General:

• Law No 5 of 1960 (“Agrarian Law”).

Land title ownership and land registration:

• Law No 11 of 2020 on JCL (“JCL”);
• Government Regulation (“GR”) No 13 of 2021;
• GR No 18 of 2021 (“GR 18/2021”); and
• GR on No 24 of 1997.

Zoning:

• Law No 28 of 2002;
• Law No 26 of 2007;
• GR No 21 of 2021; and
• GR No 16 of 2021.

Land acquisition:

• Law No 2 of 2012 (“Law 2/2012”);
• GR No 19 of 2021 (“GR 19/2021”); and
• GR No 20 of 2021.

Environment:

• Law No 32 of 2009, as amended by the JCL; and
• GR No 22 of 2021.       

The COVID-19 crisis significantly impacted the residential real estate market in 2021. However, according to Bank Indonesia's (the Central Bank) report, residential property prices were accelerated in the fourth quarter of 2021. More restrained growth of residential property prices in the primary market was predicted for the first quarter of 2022.

For both local and foreign investors, the most favoured property investment sectors in Indonesia remain landed housing.

Large-scale commercial real estate transactions usually involve real estate companies, which can be either 100% Indonesian limited liability companies (perseroan terbatas, or PT) or foreign investment companies.

Blockchain, decentralised finance and other disruptive technologies are slow to develop in Indonesia and the firm believes that they will not have any significant impact on the real estate market in Indonesia over the next 12 months. This is also partly because the government has issued regulations prohibiting the use of cryptocurrency as a method of payment and on financing for real estate to developers and property buyers. However, proptech is quite developed (unlike other disruptive technology) as there are a lot of proptech platforms in Indonesia, with the technology regarded as fairly simple and acceptable to the Indonesian market.

Real estate is one of the sectors that has been most significantly affected by the enactment of the JCL in late 2020 and the issuance of its implementing regulations in 2021 to create an easier and more comfortable investment environment, such as more relaxed regulation on real estate ownership by foreign individuals. Foreign individuals were only allowed to hold land under right to use or to lease, and condominiums built on a right to use land. Therefore, investment in condominiums was less attractive to foreigners, despite the number of foreigners entering and exiting Indonesia for work. As a result of the changes introduced under the JCL, a foreigner with the proper immigration documents may now hold a right of ownership over a unit in a condominium that is built on land under a right to build or right to use in:

• a special economic zone;
• a free trade or free port zone;
• an industrial area; or
• another economic zone.

This new regulation – together with the long-awaited long-stay permit, which is also under discussion – is expected to increase interest in investing in condominiums in Indonesia.

However, Constitutional Court Ruling No 91/PUU-XVIII/2020 handed down on 25 November 2021 (“MK Ruling”) in essence states that amendments must be made to the law within two years to comply with the MK Ruling. If the amendments are major or the previous regulations come back into force, it will affect the real estate market.

Under Indonesian law, the following rights to real estate are recognised.

Primary Land Ownership Rights

Primary land ownership right is a right to land that is owned directly by an individual or a legal entity for a certain term, which is granted by the state. The primary land ownership rights are the following:

• a right of ownership (Hak Milik);
• a right to cultivate state land (Hak Guna Usaha/“HGU”);
• a right to build (Hak Guna Bangunan/“HGB”) on state-owned land (atas Tanah Negara); and
• a right to use state-owned land (Hak Pakai atas Tanah Negara).

Secondary Land Ownership Rights

Secondary or derivative land ownership rights are rights to land of a temporary nature that arise and/or are granted over land that is under an existing right. Secondary ownership is usually the result of an agreement between the primary owner and the secondary owner. Secondary land ownership rights include:

• a HGB/a HGU/a right to use land that is under a right of ownership/Hak Milik and a right to manage/Hak Pengelolaan (“HPL”) land;
• a right of ownership over a condominium unit (HMSRS) built on a HGB or a right to use over a HPL;
• a lease over a land right;
• a lease over farmland; and
• a right to a security right (eg, a pledge or mortgage).

