Property Laws and Land Ownership in Indonesia

Land matters except for mining and forestry are under the jurisdiction of the National Land Agency (Badan Pertanahan Nasional) formed to administer all matters relating to the Basic Agrarian Law of 1960 such as the registration of land rights and the granting of rights and various permits to use the land.

There are currently only two categories of land rights:

A. Adat land (customary land) where the land is not registered with the relevant land office.
There are 2 individual rights and 6 community rights in this category. All rights held under this
category will eventually be converted to certified titles.

B. Certified land, the title to which is governed by the Basic Agrarian Law of 1960 and is
registered at the local land office. There are five principle types of land rights held under the
Agrarian Law. These are:

1 Right of Ownership (Hak Milik)
This refers to absolute ownership of land and corresponds to a fee simple or freehold title in common law jurisdictions. This right can only be held by an Indonesian citizen, not a corporate entity whether local or foreign. Certain legal entities designated by the government, such as State Banks, agricultural cooperatives, religious bodies, and social foundations may hold this right subject to certain restrictions. This right of ownership is held in perpetuity. It can be sold, transferred, bequeathed, and hypothecated (mortgaged).

2 Right to Build (Hak Guna Bangunan - HGB)
This is the right to construct a building on land for a period of 20 or 30 years (renewable for another term of 20 years). This right can be sold, exchanged, transferred, and mortgaged, and can be held directly by any corporate entity whether it is a local company or a government approved PMA company.

3 Right to Rent (Hak Sewa Bangunan)
This is the right to use land owned by another private party (the leasson) for building purposes. The right cannot be registered at the land office and therefore does not exist in certificate form. The law does not stipulate a period for such lease agreements and whether this can be transferred or not depends on the original agreement between the parties.
This right may be held by a foreigner permanently domiciled in Indonesia or a foreign legal entity having a representative office in Indonesia. It cannot be mortgaged.

4 Right of Use (Hak Pakai)
This is the right to use State-owned or other land by public or private persons or entities for a specific purpose for a definite period or occasionally for an indefinite period. This land right cannot be sold, exchanged or transferred unless explicitly provided in its grant or agreement and normally for a period not exceeding 10 years.
This right may be held by an Indonesian individual or entity or foreigner permanently domiciled in Indonesia, or a foreign legal entity with a representative office in Indonesia such as foreign banks, embassies, etc.

5 Right of Exploitation (Hak Guna Usaha - HGU)
This is the right to exploit State-owned land for agriculture, fishery or husbandry purposes for a period of up to 35 years with a possible 25 years extension. This right can be held by Indonesian individuals/entities as well as government approved PMA companies. The certificate can be mortgaged.

Renewal of Rights
Renewal or extension 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 term/s, the consensus is that a land right can be extended if there has been no infringement of the conditions attached to its usage.

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 PPAT's 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, we recommend having contracts and agreements always drawn up and executed in Bahasa Indonesia to prevent later arguments that the local partner did not fully understand the content.

 

 

Legal Aspects of Foreign Investment in Indonesia

Foreign Investment Law No. 1/1967
Foreign Direct Investment (FDI), further known as PMA (Penanaman Modal Asing), controlled by the Foreign Investment Law No. 1/1967, as amended by the Law no.11/1970. Until today, this law is still considered suitable with Indonesia's actual needs. As a legal basis, the law is sufficiently accommodative to several deregulatory policies and measures that have been taken by the Government.

In addition to the PMA Law No. 1/1967, the PMA Company as well as other companies are still subject to industrial policies that have been applied by the concerned Ministries.

A PMA company is given a 30 year time period in order to operate as from its legal formation. If within that stated time span it involves additional investments (project expansion). Consequently, a PMA company can, in effect continue to exist despite continuing or expand and reinvest.

