Tax Issue on Real Estate in Indonesia

Konsultan Indonesia Bersama (KIB) Page 1

Real Estate Tax Summary Indonesia
General
Under the current land regulations the option for a foreign citizen and/or entity to own land (and buildings, as
the case may be) in Indonesia is quite limited and depending on the selected line of business (i.e. that which is
open to direct foreign investment), a foreign investor may acquire limited land titles in Indonesia by forming an
Indonesian direct foreign investment company or acquiring an existing Indonesian limited liability company.

Rental income
Rental income from real estate property is subject to final income tax of 10% from the gross rental fee. The
final tax on rental of land/buildings is withheld by third parties (i.e. tenants) and constitutes the final
settlement of the income tax for that particular income. Consequently, any corresponding expenses (including
depreciation of the relevant buildings and interest expense) will be non-deductible for tax purposes.

Transfer of land and building
A transfer of land and building is subject to 5% final income tax from the higher of the transaction value or the
tax imposition base (referred to as the NJOP) as determined by the tax office. For transfers of simple houses
and apartments conducted by taxpayers engaged in a property development business, the tax rate is 1% final
income tax.
On the transferee side, an acquisition of land and building rights will give rise to 5% duty (Bea Perolehan Hak
atas Tanah dan Bangunan or BPHTB). The 5% duty is imposed on the higher of the transaction value or NJOP.

Value added tax (VAT)
Real estate transactions are also subject to value added tax at a rate of 10%. For these purposes, real estate
transactions include rental and sales of real estate properties. Charges for common services for office buildings
and the like are also subject to VAT at 10%.Real Estate Investments Indonesia Real Estate Going Global
Indonesia 4


Real Estate Investments Indonesia
Legal aspects
Investing in real estate
Indonesian law and regulations do not specifically use the term 'real estate'. However, the reference to 'real
estate' in the Indonesias Standard Business Classification Code (KBLI) includes land and any buildings or
structures on it. Generally, buildings or structures on land are also owned by the land owner. However,
Indonesian land law acknowledges the horizontal land separation principle (asas pemisahan horizontal), where
buildings or structures on a land are not part of the land, i.e. the rights over the land do not automatically cover
ownership of the buildings or structures on it.
Generally speaking, an interest in real estate can be held by foreigners through land ownership (i.e. based on a
particular land title) or land lease schemes. Under the current land regulations the option for a foreign entity to
own land (and buildings, as the case may be) in Indonesia is quite limited (i.e. through HGB, HGU, HP, and Hak
Sewa as further explained below). Depending on the selected line of business (i.e. one which is open to direct
foreign investment), a foreign investor may acquire limited land titles in Indonesia by forming an Indonesian
direct foreign investment company (known as PT PMA) or acquiring an existing Indonesian limited liability
company (status of which will then be converted to PT PMA upon acquisition).

Real estate business activities direct foreign investment
In terms of real estate business, Presidential Regulation No. 36 of 2010 on the List of Business Sectors Closed
and Open for Investment with Conditions (Negative List) provides that real estate brokerage is closed for
foreign investors while real estate development is not regulated under the Negative List and thus arguably
should be open for foreign investors through a PT PMA.

Tax Issue on Real Estate in Indonesia

Konsultan Indonesia Bersama (KIB) Page 2

Having said that and given the current policy of foreign investment in Indonesia, we perceive that it will need to
be a large-scale and significant real estate development. There is no clear definition of large scale; however
noting the amount of minimum investment mentioned below presumably approval for acquiring small land
holdings or houses through a PMA company is unlikely.
Foreign companies and individuals, alone or together with Indonesian limited liability companies, individuals
and cooperatives, generally need to establish PT PMA in accordance with Law No.25 of 2007 on Capital
Investments (Investment Law) to engage in businesses/activities open to direct foreign investment, which
will need to be approved by the Capital Investment Coordinating Board (BKPM).
If a foreigner wants to establish a PT PMA, based on the current investment policy by BKPM, there will be a
minimum investment of USD 1.2m.Real Estate Investments Indonesia Real Estate Going Global Indonesia 5