One of the most essential restrictions on real estate ownership concerns the types of entities that are allowed to hold certain rights. Examples include the following:

• A right of ownership/Hak Milik may only be held by:
• Indonesian nationals (ie, individuals); and
• special legal entities appointed by the government (eg, government banks, cooperatives and religious or social bodies).

A HGB and a HGU can only be granted to:

• Indonesian citizens; and
• legal entities incorporated under Indonesian law and domiciled in Indonesia.

A right to use/Hak Pakai for a certain term may be granted to:

• an Indonesian citizen;
• a legal entity incorporated under Indonesian law and domiciled in Indonesia;
• a foreign entity with a representative in Indonesia;
• a religious or social body; or
• a foreigner.

However, an indefinite right to use only may be granted to a central government agency, a regional government, a village government or a representative of a foreign country or an international body.

Generally, all laws mentioned in 1.1 Main Sources of Law apply for transfer of title of real estate.

In Indonesia, title to land is effectively transferred upon the signing of a land sale and purchase deed (Akta Jual Beli/AJB). This applies if the buyer can own the type of title that the land certificate of the seller has (for example, if the seller holds Hak Milik title, it cannot be held by a company).

If the buyer cannot own the type of land title that the seller has, the land title is transferred indirectly by the seller and buyer first signing a deed of relinquishment of title (Akta Pelepasan Hak/APH), whereby the landowner/seller relinquishes its title to the land to the state for the buyer’s benefit so that the buyer can apply for a new land title, which the buyer may hold. Therefore, there is a two-step process. It is now common for the seller to first convert its ownership title to the land title, which the buyer may hold (penurunan hak), for example from Hak Milik to HGB, then after the seller’s conversion of the land title to HGB, they sign the AJB to expedite the transfer of title to the land.

An AJB or APH must be drawn up in Indonesian by an authorised Land Deed Officer (Pejabat Pembuat Akta Tanah/PPAT) with jurisdiction over the location of the land being transferred. After the land transfer deed has been signed, the PPAT will arrange for the registration of the buyer’s title or application for the new land title in the buyer’s name (in the case of an APH) to the relevant Land Office.

The capital gain tax of 2.5% and the acquisition tax of 5% must be paid by the seller and the buyer respectively before the PPAT draws up the AJB or APH. 

In Indonesia, title insurance is not yet common and no specific remedies are available to the buyer against the seller for any misrepresentation except to those stipulated in the Civil Code for a breach of contract, which means that the buyer must file a claim against the seller in court.   

Due to the COVID-19 pandemic, the Land Office has issued a new system allowing land registration to be conducted online. However, signing and notarising documents is still more or less the same as before the pandemic, as the parties still have to sign the deed in front of each other and the PPAT.

For Indonesian land transactions it is advisable for the buyers to engage local legal counsel to conduct a land due diligence, which should cover the following.

Land Title Search

This is necessary to make sure that the seller is the legal owner of the land and has the legal right to transfer the land title, and to check for any mortgage or claim registered over the land by reviewing the land certificates. Currently, the land title search can be conducted through an online system. However, to obtain complete information, it still needs the assistance of a certain registered party (eg, the notary/land deed official).

Licences

The relevant licences associated with the land relevant to the buyer, such as its conformity with zoning, must be checked. A due diligence review usually covers:

• the term of the licences; and
• any obligations imposed under the licences.

Agreements

The buyer should review any agreements that the seller has entered into in relation to the land (eg, a lease agreement, loan agreement and related security over the land). 

Information About the Seller

The buyer should review the seller’s Articles of Association and other corporate documents or corporate licences relevant to the transaction, if the seller is a business entity, to identify the authorised representative of the seller. If the seller is an individual, the buyer should check his or her marital status, because unless there is a prenuptial agreement, assets such as land obtained during a marriage are joint property and the consent of the spouse is required to dispose of their jointly owned land.

Other Documents

These may include evidence of payment of relevant taxes and utility bills for at least the past three months. 

Zoning

To make sure that the land can be used for the intended development, the zoning search should cover:

• the building coverage ratio or the total land area that can be built on (usually 60% to 70%); and
• the floor coverage ratio (the total number of floors that can be built). 