Shared Ownership
A company is generally set up as a joint-venture between foreign and Indonesian partners. This partnership can involve legal entities (corporations) or individuals. The joint-venture legal entity will take the form of a limited liability company which is subjected to Indonesian Corporate Law, designated as PT (Perseroan Terbatas), There is no minimum investment amount requirement (equity plus loan). The amount for the parties wishing to determine, based on economy of scale and other business considerations. The PMA companies in infrastructure projects such as seaports, generation and transmission as well as electricity distribution for public usage; Telecommunications; shipping; airlines; potable water; national railway lines, atomic energy reactors and mass media should be comprise itself by intermediary of joint-ventures between foreign and Indonesian partners provided that the Indonesian share is maintained at a minimum of 5%. A PMA company can be set up as direct investment, the company starts to be divested by selling part of it's shares to Indonesian individual(s) and/or business entity(s), through direct and/or indirect placement through the domestic stock markets.

Indonesia offers comparative natural and regulatory advantages to the investor, with an attractive range and composition, for example:

• A vast, fertile country endowed with nature's bounties.

• A big population around 200 million people who generally live peacefully and are dynamically adaptive towards progress, constituting the market with a colossal potential as well as a competitive workforce.

• A strategic location, at the crossroads of two great continents and oceans that control important sea communication lanes.

• A nation in the process of change/reformation, return to a civil and democratic society will manifest itself in a stable political environment.

• A government committed to continuously provide a favorable business and investment climate, especially for the private sector, being constantly prudent in macro-economic management and maintenance of high international financial credibility.

Property Ownership for Foreigners in Indonesia
According to "Peraturan Pemerintah" or Government Regulation (PP No 41 th 1996, dated 16 th Jun 1996) it says that a foreigner who domicile in Indonesia can own a house or residence that was built on a piece of land with a Hak Pakai title and own an apartment that was built on a piece of land with Hak Pakai title.

But this Government Regulation did not follow with "Petunjuk dan Pelaksanaan" or Manual and Procedure how to implement the regulations above, so a notary cannot process the property ownership for foreigners in Indonesia at this moment. But we hope this is only temporary and while we are waiting for finishing of the manual and procedure a foreigner can still buy a house with options below.

Then, How Do Most Foreign Investors Solve this problem ?
In most cases an Indonesia citizen will hold the interest in the property as the nominee and on behalf of a foreigner, and the title or rental/lease contract will be made out in the Indonesia's name. Which such arrangements are not strictly again the law, they are contrary to current government policy and the spirit of the law.

When using an Indonesia Nominee

Foreign Land Ownership in Indonesia

If an Indonesia acts as nominee for a foreign investor there are a number of contracts and other documents which must be prepared by and signed in front of a qualified notary. These include the purchase or rental contract for the property transferring the rights from the previous owner to the nominee ; and an irrevocable and transferable Power of Attorney to sell, transfer or otherwise dispose of the property transferring the rights from the previous owner to the nominee in any dispute regarding the property, given from the nominee to the investor. The nominee will also be asked to hand over all original land titles to the foreign investor.

Using a PMA Company

Although most foreigners have found the above arrangement to work satisfactory without any problems (as long as all agreements have been properly executed in front of a qualified notary), some buyers prefer to have their property owned by a PMA (Penanaman Modal Asing = Foreign Investment) Company directly controlled by the foreign investor.

Since the investment deregulation package issued on May 19 th, 1994 (Government Regulation No. PP-20/1994), a PMA Company can be 100% foreign owned. The foreign investment may comprise both debt and debt and equity, but the BKPM (Badan Koordinasi Penanaman Modal under the Ministry of Investment in Jakarta ) has a rule of thumb that the ratio of debt to equity should be no more than 3:1.

Before the establishment of a PMA Company an application has to be made to the Investment Coordination Board for approval of the company and its investment project. This approval is usually received after two or three month in the form of a 'Capital Investment Approval Letter', or' Surat Pemberitahuan Persetujuan Presiden' (SPPP).

Major disadvantages of using a PMA Company are that the property must be directly used for the approved project, and that PMA Company - like any other corporate entity (Indonesia or Foreign) - cannot hold a freehold title ( Hak Milik ) Whenever freehold land is transferred to a corporate entity the title is changed to 'HGB' which has to be renewed after 20 or 30 years