Land acquisition and Due Diligence
Can a foreign person or other foreign entity legally purchase property in Indonesia? The Indonesian government issued Law 5 of 1960 on the “Basic Regulation Of Land in Indonesia” (“UU 5/1960″), which came into force on 24 September 1960. This law explicitly and implicitly revoked many older laws. As a result, it can be said that UU 5/1960 established revolutionary new rules and principles concerning rights in land. UU 5/1960 recognized and regulated several rights over land and houses, including the: Right of Ownership (Hak Milik), Right to Cultivate (Hak Guna Usaha), Right of Building (Hak Guna Bangunan), Right of Use (Hak Pakai), and Right of Building Lease (Hak Sewa Atas Bangunan).
The freehold property option for foreigners. The most used (and unfortunately for the unwary, misused) option is to use an Indonesian name holder for your property, with who you make contracts. These contracts give you the right to use the property. See for more information below. We cannot stress enough that these contracts should be checked and double checked. No matter how friendly the people are that offer their help, ask advice from a well know legal company in Bali.
Right of Ownership is the most comprehensive and complete form of individual rights over land. There is no time limit, and the holder has the right to use the land, including the earth underneath and the water and air above. It does not, however, include the right to obtain wealth from resources underneath the earth. Right of Ownership may be had only by Indonesian citizens.
The Right to Cultivate is the right to cultivate State-owned land or to use it for other agricultural purposes for a certain period of time. There are two kinds of Right to Cultivate: for farming enterprises that are smaller than 25 hectares and for enterprises that are 25 hectares or more. Government Regulation 40 of 1996 on the Right to Cultivate, Right of Building, and Right of Use (“PP 40/1997″) states that the period for Right to Cultivate is not to exceed 35 years initially but can be extended for another 25 years. When the extension period expires, the Right To Cultivate shall be renewed over the same land. The Right to Cultivate may only be owned by Indonesian citizens and companies established under Indonesian law and domiciled in Indonesia.
Right of Building is a right over land, either State-owned or private, with which the holder may erect and possess buildings for a certain period of time not to exceed thirty years (can be extended for another twenty years). When the extension period expires, Right of Building shall be renewed. There are no limitations on the size of the holding. Right of Building may only be owned by Indonesian citizens and companies established under Indonesian law and domiciled in Indonesia.
Right of Use is a right over land, either State-owned or private, which gives the holder the right to use and obtain the product of a certain piece of land. The land to which Right of Use is applied may be used as a building site or for agricultural purposes. PP 40/1997 states that the initial period for Right of Use is not to exceed 25 years but can be extended for another twenty years or even indefinitely if the land is still in use for a certain reason. Right of Use may be owned by Indonesian citizens, resident foreigners, Indonesian companies domiciled in Indonesia, and foreign companies that have a representative office in Indonesia. Currently it is easy for foreigners in Bali to obtain the right of use.
Right of Building Lease is a right to lease land, either State-owned or private, which gives the holder the right to use the land in return for compensation. The payment could be one-time or periodical as determined by mutual understanding between the parties. Right of Building Lease may be owned by Indonesian citizens, resident foreigners, Indonesian companies domiciled in Indonesia, and foreign companies that have a representative office in Indonesia.
Property Rights of Foreigners UU 5/1960 only allows foreigners to obtain Right of Use or Right of Building Lease. However, UU 5/1960 only provides very general information on how to obtain either of these rights, the maximum time period, or the legal assurances provided. As a result, many foreigners in Indonesia are not willing to engage in such transactions because they do not know the regulations or feel insecure with the regulations.
Renewal of rights on expiry of the initial term is via an application to the National Land Agency and is subject to payment of a fee. An application must be submitted one year before expiry of the term. Although the law is silent in regard to the period after the expiry of the extended terms, the consensus is that a land right can be extended if there has been no infringement of the conditions attached to its usage.
Pipil is land owned by Balinese families by inheritage and never has been formally registered with the Land Registration office. Before aquiring this type of land it has to registered. This takes usually 4 to 6 months.
What do foreigners have to do if they want to use an Indonesian nameholder? It is best to use a well known company to arrange your contracts, and it is not unusual to ask a second opinion about the contracts. Important issues are inheritage and marriage. A foreigner married to an Indonesian woman, needs to have a marriage contract f.i.
Procedures for Property Acquisition. All transactions of land rights must be via deeds executed before a land deed official at the local office of the Pejabat Pembuat Akta Tanah (PPAT) where the land is located and must be registered in the regional office of the National Land Agency. The PPATs are privately managed offices (usually run by a notary) authorized by the National Land Agency to handle land acquisition matters. Although there is no regulation that contracts have to be in Indonesian language, it is recommended having contracts and agreements always drawn up and executed in Bahasa Indonesia (or two languages) to prevent later arguments that the local partner did not fully understand the content.
Property Sales Tax. When property is sold there is tax to be paid by both the selling and the buying party. This is 5%, for each, over the amount that is on the sales contract. Please note that the amount on the sales contract can be different from the actual price agreed upon. The tax has to be paid to the notary handling the transaction. Project developers usually include all in their pricing schemes, but when negotiating please ask how sales tax will be handled. Many a foreigner got an unpleasant surprise after agreeing on a price and hearing of the extra tax.
VAT Sales Tax. VAT on sale is 10%
Luxury Sales Tax. 20% Tax on sale of landed houses with a building size of 400m2 or more or an installed electricity capacity above 6.600 watt.
Documents drawn up at the Notary. There are four documents needed: Number one describes that the foreigner gives money to the Indonesian name holder to buy land and property and the Indonesian gives this land and property to the foreigner to use it, out of his free will. The document also describes that the name holder gives the foreigner permission to sell , to rent it out or rebuild the house or property. It states that the agreement, if necessary, passes automatically to the heirs, as well of the foreigner as the name holders. It states that all of the property costs (electricity, water and taxes) have to be paid by the foreigner. The official ‘Sertipikat’ will be in the foreigners possession as well as the statement of cession, signed by the name holder. Only with this ‘Sertipikat Hak Milik’ it is possible to sell the land. In the second document the selling of the property is granted to the foreigner. The name holder gives his explicit permission to do so. In the third document the name holder gives permission to rent out the house or property. The fourth document commits the name holder to co-operate, if the time ever comes that foreigners can own land and property in Indonesia, in making the foreigner being the new name holder on the ‘Sertipikat’. In case the law changes in the disadvantage of foreigners, the name holder will co-operate in changing the agreement into a lease-contract of 50 years with option for another term.
Choose the right Indonesian Partner to “own” your property or land. This may take some time and asking around. Talk with foreigners in your area, and don’t haste.
Properties can be owned by companies, like a PT or a PMA. A PT is an Indonesian “Limited”, a PMA is a foreign investment company which can be owned 100% by foreigners. The PMA property license has to be renewed every 20 or 30 years. Setting up a PT costs about 7 to 10 million rp, a PMA around 35 million rp.
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