Types of land titles in Indonesia
Generally, there are five types of land title recognized in Indonesia:
Right of Ownership (Hak Milik or HM)

Right to Build (Hak Guna Bangunan or HGB)

Right to Use (Hak Pakai or HP)

Right to Cultivate (Hak Guna Usaha or HGU)

Right to Manage (Hak Pengelolaan or HPL)

Right to Lease (Hak Sewa)

Hak Milik (HM)
HM is the strongest and fullest hereditary right which may be held on land. HM does not have any time limit.
However, please note that all the rights to land in Indonesia (including HM) have a social function, meaning
that the usage of the land has to comply with the condition and nature of the right, thereby benefiting the
owner, the community and the country.
HM can only be owned by Indonesian citizens (individuals) and some corporate entities determined by the
government (e.g. social and religious institutions). Other Indonesian corporate entities and foreign citizens may
not own land with HM.
HM may be transferred to other parties either by sale/purchase, exchange, donation, inheritance and other
acts meant for the transfer of HM. HM can also be pledged as collateral for debt, by encumbering it with a
mortgage (Hak Tanggungan) or encumbrance right under Law No. 4 of 1996 on Mortgages (Mortgage Law).

Right to build (HGB)
HGB is basically a right granted by the government to establish and construct (buildings) on land for a period of,
theoretically, at the most 30 years, which may be extended for another 20 years. Nowadays we normally see
HGB certificates, especially in Jakarta, with periods of 20 years. After the term of extension expires, a HGB title
may theoretically be renewed for another 30 years.
HGB may be granted to (i) Indonesian citizens, (ii) Indonesian corporate entities established under Indonesian
law and domiciled in Indonesia, including PT PMA.
HGB may be acquired by:
(i) transferring the (existing) HGB from the holder to the transferor, by sale/purchase, exchange or donation;
(ii) creating or granting the HGB title on top of land already granted HM or HPL, or on state land (tanah
negara).
HGB may also be pledged as collateral for debts by encumbering it with a mortgage.Real Estate Investments
Indonesia Real Estate Going Global Indonesia 6


Tax Issue on Real Estate in Indonesia

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Right to use (HP)
Law No. 5 of 1960 on Agrarian Affairs (Agrarian Law) defines HP as the right to use and/or collect the
products of land directly administered by the government. The types of land on which HP title can be granted
are state land, and HM and HPL land. This means that HP title can be created on top of these land titles (HM
and HPL).
HP title is granted for a maximum period of 25 years and can be extended for a maximum of 20 years.
Afterwards, the term can be renewed for another 25 years. HP on HM land is granted for a maximum of 25
years and cannot be extended. Theoretically, HP can also be granted for an unlimited time, to be used as
government offices, international organization offices or foreign embassies.
HP may be owned by (i) Indonesian citizens; (ii) foreigners residing in Indonesia; (iii) corporate bodies
established according to the Indonesian law and domiciled in Indonesia (including PT PMA); (iv) foreign
corporate bodies with a representative in Indonesia; (v) departments, non-department government bodies and
regional governments; (vi) foreign country representatives and international organization representatives; and
(vii) religious and social institutions.
Under the relevant law, land with HP title may also be pledged as collateral.
Right to cultivate (HGU)
HGU is the right to cultivate land which is administered by the government. This title is normally granted to
land for cultivation/plantation businesses. The period of HGU title is 35 years and may be extended for another
25 years, with renewal for another 35 years at the most. The minimum size of land for HGU is five hectares
(Ha), and the maximum is 25 Ha (for individuals). For corporate bodies, these sizes will be determined by the
Land Office.
HGU may only be granted to:
Indonesian citizens;

Indonesia corporate entities which are domiciled in Indonesia, including PT PMA.

