Story : Pattamaporn Kittipanachol
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Before investing in Indonesian property, one of the first things to study and fully understand is the different types of contract and land right restrictions. As in South East Asian countries, foreigners are officially barred from freehold rights to land. However, various contracts allow foreign investors to legally profit from the land and property leased for long periods.

Certified vs. Uncertified Land

When offered an ideal plot of land, first check its official registration:

• Sertifikat – The Land Registry Office has issued the land with a certificate. Only sertifikat land can be sold.
In Thailand, it would be the official title deed or Nor
Sor Four, colloquially called chanote.

• Pipil – Land which has never been officially registered. Land inherited by the family or by the community cannot be sold unless it is measured and certified by the local government. The process usually takes four to six months. The closest Thai equivalent is the Nor Sor Three, which refers to land that has yet to be surveyed.

Supervising construction can be a problem if the foreign investor resides elsewhere, so it is better to purchase projects built by reputable developers. Buying or leasing buildings that have already been constructed is recommended. Not only does it allow you to inspect the quality of construction and the amenities, but licences and permits are required before any structure can be erected.

Types of Property Rights

The 2007 Investment Law replaces the 1967 Foreign Investment Law and 1968 Domestic Investment Law and has altered foreign property ownership, immigration and taxes.

1. Hak Milik
(Freehold land titles in perpetuity)

Individuals and entities eligible for these titles are limited to: Indonesian citizens and legal entities designated by the government with specific restrictions such as state banks, agricultural cooperatives, religious bodies, and social foundations. Hak Milik can be sold, transferred, bequeathed, and mortgaged.

According to Bali Discovery Tour’s interview of Rainy Hendriany, a leading notary in Sanur, the only uncontested case of foreigners ‘owning’ property with a Hak Milik is when the Indonesian spouse has ownership prior to marriage and the title is listed in the pre-nuptial agreement. 

Beware: The ‘nominee’ method whereby an Indonesian citizen is appointed the ‘buyer’ in the official Hak Milik. Even if foreign investors have watertight legal agreements with the ‘nominee’ via power of attorney and many foreigners have happily purchased property this way, these side agreements are invalid in court if the ‘buyer’ reneges, since they essentially contravene the law.

2. Hak Sewa atas Bagunan
(right of lease/rent)

This is the simplest contract for foreign individuals and all corporations. The simple leasehold/rental contract pertains to structures on non-agricultural, non-state land. Although initial tenure is limited to less than 25 years, it is usually quite easily renewed, and is suited to those who do not plan to sub lease the property. Although, this contract is not registered at the land office, it has precedence over a Hak Milik contract on the land.

3. Hak Pakai (right to use land)

This right pertains to constructing buildings. Since October 1996, resident and non resident foreigners are eligible. The new law permits foreigners to build houses on land, usually owned by the state. A 25 year land certificate is issued in the foreigner’s name, with a maximum of one 20 year extension.

A variation, Hak Pakai atas Tanah Hak Milik, (right of use over freehold land) is best for long term use because the buyer has exclusive land rights up to 100 years, in four 25 year contracts.

• An Indonesian landowner (Hak Milik) creates an initial
  agreement with the foreigner (Hak Pakai) for 25 years.
• Three 25 year prepaid consecutive leases can be
  signed at the same time in front of a notary. However,
  it is not necessary to sign them all, in case future laws
  nullify them.
• Renewals are required at least three years prior to
  contract expiration, and the cost, a transfer tax is 10%
  of the government designated value of the property.
• This right is fully transferable between foreigners. The
  subsequent buyer only needs a valid entry permit and
  signs the contract in Indonesia, in front of a notary.

Hak Pakai cannot be mortgaged but some banks accept Hak Pakai atas Hak Milik agreements for mortgage loans.

4. Hak Guna Bangunan or HGB
(right to build and use for commercial purposes)

In Thailand, local and foreign corporations can own land outright, but this is not true in Indonesia. When freehold land is transferred to a corporation, Hak Milik automatically becomes HGB. Most commercial, industrial and residential buildings use this title. HGB atas Hak Milik arrangement is used when an Indonesian landowner still retains the Hak Milik. Both types of HGB can be sold, exchanged, transferred, and mortgaged.

‘Foreign Investment Companies’ or Penanaman Modal Asing (PMAs) are eligible to buy HGB. Since 1997, PMA can be 100% owned by foreigners and many were established to purchase property. Property leased under HGB can only be used for approved projects listed in the application to form a PMA. A PMA application, which takes three to four months, requires the Investment Coordination Board’s approval of the company and its proposed project. Rainy notes that PMA minimum capital requirements were reduced to IDR50 million to match local firms, though the government has since curtailed the issuance of small scale PMA licences.

Previously all HGBs’ maximum term was 50 years. Now, the lease totals 80 years, for 50 years with a 30 year extension. 

5. Sertifikat Hak Milik atas Satuan Rumah Susun (right of apartment unit ownership, sometimes called Strata Title Certificate)

Whereas Thailand only allows foreigners to purchase condominiums outright, this structure is officially limited to Indonesian citizens since only buildings with Hak Pakai titles enable foreign individuals to purchase a unit and virtually no apartments have these titles. For apartment units built under an HGB, individuals and entities that qualify for an HGB are entitled to purchase units in that apartment.

6. Hak Guna Usaha
(the right to cultivate)

This right includes agriculture, animal husbandry and fisheries in state land, and any structure for related uses. The original law allows 35 year titles and a maximum 25 year renewal has been extended to 95 years under the 2007 law.

Acquiring Property

Foreigners are legally allowed to acquire just one property. After the price is negotiated, investors should conduct a complete background check on the property with a notary and lawyer before drafting, signing and getting the Sale and Purchase Agreement (Akte Jual Beli) notarized:

Role of Notary/Lawyer

• Authenticate title.
• Confirm that buildings can be constructed on the
   property. Building homes near temples is prohibited.
• Confirm existence and type of road access. This is not
   always guaranteed. If the access road is shared with a
   temple, it will be closed on religious days.
• List all outstanding government taxes on the property.
• Conduct due diligence to verify that property is free of
   financial encumbrances and legal cases.
• Hold the land title on escrow after agreement is signed
   until seller is paid in full.

Contracts should be in Indonesian accompanied by a certified translation to prevent future disputes.   

Signing the transfer of land rights has to be done in front of a land deed official, who may also be a notary, at the Pejabat Pembuat Akta Tanah (PPAT), a local privately owned office authorized by the National Land Agency to handle land purchase transactions before being subsequently registered at the National Land Agency’s regional office.

Taxes and Fees

Different sets of payments are required for different transactions but these two are mandatory in almost all cases:

• Notarial fee between 0.75% - 1% of actual transaction
   value, which is shared or paid for by one party, usually
   the buyer.
• 10% government transfer tax – buyer and seller each
   pay 5% based on the official valuation of the property.

Tax and Immigration Policy Changes for Foreign Investors

• Business related taxes like import duties and value
   added taxes on capital goods and imported material are
   exempted or reduced.
• Taxable income will be reduced. All foreign investment
   capital and expatriates’ income can be freely
   repatriated.
• Lower property taxes and accelerated depreciation.

Foreign investors have more lenient immigration requirements:
• Property investors will be given two year residence
   permits.
• Four years of consecutive stay in Indonesia makes
   investors eligible for permanent residency.

Due to regional variations and potential changes to property laws, investors are recommended to consult a notary, in addition to a lawyer, for the most objective and current advice.