Under the Civil Code, a buyer of land acting in good faith is protected by law. Under a circular issued by the Supreme Court in 2016, one of the requirements for a buyer to be categorised as a buyer acting in good faith is that it has conducted a due diligence on the land that will be bought. Therefore, the buyer must conduct a due diligence on the land so that it can be protected by law as a buyer acting in good faith.

The continuing COVID-19 pandemic has not really affected the above due diligence process except that now as far as possible, everything is conducted online.

The representations and warranties in the standard form are limited to the following.

The seller warrants that the object of the sale:

• is free from any claims and dispute;
• is free from any seizure or attachment;
• is not collateralised as security for a loan that is not registered in the certificate; and
• is free from any lease and other liens.

The buyer represents that, following the land acquisition, its ownership of the land will not exceed the land possession limit under the regulations.

However, buyers – especially sophisticated buyers – often request additional representations, such as the following.

If the seller is an entity:

• that the establishment of the company is legal;
• that the entity has the necessary authority to own and transfer the land;
• that the entity has obtained all the consents and approvals required to sell the land;
• that the sale of the land will not violate its constitutional documents, approvals, licences or any contract entered into by the seller;
• that the seller has paid all the tax due on the land before the transfer of title;
• that the land is free and clear of any security rights, mortgages, claims or liens;
• that there are no ongoing legal actions or proceedings against the seller that may prevent the sale of the land;
• if the seller is an individual, that the seller has obtained the required spousal consent (if applicable), and if the land was obtained through inheritance, that no claim to it has been made by other heirs; and
• that the land is free from any toxic waste.

If the seller is a sophisticated seller, it may ask for the following additional representations and warranties from the buyer.

• if the buyer is an entity:
• that the company has been established legally;
• that the entity has the necessary corporate authority to acquire the land;
• that the entity has obtained all the consents, approvals and permit required to acquire the land;
• that the procurement of the land will not violate its constitutional documents, approvals, licences or any contracts entered into by the seller;
• that the buyer can pay the purchase price of the land;
• that there is no ongoing legal action or proceedings against the buyer that may prevent the sale of the land to the buyer; and
• if the buyer is an individual, that the buyer has obtained the required spousal consent (if applicable).

No specific remedies are available to the buyer against the seller for any misrepresentation. However, under the Civil Code, if a party suffers a loss due to a breach of contract, it can file a lawsuit to claim damages or for the cancellation of the contract. Under the freedom of contract principle, the buyer and the seller are free to agree on remedies in the event of any misrepresentation by the seller.

The important areas of law for an investor to consider when purchasing real estate are the following.

• The investment environment: before purchasing real estate, if the purchaser is a foreign entity, it is important to identify all the regulatory requirements for its investment.
• Tax: the taxes to be paid on a transfer of land are the land acquisition tax (Bea Perolehan Hak atas Tanah dan Bangunan/BPHTB) to be paid by the buyer and income tax on the transfer of rights over land to be paid by the seller.
• The land’s legal status – before purchasing the land, the investor must identify the legal status of the land, which may include:
1. the ownership of the land;
2. the validity of the title certificate and other documents related to the ownership of the land;
3. the zoning and permitted use of the land;
4. the location of the land;
5. the technical requirements imposed by the local government for the development of real estate (such as the relevant business licence, a location permit, compliance with the requirement to provide public facilities and social facilities, compliance with the requirements for the sale of housing or apartment units).

Land acquisition can be a very sensitive matter in Indonesia, especially when it comes to a large-scale acquisition that involves an obligation to pay compensation to parties that are entitled to it. A rigorous land due diligence may take time and be costly, but it is crucial to avoid potential problems in the future.

Under Indonesian law, liability for violations of the Environmental Law and regulations rests with the party that causes the environmental pollution. If it is not known who caused the environmental pollution, the owner or occupier of the land may be held liable. It is therefore advisable to conduct soil tests, especially before the acquisition of a site, where the seller engages in industrial activities that may produce contaminants; and to include representations and warranties on environmental pollution in a side agreement with the seller.