Right to manage (HPL)
The title is only granted to state-owned companies and government agencies with, normally, an unlimited
term. The land itself normally comes from the land administered by the government and is allocated for
government agencies. Theoretically, other land titles, i.e. HGB and HP, can be granted on top of HPL land.
Right to lease (Hak Sewa)

Right to Lease (Hak Sewa)
Article 16 of the Agrarian Law lists Hak Sewa or Right to Lease as one of the titles for land. Article 44 of the
Agrarian Law further provides that Hak Sewa is a land title that gives its holder the right to construct a building
on another persons land, upon payment of rent.
While HP is a primary land title as it is granted by the government and constructed on state land, Hak Sewa is a
secondary or derivative title granted by a holder of a land title. As Hak Sewa is a derivative title, Hak Sewa in
practice is rarely used.Real Estate Investments Indonesia Real Estate Going Global Indonesia. This is not a
registered land title with the Land Office. It is generally a contractual right over the existing title. This could be
used for example for build operate and transfer schemes (which might be the case in respect of retail
business).
Unfortunately Hak Sewa is not a registered land title with the Indonesian Land Office (as it is generally a
contractual right over the existing title). The only protection given to leases is under article 1576.1 of the
Indonesian Civil Code which loosely provides that the "Selling of a leased object does not terminate the lease on
the object unless it has been agreed so upon the entry into the lease agreement".

Land registration system in Indonesia
Indonesias land registration was initially based on a system commonly known as registration of deeds. After
the Agrarian Law was enacted in 1960, Indonesia adopted a system commonly known as registration of title
because (i) land registrations are recorded in a land registration book at the relevant Land Office and (ii) land

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title certificates are issued to serve as a strong evidence of ownership to land. However, the Land Office does
not provide a guarantee on the status of the land being registered as the land certificates are not construed as
absolute evidence of ownership, i.e. if other parties can prove in a court of law ownership over a plot of land
title that has been issued a land certificate, then such land certificate can be cancelled.
The Indonesian law concept provides that a land certificate is a proof of rights which serves as strong evidence
of the physical and juridical data stated therein, as long as the physical and juridical data are in accordance with
the data stated in the related measurement letter and land registration book.
Land title registration is managed by the regional Land Office with jurisdiction where the land/premise is
located.

Brief overview of land acquisition
The process of land acquisition in Indonesia is relatively complex and time-consuming. Generally, the
procedure of acquiring land in Indonesia under the relevant land regulation is as follows:
Obtaining Izin Lokasi (Location Permit)
Based on Minister of Agrarian Affairs/Head of National Land Agency Decree No. 2 of 1999 on Location Permits
(Decree No. 2/1999), a company which has obtained investment approval must obtain a Location Permit to
acquire land for its business activities. In practice, this requirement will also apply for every non-PT PMA that
will acquire land for its business activities.
A company must apply for a Location Permit from a local government (Municipality/Regency
Government/Bupati). Before granting the Location Permit, the Bupati will consider, among other things, the
recommendation of the Camat (district head) and the Lurah (Head of Village), and the zoning of the area.
The Location Permit allows its holder to acquire land covered by the approval in accordance with a regional
development plan and to apply for the transfer of the rights over that land. A holder of a Location Permit must
acquire the land subject to those rights within one to three years depending on the size of the land (which can
be extended to one year subject to the fulfilment of certain conditions, and if the holder of the Location Permit
has acquired 50% of the land granted under the Location Real Estate Investments Indonesia Real Estate Going
Global Indonesia Permit); otherwise, the holder may lose the right to acquire the land covered by the Location
Permit.
However, exemptions from the requirement to obtain a Location Permit apply in the following events:
The land derives from retribution in-kind (inbreng) from a shareholder of the company.

The land is already controlled by another company, and it is being acquired for the purpose of continuing the
investment plan of the other company, provided that approval from the relevant authority has been obtained.

The land is located in an industrial complex/zone.

The land is from a development authority of a certain region, which is in accordance with the regional
development plan.

The land is required for the expansion of an ongoing business, for which the expansion has obtained the
required approval from the relevant authorities.

The land is less than 25 Ha (for the agriculture business sector), and not more than 1 Ha (for non-agriculture
industries).

The land is already owned by the company, and the purpose of the land is in accordance with the zoning plan
determined by the government.

The procedure to grant the Location Permit is essentially based on the review of the land acquisition process
and technical land management data, consisting of the physical examination of the land, and the use and the
conditions of the land.

