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Indonesian Land Law & Foreign Ownership of Land

Legalities

Indonesian Land Law is quite different indeed to the laws that apply in most Western or developed countries. Foreigners wishing to use or purchase land for whatever purpose need to be aware of these differences and not assume that legal conventions that apply in their home countries necessarily apply in Indonesia.

Legal certainty in Indonesia has always been rather precarious, not least in the realm of land ownership. However, secure land title for foreigners is possible if correct procedures are observed.

Currently in Indonesia, there is no limitation for the foreigner or foreign entity to establish an Indonesia legal entity, fully owned by foreigner or foreign entity, which has main business in property development/investment sector. This matter is regulated under the Presidential Regulation of the Republic of Indonesia Number 77 of 2007 on List of Business Fields Closed and Open with Conditions to Investment as amended by Regulation of President of the Republic of Indonesia Number 111 of 2007 on Amendment to Presidential Regulation of the Republic of
Indonesia Number 77 of 2007 on List of Business Fields Closed and Open with Conditions to Investment.

As it is said earlier above, the Right to Build can be owned by Indonesia legal entity. A PMA company is also regarded as an Indonesia legal entity. Further, for property development/investment sector, there is no limitation for a foreigner or foreign entity to establish a PMA company. Therefore, a foreigner or foreign entity, through a PMA company, can own a property or a strata title building which is built over the land of the
Right to Build.

 

    

The Republic of Indonesia is by far the largest country in Southeast Asia, both in area and population. It consists of 13,677 islands that cover 1,919,443 km2 of land along the equator between the Indian and Pacific oceans. The islands of Indonesia, of which 6,044 are inhabited, spread out over about 5,300 km from east to west, and 2,100 km from north to south. The country’s total land and sea area is more than 7.7 million km2 (3 million miles2). Despite the vast number of islands, five of them account for nearly 92% of the land area.

 

Foreign Investment 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:

Right of Ownership (Hak Milik)
This refers to absolute ownership of land and corresponds to a fee simple orfreehold 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).

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. ( now the period been adjust to 70 years and then renewable every 20 years )

Right to Rent (Hak Sewa Bangunan)
This is the right to use land owned by another private party (the lessor) 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.

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 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.This right may be held by an Indonesian individual or entity, certain foreign individuals or a foreign legal entity with a representative office in Indonesia.

Right of Exploitation (Hak Guna Usaha)
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 PPATs are privately managed offices (usually run by a notary) authorised 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 Behasa Indonesia to prevent later arguments that the local partner did not fully understand the content.

 

PMA Application Prosedure and Duration

          (For Foreign Investment )

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.

Step by step flow chart

IN CONSTRUCTION

PROPERTY LAW IN INDONESIA

Registration
The system of land registration in Indonesia includes measuring, mapping and recording the land dimensions, registering the land title (which includes a public announcement) and, finally, the issuance of the land certificate under the applicant’s name.The advantages of registration
include that the applicant is entitled to the title he or she acquires without any interference from other parties. The legal effect of recordation in a land registration book and land certificate varies depending on when the certificate was issued.

1997 Government Regulation on Land Registration
Prior to the 1997 Government Regulation on Land Registration, any land certificate issued constituted presumptive evidence that the rgistered holder of the certificate is the owner of the land covered thereby. This means that it was possible to set aside the certificate and title
if another person claimed rights to the land and could successfully challenge the rights of the certificate holder.
This may have occurred if, for example, in the course of the land relinquishment process, the notary/land deed official failed to adequately ensure that all persons with customary law rights were included in the relinquishment.This created legal uncertainty in the certification process, and as a result the Government of Indonesian adopted the Government Regulation mentioned above. Under this Regulation, the
presumptive evidence of a certificate issued after October 8, 1997 becomes conclusive on the 5th anniversary of the date of the certificate. Failure to register means that there is no legal certainty as to land ownership. As mentioned above, the registration of the land by issuing the land certificate constitutes presumptive evidence of land ownership.
It should be noted that under Indonesian law, any actions related to land must be processed by a Land Deed Official (Pejabat Pembuat Akta Tanahor “PPAT). Most notaries are PPAT officials but PPAT officials need not be notaries. In rural areas, PPAT officials are often local government officials, such as the “camat” (a district head) or the head of the Land Office (BPN), who has jurisdiction in the district in which the property is situated.