Prior to buying a parcel of real estate, a buyer should check that the applicable zoning or planning law complies with the applicable detailed spatial plan (“RDTR”) issued by the municipal/regency government where the land is located. However, for large-scale real estate and very special cases, it is possible to have a discussion with the relevant public authorities in order to facilitate a project. Regardless, the process will be very lengthy and the outcome will be fully at the discretion of the public authorities involved.       

Under Law 2/2012 (as amended by the JCL), and further under Government Regulation 19/2021, land acquisition by the government for public interest must be conducted in accordance with land acquisition for public interest process under the law. The designation of the land acquired is restricted by law (eg, for national defence and security, public roads, tunnels, etc). The state will not confiscate land that is legitimately owned by a person/entity. However, if an area of land or zone is deliberately not exploited, used, utilised or preserved according to the terms of the permit for a certain period, the state may declare the land or zone abandoned under Government Regulation 20/2021 and become controlled by the state, and may be declared an asset of the national Land Bank or transferred to another party through a transparent and competitive mechanism.

Sales of Real Estate Through Asset Deals

• Land and building acquisition tax is 5% of the acquisition value of the taxable object, to be paid by the buyer.
• Income tax is 2.5% of the total gross value of the transfer of the right over the land, to be paid by the seller.
• Value added tax (VAT) is 11% of the purchase price (applicable if the seller is a real estate company) or if the seller is a company.

It is normal for the buyer to bear the costs and fees of the sale and purchase of the land, although in some cases, the buyer and seller may agree to split the land deed official’s fee between them.

An exemption from VAT is available for the sale of:

• a simple house or a very simple house with a total area of up to 36 square metres; and
• a simple apartment unit with a total area of between 21 and 36 square metres.

Exemptions from land and building acquisition tax are available for:

• embassies and consulates;
• the state, to perform a government function or develop for the public interest;
• international agencies and bodies determined by the Ministry of Finance; and
• transfers to religious institutions to be used as land for worship.

An exemption from land and building acquisition tax is also available for a land transaction if the acquisition value of the untaxable tax object is not more than IDR60 million.

To facilitate land transactions during the COVID-19 pandemic, the government reduced the rate of the land and building acquisition tax by 10% for land transactions conducted between 1 May and 30 June 2021; and for land registrations, for the first time, the tax will be reduced by 30% at the request of the applicant. 

An exemption from income tax to be paid by the seller can be granted:

• to an individual whose income is below the untaxable income threshold for a transfer of land with a gross transaction value of less than IDR60 million;
• for the granting of land by an individual to a family member, religious entity, educational entity or social entity for non-commercial purposes;
• for a transfer of land in conjunction with a merger, consolidation or expansion of a business, if the transaction value is determined by the Ministry of Finance based on the book value;
• to an individual or entity in order to transfer land to implement a build-operate-transfer agreement or to utilise state land/or buildings; and
• to an individual or entity that is not categorised as an Indonesian tax subject.

Sales of Real Estate through Share Deals

• A final tax of 0.1% of the transaction value is due on a sale of shares on the Indonesian Stock Exchange; and if the seller is a founding shareholder, an additional income tax of 0.5% of the company’s share value at the closing of the stock exchange at the end of 1996 (as from 1 January 1997, the value of the shares is calculated as the value at the initial public offering).
• If the seller is a foreign shareholder in a PT with foreign shareholdings, capital gains tax at a rate of 5% is due, unless an exemption applies under a relevant tax treaty.
• The notary public’s fee must be paid for processing the notarial deed for corporate approval, and for preparing the share sale and purchase deed if the sale of the shares constitutes a change of control.
• Stamp duty of IDR10,000 must be paid on each agreement or document.

In addition, withholding tax at a rate of 20% is charged on dividends paid to foreign shareholders, subject to the provisions of any relevant tax treaty.

One of the most essential restrictions on real estate ownership concerns the types of entities that are allowed to hold certain rights. Please refer to 2.1 Categories of Property Rights.

