grand and refers to the building purpose as Pondok Wisata such building may be used partially or entirely as an accommodation facility. The relevant license is issued by the regional government, i.e. the mayor of regent. Since the regulation of Pondok Wisata is governed under regional regulations, the specific implementations may vary from one region to another. It is also crucial to note that operating a property under Pondok Wisata incurs tax liability.
Where several units or properties shall be used commercially and rented out, a specific type of hotel license would be required. The type of hotel license required generally depends on the classifications of the accommodation and the additional facilities that are available on the Property. Regional regulations stipulate specific condition and criteria for the respective hotel type categories, which range from 1 star to 5-star hotels. Depending on the category, under current regulations, 3-star hotel accommodations or higher might be eligible for up to 100% foreign investment through a foreign investment company subject to approval by the Capital Investment Coordinating Board ”Badan Koordinasi Penanaman Modal” in Jakarta. In addition to the general approval of foreign Investment through a PMA company, further local licenses and permits will be required.
Establishing an Indonesia Company with Foreign Share Ownership
As a legal vehicle to conduct business in Indonesia, a foreign entity or individual may establish a limited liability company with shares owned by the foreigner known as Penanaman Modal Asing (PMA company) or foreign investment company.
Depending on the line of business a PMA company wishes to engage in the foreign shareholding quota in such PMA company may be up to 100%, thereby allowing the foreign investor to have direct legal control and access over the company and its business. A PMA company requires a minimum of two shareholders, one Director, and one Commissioner, who may all be foreigners. The Director is responsible for the day to day operation of the company, and the Commissioner has a supervisory function on behalf of the shareholder. The shareholder appoints the Director and or Commissioner in accordance with the articles of association of the company.
As a first step, the establishment of a PMA company requires approval from the capital investment coordinating board (Badan Koordinasi Penanaman Modal or BKPM) In Jakarta. This approval would define and stipulate the quota of the maximum foreign shareholding, the authorized share capital and other corporate governance terms. The BKPM will, depending on the line of business.
Stipulate a specific minimum paid-up capital for the PMA Company, which is substantially higher than the general capital requirements set forth for local Indonesian owned companies under the Indonesian Company Law.
Once the BKPM approval is obtained, the foreign investor would sign the deed of establishment of the company before a public notary and provide the required share capital of the company. Thereafter, the public notary will submit the deed to the minister of law and human right to obtain final approval for the establishment. Once such approval is issued the PMA company officially obtains its a legal status.
Subsequently, the PMA Company may proceed with obtaining the necessary local permits and licenses in the area where the business will be domiciled.
A PMA company is entitled to acquire asset including land under HGB title which would be registered in the company’s name. Certain incentives may be granted to foreign investment project under a PMA company. Such as exemption from import duty, reduction of income tax or VAT. A PMA company must regularly report investment activities to the BKPM in Jakarta. Once the PMA Company is commercially operating it must obtain its permanent business license with the BKPM.
List of Abbreviations
HM – Hak Milik or Freehold Title
HGB – Hak Guna Bangunan or Right to Build
IMB – Ijin Mendirikan Bangunan or Building Construction Permit
BPN – Badan Pertahanan Negara or National Land Office
BKPM – Badan Koordinasi Penanaman Modal or Capital Investment Coordinating
VAT – Value Added Tax or Pajak Pertambahan Nilai
PMA – Penanaman Modal Asing or Foreign Investment Company
AJB – Akta Jual Beli or Sale and Purchase Deed
AMDAL – Analisis Mengenai Dampak Lingkungan or Environmental
PPAT – Pejabat Pembuat Akta Tanah or Land Deed Offical
Legal Facts About Indonesia Real Estate
The information described in this article is not legal advice and only a brief and general summary of legal information. The content of this article shall not consider as legal service. Legal advice depends on the specific facts and circumstances of each individual matter and subject. The content of the article is not intended to provide complete and comprehensive statements of applicable laws or regulations, and we do not guarantee or warrant its accuracy as laws and regulation are subject to frequent change, and implementation of laws and regulations may vary depending on the relevant government officials. Those considering any investment should seek specific legal advice or assistance and should always contact an attorney or consultant to get complete, accurate, and current advice. Is you liked this blog post about Legal Facts About Indonesia Real Estate you are most welcome to share it to friends and colleagues.