The Government Regulation on Housing Ownership by Foreigners Domiciled
in Indonesia issued in 1996 states that foreigners who reside in Indonesia can purchase a home, apartment or condominium as long as it is not a part of a government-subsidized housing development. However, there are restrictions. Foreigners can only hold land with a Hak Pakai title, and a Hak Pakai title may only be granted for a maximum of 25 years and can be extended for a further maximum of 20 years. In certain special cases (i.e., religious organizations etc.), such title may be granted for an indefinite period as long as the land is utilized for
certain specified purposes. While the GOI has made repeated overtures of relaxing all restrictions on foreign ownership of land and
property, we do not anticipate such regulatory changes in the near future.

Foreign Investment
The Agrarian Law provides that a foreigner can only acquire the Hak Pakai title for land if they reside in Indonesia. If foreign investors wish to engage in business in Indonesia, they must establish a PMA Company. As stated at the outset, the PMA Company is able to acquire a HGB or a Hak Pakai title, while foreign individuals can only possess the Hak Pakai title.

As mentioned , the HGB or Hak Pakai title may also be placed “over” the seller’s pre-existing Hak Milik or Hak Pengelolaan title. Under the applicable regulation, individual foreigners are allowed to own residential property under the Hak Pakai title. Specifically, foreigners who provide benefits to national development, reside permanently or temporarily in Indonesia and have proper immigration documents can purchase the following:

  • vacant land with a Hak Pakai title;
  • apartments on Hak Pakai title as its underlying title;
  • non-subsidized houses on Hak Pakai title; and
  • any of the above with the lease right as evidenced by the lease documents entered into with the landowner.


Adat Land
Issue arises if a foreign investor acquires traditional or customary land (known as Adat land). In Indonesia (particularly in rural areas) large areas of land exist which usually are held through a traditional joint community ownership structure and which have not been registered and certificated with the relevant land office under the Agrarian Law. The rights to these areas are still governed by Adat or customary law. Adat rules vary significantly from one area to another within Indonesia.

Possession of uncertificated land is most often evidenced by a letter (either a Surat Girik or Surat Petuk Pajak Bumi) issued by the Head of the relevant Sub-District/Village (Lurah/Kepala Desa) to the “landowner” evidencing their payment of local land taxes.
Girik (also known as Letter C) is not evidence of land title ownership (the tax authority – i.e. the Land and Building Tax (PBB) office stopped using Girik in 1994). These days, PBB receipts, constitute the only evidence of payment of property tax.
In terms of purchasing the land, when “uncertificated land” is transferred, the buyer must apply for a registered title pursuant to the Agrarian Law and obtain a formal certificate of title. To obtain a land certificate, Adat-based proprietary rights must be relinquished by the original owner to the State by signing a Right Relinquishment Deed in favour of the buyer. With the APH, the buyer can then apply to the State for one of the primary titles to the land.

Public Amenities
Another issue affecting the ownership of property by investors (whether local or foreign) is the presence of public areas or amenities. For example, if there is a river, a public cemetery, or a public road within the land area, there may be special rules governing right of use by other individuals.
Likewise, if the intended land is located in a protected forest area, construction upon such land can usually not be carried out without proper licenses and/or permission from the relevant government institutions and community surrounding such areas.

Foreign Investment on Property Development/Investment Sector
Currently in Indonesia, there is no limitation for the foreigner or foreign entity to establish an Indonesia legal entity, fully owned by foreigner or foreign entity, which has main business in property development/investment sector. This matter is regulated under the Presidential Regulation of the Republic of Indonesia Number 77 of 2007 on List of Business Fields Closed and Open with Conditions to Investment as amended by Regulation of President of the Republic of Indonesia Number 111 of 2007 on Amendment to Presidential Regulation of the Republic of Indonesia Number 77 of 2007 on List of Business Fields Closed and Open with Conditions to Investment.
As it is said earlier above, the Right to Build can be owned by Indonesia legal entity. A PMA company is also regarded as an Indonesia legal entity. Further, for property development/investment sector, there is no limitation for a foreigner or foreign entity to establish a PMA company. Therefore, a foreigner or foreign entity, through a PMA company, can own a property or a strata title building which is built over the land of the Right to Build.

Land Registration

Foreign Applicant

Submission of PMA application to Head office at Jakarta

Approval duration 3~6 months

Engage Notaries

Register Company Name

Documentation

3 Director

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