The most common providers of real estate finance in Indonesia are banks and international lenders. Financing for commercial real estate, for either large real estate portfolios or companies that hold real estate, takes the following forms.

• Loans from third parties: real estate companies in Indonesia may obtain funding from third parties, including banks and international lenders. Individuals may also obtain funding for real estate purposes from banks, such as Housing Loan Credit and the Apartment Loan Credit.
• Internal funding: real estate companies can also use their own capital (eg, paid-up capital or retained earnings). Real estate companies also rely on the consumers paying for the property in full or instalments while the construction is ongoing.
• Listing on the Indonesia Stock Exchange (IDX).

The most common types of security interests are those classified as proprietary security – fiduciary security, a pledge or mortgage – as they have the nature of a droit de preference. In Indonesia, the main form of security interest over land is a mortgage. The land titles that can be secured under a mortgage are Hak Milik, HGB, HGU, a right to use granted over state-owned land and HMSRS.

In addition to a mortgage over land and buildings on the land, the Law on Fiduciary Security allows a building constructed on a plot of land to be owned by a different party from the landowner, although the building cannot be encumbered under a mortgage. This is because Indonesian law adopts the principle of horizontal separation, under which the owner of the building on a plot of land can be different from the owner of the plot of land. The building can be secured under fiduciary security.

There is no restriction on granting security over real estate or repayment under a security or loan agreement to foreign lenders. Under Indonesian law, a holder of security may not own the secured assets in the event of a default on the secured loan agreement. To execute or enforce a mortgage, the holder can sell the security object in a private sale if it will secure a better price or at a public auction under a writ of execution.

Notaries' fees are required in executing the deed of mortgage.

• The fee for land certificate verification to be paid to the relevant land office, which depends on the number of land certificates to be verified.
• The fee for registering a mortgage, known as Non-Tax State Revenue (Penerimaan Negara Bukan Pajak or PNBP) is set under a Government Regulation that may be amended from time to time; the PNBP depends on the amount secured by the mortgage (the mortgage value).
• For enforcement, a court fee will be charged.

The provision of a security interest must be drawn up in a deed executed before a land deed official and registered with the branch of the Land Office where the land is located. A mortgage certificate confirming the creditor(s) as a mortgage holder will be issued by the relevant branch of the Land Office upon completion of the registration. The mortgage gives the holder (creditor) priority in the repayment of the loan over other creditors from the sale of the property.

A mortgage certificate issued by the relevant BPN office has conferred to it an executorial title under which the mortgage has the same power as a final and binding court ruling. Given this, a mortgage is not enforced through an ordinary civil procedure for a claim but by serving a writ of execution from the court.

The Mortgage Law provides two alternative mortgage execution methods: a public auction or a private sale.

Auction houses will ask for the writ of execution from the court. A ruling of the Supreme Court in 1986 states that a sale at auction requires the consent of the Chairman of the Court to avoid the misuse of authority. This is probably the reason why auction houses refuse to sell secured assets under automatic executory title (parate execution) under the mortgage deed.

Another difficulty that may be faced if a mortgaged object is sold through parate execution is that the mortgage holder will not be able to benefit from the protection of the authorities when enforcing the mortgage unless the sale is conducted under a court order. 

In practice, the following procedure must be followed to foreclose and subsequently sell real security in Indonesia:

• demand of payment letters: upon a default by the borrower, the creditor is normally required to serve the borrower three warnings/demand of payment letters;
• obtain a court order to foreclose the secured property;
• the attachment of the secured property by the bailiff; and
• public auction.

Secured debt means that the lender holding the security has priority with regard to the repayment of the debt over other creditors from the sale of the secured object. A secured lender can agree with a new creditor that despite having a priority right, the secured lender will subordinate its loan to the new lender. However, in the event of the bankruptcy of the borrower, such an agreement is not enforceable to the receiver or other creditors as it is a commercial agreement between the parties.

Please refer to 2.7 Soil Pollution or Environmental Contamination.       