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Please note that as a general rule, a location permit is considered a license and therefore is not transferable.
However, if a company that has obtained a location permit intends to transfer the location permit to another
company, the transferee will need to submit an application to the regional government covering the same area
of the location permit held by the transferor. At the same time the transferor also submits an application to
revoke the location permit it currently holds and requests that a new location as permit be issued to the
transferee for the same location that of the location permit held by the transferor. Accordingly, the regional
government will issue a new permit under the name of the transferee.
Please note that since a location permit is issued by the local government (Municipality/Regency
Government/Bupati), there may be local regulations that need to be considered.
Transaction documents in real estate transactions
Generally a buyer will be the one who prepares the documentation related to the acquisition of real estate. To
effect a title transfer due to sale and purchase, exchange, grant, in-kind contribution, the parties to the
transaction must sign a title transfer deed in a form which is already prepared by the government and the
execution of such deed must be conducted before a land deed officer (PPAT) who is licensed to practice in
the area where the land is located.
Usually the following documents are involved in real estate transactions: Real Estate Investments Indonesia
Real Estate Going Global Indonesia
Conditional Sale and Purchase Agreement: This document is suggested if the title transfer is subject to certain
conditions. For example, a title transfer over a certain type of land title, e.g. HGU, is subject to government
approval. This document also contains the details of commercial terms of the transaction, e.g. deposit (if any).

Deed of Sale and Purchase of Land (Akta Jual Beli Hak Atas Tanah): Deed of Sale and Purchase of Land is the
required document for the transfer of ownership over land. The Deed of Sale and Purchase of Land is prepared
by a PPAT and signed by the buyer and the seller before the PPAT.

Costs usually shouldered by the parties in real estate transactions
The buyer usually pays for:
Buyer's agent's fees (if any);

Legal service fees;

Due diligence fees;

PPAT service fees;

Land registration fees; and

Land acquisition duty.

The seller usually pays for:
Listing agent's fees (if any);

Legal service fees; and

Income tax on the sale of the real estate.

Granting of a land title
Once all requirements to obtain a land title (e.g. HP, HGB or HGU) have been fulfilled, the relevant Land Office
will issue a Decision Letter on the Granting of a new land title. After the granting of the new land title, the new
land title holder will need to register the land, and the land title certificate will be issued by the regional Land
Office. Please note that the issuance of a land title certificate will occur after the company (i) pays the
administrative fees in relation to the issuance of a land title (which can be substantial depending on the

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circumstances) and the land acquisition duty (Bea Perolehan Tanah dan Bangunan) at a rate of 5% of the
estimated value of the land (determined by the government).

Acquisition of a real estate developer company
Acquisition of a real estate developer company will need to take into account provisions under the Investment Law (e.g. a local
PT will need to convert its status to become PT PMA once acquired by a foreign entity) and Law No. 40 of 2007
on Limited Liability Companies (Company Law).
An acquisition resulting in the change in control of a company (whether by a transfer of shares or by way of
dilution) needs to follow a strict process under articles 125 (as applicable) and 127 of the Company Law,
requiring acquisition plans, a 30 day Real Estate Investments Indonesia Real Estate Going Global Indonesia
creditor and employee notification procedure prior to the calling of the General Meeting of Shareholders
(GMS) authorizing the transfer or issue of shares etc (notices for GMS require a minimum of 14 clear days). A
transfer of a 49% interest to a shareholder that holds 51% is not considered a transfer of control.
If the acquisition is shareholder driven rather than by management of the target company and the acquirer the
more complex process set out in article 125 of the Company Law (i.e. preparation of acquisition plan) need not
be followed however there remains the 30 day employee/creditor notification procedure.
Documents required include, among other things:
An acquisition plan for the target company and purchasing entities (including draft acquisition proposal by
directors and directors resolutions, approved acquisition plan by commissioners (and commissioners
resolutions)),

Notices to creditors and employees, a notice calling a GMS, newspaper announcements (including an
abridged acquisition plan), and

Shareholders resolutions (amendments to articles etc), and transfer deed.