If the borrower becomes insolvent and then the borrower becomes bankrupt, the borrower will not have any authority to manage its assets or enter into any arrangement with any party in relation to the assets. Security interests registered prior to the bankruptcy will remain enforceable but with a three-month stay period. Legal actions entered into by the bankrupt within one year before the bankruptcy, which are not mandatory by law or based on prior agreements, can be cancelled by the court at the request of the receiver on the basis of fraudulent conveyance.

For the past few years, lenders have already referred to JIBOR (Jakarta Interbank Offered Rate), so the LIBOR index expiry does not have any direct consequences to securities in Indonesia.

In general, the use of land must comply with the applicable detailed spatial plan (RDTR) issued by the municipal/regency government where the land is located. According to Government Regulation 5/2021 on Risk-Based Business Licensing, in order to commence operations, a new business must obtain confirmation of its spatial use activity, which confirms that the business location complies with the RDTR. If the regional government has not issued an RDTR, the central government will confirm the business location according to the applicable spatial plan (RTR).

Under the Law on Buildings (28/2002), as amended by the JCL, a similar provision requires the building function stated in the building approval to comply with the location designation under the applicable RDTR.

The regulations on construction of buildings issued by the relevant regional government typically apply to design, appearance and method of construction. Further, in Indonesia, the construction of buildings must adhere to the technical requirements set by the government. The Building Law and GR 16/2021 impose certain technical and administrative requirements for buildings.

The government usually determines the following factors (under GR 16/2021) to control the construction of new buildings or, to some extent, the major refurbishment or demolition of buildings for reconstruction:

• KDB (Building Base Coverage);
• KLB (Building Floor Coverage);
• KDH (Green Base Coverage); and
• KTB (Basement Floor Coverage).

The Land Office and the relevant regional government are responsible for regulating the development and designated use of individual parcels of real estate. Each region provides different restrictions and requirements.

Planning permission is obtained through the Online Single Submission (OSS) system. It is part of the application for a business identification number: the planned business location must be submitted to complete the business profile. The OSS system, which is integrated with the BPN system, will automatically crosscheck the submitted location against the available digital RDTR or RTR and will:

• confirm the compliance of the business location with the RDTR or reject the business location; or
• have the Minister of Agrarian Affairs issue confirmation of the compliance of the business location with the RTR.

If a digital RDTR is available, the procedure should take less than one day. Otherwise, checking the location against the RTR and approving it should take no more than 20 days.

The procedure for land acquisition for development in the public interest is longer and results in the issuance of a permit in the form of a location determination.

No regulation allows a third party to participate in a development project without approval from the project developer. However, third parties can sue if a project violates the zoning, or in the event of construction failure and they suffer harm or losses. As a part of the Environmental Licensing process, the project owner must involve the surrounding communities that will be affected by the project through social awareness events and public consultations, and their input must be taken into consideration. 

If it is determined that the business location does not comply with the applicable RDTR or RTR, the business must resubmit its application for a business identification number from the beginning. There is no means of appeal.

In the case of land acquisitions for development in the public interest, an objection against the amount of compensation to be paid to the parties entitled to it may be submitted to the district court with jurisdiction. However, if a location determination decree has been issued, the development can go ahead during the legal proceedings. Government Regulation 19/2021 does not provide any legal way to object to an issued location determination decree; however, as a written product issued by a state administrative body, the decree may be challenged in the State Administrative Court.

On a case-by-case basis, it is possible to enter into agreements with local or governmental authorities or agencies, or with utility suppliers, in order to facilitate a development project. The agreement will depend on the relevant government official.

Without the required planning permission – either a confirmation of the compliance of the spatial use activities for a business or a location determination decree for land acquisition for development in the public interest – the parties may not proceed with their planned business/development.

If a party proceeds without confirmation of the compliance of its spatial use activities under the applicable RDTR or RTR, resulting in a change to the spatial use, it will be subject to the following administrative sanctions under Government Regulation 21/2021.

• a written warning;
• an administrative fine;
• a temporary suspension of activities;
• a temporary suspension of public services;
• the location’s shutdown;
• the revocation of the confirmation of the compliance of spatial use activities;
• the cancellation of the confirmation of the compliance of spatial use activities;
• the demolition of the building; and/or
• the restitution of the spatial use.