Permit and environmental issues
Government authority relating to land development
In general, land development is controlled and monitored by the provincial and sub-provincial governments as
well as the Land Office. The authorized party for the environment is the Ministry of Environmental Affairs.
However, each province may have specific regulations on land development and the environment.
What environmental laws affect the use and occupation of real estate?
The environmental laws must be taken into account when the use and occupation of real estate has an impact
on environment. Environmental documents to manage environmental impact may need to be prepared.
Main permits or licenses required for building or occupying real estate
A building permit is required for the construction or renovation of real properties.

A building use permit/building occupational permit is required to be obtained before occupying a building
(depending on the applicable regional regulations).

The explanations above consider matters from a general point of view. Please note that local
requirements/licenses may be applicable depending on the relevant regional regulations.


Tax aspects
Rental income
Rental income on property owned either by a corporation or an individual is subject to final income tax at a
rate of 10% from the gross rental fees (excluding VAT). This is withheld by a company tenant, but for individual
and foreign tenants, Real Estate Investments Indonesia Real Estate Going Global Indonesia the landlord is
obliged to pay the 10% final tax due on the rental income through self assessment mechanism. This 10% tax
constitutes the final settlement of the income tax for that particular income.

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Gross rental value is the total amount paid or payable by the tenant in whatever name or form with respect to
land and/or buildings rented. The gross rental value includes repair costs, maintenance expenses, security
expenses and service charges, regardless of whether these exist in a separate agreement or are included in the
rental agreement. As the rental income is subject to final tax, all expenses related to the property rental
business are non-deductible. Other income (after allowable deductions) of a real estate company, for example
property management, will be subject to the normal corporate income tax at a flat rate of 25%.
The corporate tax rate of 25% may be reduced to 20% for listed companies that satisfy all of the following
conditions:
Total shares held by the public is a minimum of 40% of the total paid in capital;

The total shares are held by at least 300 parties with each holding less than 5% of total paid in capital;

The above conditions must prevail for at least six months or 183 calendar days within one fiscal year.

Transfer of land and building
A transfer of land and building will cause income tax on the deemed gain on the transfer/sale to be charged to
the transferor (seller). The tax is set at 5% of the gross transfer value (tax base). However, for transfers of
simple houses and apartments conducted by taxpayers engaged in a property development business, the tax
rate is 1%. This tax must be paid by the time the rights to the land and building are transferred to the
transferee. All the tax paid constitutes a final tax.
In general, the tax base is the higher of the transaction values stated in the relevant land and building right
transfer deed or the NJOP.
A notary is prohibited from signing a transfer of rights deed until the income tax has been fully paid.

Duty on the acquisition of land and building rights
A transfer of land and building rights will typically also give rise to BPHTP duty on the acquisition of land and
building rights liability for the party receiving or obtaining the rights. Qualifying land and building rights
transfers include sale-purchase and trade-in transactions, grants, inheritances, contributions to a corporation,
rights separation, buyer designation in an auction, the execution of a court decision with full legal force,
business mergers, consolidations, expansions, and prize deliveries. Acquisition of land and building rights in
certain non-business transfers may be exempt from BPHTB.
BPHTB is based on the Tax Object Acquisition Value (Nilai Perolehn Objek Pajak or NPOP), which in most cases
is the higher of the market (transaction) value or the NJOP of the land and building rights concerned. The tax
due on a particular event is determined by applying the applicable duty rate of 5% to the relevant NPOP, minus
an allowable non-taxable threshold. The non-taxable threshold amount varies Real Estate Investments
Indonesia Real Estate Going Global Indonesia by region. The government may change the non-taxable
threshold via regulation. BPHTB is typically due on the date that the relevant deed of land and building right
transfer is signed before a public notary.
A notary is prohibited from signing a deed transferring rights until the BPHTB has been paid.

Depreciation
For tax purposes, permanent buildings are depreciable in 20 years and non-permanent buildings are
depreciable in 10 years using straight line method. Considered non-permanent are temporary buildings which
materials are not durable. While lands, are not depreciable.