Indonesian domestic investors that can hold real estate assets can be (i) a non-legal entity such as (a) maatschap (civil partnership), (b) partnership (firm), (c) commanditer venootschap (limited partnership, or CV); or (ii) a legal entity such as a limited liability company (PT), a co-operative or a foundation. However, only legal entities can hold ownership over real estate assets; meanwhile the non-legal entities can only have lease over the real estate assets. Please refer to 2.1 Categories of Property Rights.

Under Indonesian investment law, foreign investors are required to establish a PT with foreign shareholdings (commonly referred as a “PT PMA”).

All the above entities can acquire real estate, but in the current business environment, a PT (or PT PMA) is generally preferred.

Under Indonesian law, a PT (or PT PMA) has the following features:

• it can own assets that are separated from the assets of its shareholders;
• it has specific purposes and objectives;
• the capital consists of shares subscribed to and paid for by the shareholders;
• it has a Board of Directors, Board of Commissioners and General Meeting of Shareholders; and
• the shareholders enjoy the profits derived from the business activities of the PT in the form of dividends distributed in accordance with its Articles of Association.

There is no minimum capital for non-legal entities such as maatschap (civil partnership), partnership (firm) and CV. However, legal entities do have minimum capital requirements.

Limited Liability Company (PT)

The minimum capital generally applied to domestic PT (100% Indonesian ownership) is IDR50,000,000. For PT PMA, the issued/paid-up capital must be at least IDR10,000,000,000.

Additionally, there is a minimum investment for foreign investment companies, ie, IDR10 billion for each business classification number (business activity) in each project location, excluding the value of land and buildings. For companies engaging in real estate property development and business, the foregoing number may include the land and buildings if the property comprises a building as a whole or integrated housing complex.

Foundation (Yayasan)

At least IDR100,000,000 of founder’s asset is set aside as the foundation’s initial asset.

There is no specific capital requirement for either PT or foundations doing real estate.

No specific governance requirements apply to real estate companies. In general, the following governance requirements to PT and PT PMAs under the Company Law apply:

• a PT must have at least two shareholders at all times;
• a PT must have at least one Director and one Commissioner;
• the shareholders must convene the annual general meetings to, among other things, ratify the annual report of the company for the preceding financial year;
• the purpose and objectives of a PT PMA must comply with the requirements under the applicable foreign shareholding limits subject to their business activities.

There is no specific law on this matter. It is common to engage an Indonesian accountant or financial adviser to manage this aspect. An accountant is usually engaged to conduct annual audit.

It would be a lease arrangement. No limit applies to the term of a lease agreement, while foreign investors often enter into long-term lease agreements with landowners to develop property in Indonesia.

No specific Indonesian regulation differentiates between types of commercial lease.

There are no required terms for a commercial lease agreement under Indonesian law. Lessors of commercial real estate usually have their own template lease agreement, which is not negotiable, except for anchor tenants.

For house leases for residential purposes, GR 14/2016 provides that the lease must include at least:

• the rights and obligations of the parties;
• the term of the lease;
• the price of the lease; and
• a force majeure condition clause.

Under the most common commercial lease agreement, the lessee pays the rent, service charges, utility invoices and value added tax, and withholds the income tax due from the rent payment to the lessor (unless the lessee is an individual, who is not required to withhold income tax). Further provisions covering other matters may be freely agreed between the parties as long as they are lawful.

Further, if the object of the lease is a state-owned good, the lease agreement will be subject to a Minister of Finance Regulation, which specifies certain restrictions relating to the duration of the lease, determination of the price of the lease and the method of payment, among other things.

Impact of COVID-19

There is no specific regulation issued to address the pandemic situation in relation to commercial lease arrangements. The Indonesian government, however, declared the COVID-19 pandemic as a natural disaster; therefore lessors and lessees may, subject to their own lease agreement, make the necessary arrangements such as adjusting the payment schedule and agreeing on late payments.

Length of a Lease

There is no specific term of a lease of business premises. However, in general, the term of the lease as a secondary right should not be longer than the term of the land right. Please refer to 2.1 Categories of Property Rights for the terms for each land right.