Other expenses and income
Taxable business profits are calculated on the basis of normal accounting principles as modified by certain tax
adjustments.
Where a final tax applies, expenses relating to rental and/or sales/transfers of property, including interest,
depreciation, and other costs are not deductible for corporate income tax purposes.


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Withholding tax on sales on luxury goods
A corporate taxpayer who sells the following luxury must withhold/collect article 22 income tax at 5% of the
selling price excluding VAT and Luxury Sales Tax:
Houses and land priced at IDR 10bn and 500 square metres width;

Apartments, condominiums, and similar types of building selling for more than IDR 10bn and/or having 400
square metres width.

Income tax collected is creditable for the purchasers of the goods.

Tax loss carryforward balance and statutory of limitation for issuing a tax assessment
Tax losses may be carried forward for a maximum of five years.
A carryback of the tax losses is not permitted. Where a final tax applies, tax losses cannot be carried forward. A
company is engaged in the property business (rental or sales of land and buildings) can no longer carry forward
its tax loss.
Under the current Tax Administration Law, the DGT can issue an underpaid tax assessment letter for the years
up to 2007 only within the years after the incurrence of a tax liability, the end of a tax period (month) or the
end of (part of) a tax year, but no later than 2013. For years from 2008 onwards, the time spans for the issuing
of underpaid tax assessment letters is reduced to five years.

VAT
VAT applies to real estate transactions at a rate of 10%. For these purposes, real estate transactions include
rental and sales of real estate properties. Charges for common Real Estate Investments Indonesia Real Estate
Going Global Indonesia services for office buildings and the like are subject to VAT at 10% of the service
charges.
VAT on the sale price of land and buildings, as part of a real estate or industrial estate price, is levied at the rate
of 10% of the invoice value.
VAT on any self-construction work on the following buildings is levied at 4% of total costs incurred or paid,
exclusive of the acquisition price of land:
Residential house or place of business, and;

Building space which is equal to or bigger than 300 square metres.

Excluded from the VAT is the delivery of a basic house, very basic house, basic apartment, rented cottage,
student dormitory, and other housing as defined by the Minister of Finance upon hearing the consideration of
the Minister of Settlement and Regional Infrastructures (e.g. religious and social buildings). In addition to the
exemption, services provided by the building contractors for the construction of places which are merely
intended for worship purposes are also excluded from VAT.

Luxury sales tax (LST)
LST is levied at 20% on apartments, condominiums, town houses with an area of 150 square metres or more,
and luxury houses (including office buildings and shop houses) with an area of 400 square metres or more.

Land and building tax
Land and building tax (Pajak Bumi dan Bangunan or PBB) is a type of property tax chargeable on all land and/or
buildings, unless exempted. PBB rate is specified at 0.5% from the taxable sale value of the object. The effective
PBB at present is either 0.1% or 0.2% of the NJOP. PBB is payable annually following an official assessment
issued by the DGT.
An individual or an organization that owns a right to a piece of land, and/or takes benefits there from, and/or
owns, controls, and/or takes benefits from a building can by law be regarded as the PBB taxpayer for that piece
of land and/or building.

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Profit distributions
Profit distributions in the form of dividends from an Indonesian corporation to its shareholders are subject to
the following withholding tax rates:
For corporate resident shareholders, the dividends are subject to withholding tax of 15%. This 15%
withholding tax constitutes a prepayment of the corporate tax liability for the company earning the dividends.
The dividends are effectively subject to the normal corporate tax rate of 25% at the level of the corporate
resident shareholders. The dividends received by the corporate resident shareholders are exempt from tax if
the following conditions are met:

- The dividends are received by a limited liability company incorporated in Indonesia, a cooperative, or a state-
owned company;

- The dividends are paid out of retained earnings; and
Real Estate Investments Indonesia Real Estate Going Global Indonesia
- The company earning the dividends holds at least 25% of the paid-in capital in the company distributing the
dividends.

For individual resident shareholders, the dividends are subject to final income tax of 10%. As the withholding
tax is final in nature, there is no additional tax to be borne at the level of the individual resident shareholders.

As for non-resident shareholders, the dividends are subject to withholding tax of 20% (or the applicable
reduced treaty rate).