Maintenance and Repair of the Real Estate

The Indonesian Civil Code regulates that the lessee/tenant must:

• make efforts to maintain and care for the house building as if it were a good owner;
• return the lease object (the goods) in the same condition as the goods were received;
• be responsible for any damage that occurs during the rental period. However, this does not apply if the tenant can prove that the damage occurred outside of his fault; and
• be responsible for any damage or loss caused by housemates, or by those who take over the rent.

Frequency of the Rent Payment

This matter can be freely negotiated between the parties. It is common for lease of residential house or vacant land to be payable annually in advance. For commercial leases, payments are made quarterly in advance.

Impact of COVID-19

There is no specific Indonesian regulation issued to anticipate future pandemics for lease agreements. However, the pandemic has, naturally, affected how lessors and lessees negotiate some terms between them, such as how to include a pandemic as one of the events of force majeure.

There is no specific Indonesian law on the rent payment for commercial leases and this matter can be freely negotiated between parties. It is common for the rent to increase from time to time (eg, per year) according to market price, inflation and increase of operational expenses, if the parties agree.

This is normally negotiated by the lessee and the lessor based on the freedom of contract principle. The parties must agree on the new rent with an amendment of the existing lease agreement.

In general, if the landlord is a taxable entrepreneur, the lease is subject to 11% VAT payable by the lessee.

It is common for the lessor to ask for a security deposit at the beginning of a lease arrangement; however, this is not required or regulated under the law and is rather a matter to be agreed between the parties. The deposit for a house lease is usually one month’s rent; for a commercial lease, it is three months’ rent.

In addition, the tenant must also withhold income tax at the rate of 10% from the income obtained by the landowner from the lease.

In the most common lease arrangements, the lessor/management of the property will take responsibility for the maintenance and repair of all the common facilities and infrastructure.

The Indonesian regulations are silent on this matter. It is common for the lessor to have meters installed so that each tenant’s consumption of electric power and other utilities can be recorded. The lessee bears the utility and telecommunications costs.

The insurance cost can be borne by either the landlord or the tenant, which can be freely negotiated between the parties. The insurance typically covers comprehensive/all risks; fire, lighting, explosions, airplane crashes and smoke; riots and civil commotions; theft and burglary; and third-party liability.

The use of buildings/properties must be in line with its designated use determined in its Building Approval or Building Permit based on the zoning of the building/property location. The tenant must consider the designated use and zoning of the building location when using a leased real estate for its business. For example, if the leased property is a residential house, the tenant may not be allowed to use it for a restaurant business.

Other than the general rule above, the landlord may impose more restrictions on the use of the lease object, which can be agreed with the tenant.

Under the Indonesian Civil Code, the lessee/tenant must return the lease object (the goods) in the same condition as the goods were received, meaning they must return it in proper condition as it was handed over before. Furthermore, in general, a building may not be altered as it relates to the safety of the building/real estate. 

However, basically any alteration or improvement can be agreed between the parties in the lease agreement.

In general, there is not much regulation on the lease of real estates.

As briefly explained in 6.3 Regulation of Rents or Lease Terms, residential housing is regulated under GR 14/2016. However, the regulation does not say much about house leases, only that:

• a disputed house cannot be put on lease; and
• the rent for houses built with government benefits will be determined by the head of the region in consideration of the location and business sustainability.

Lease over other types of real estate is not regulated under the law, only that the use of such lease object must be in line with the designated use stated in its Building Permit/Approval, as discussed in 6.12 Restrictions on the Use of Real Estate.

It is common for the parties to a lease agreement to agree on a provision for termination due to an insolvency event of either of the parties. Usually, such provision will also include the tenant’s obligation to make a termination payment to the landlord, in place of the payable rent for the remaining term of the lease, if the lease agreement is terminated due to the tenant’s insolvency event.

This matter can be freely negotiated between the parties; however, the common lease agreement requires the tenants to pay an amount of security deposit to the landlord for security. Such security deposit is usually to be kept by the landlord if the lease agreement has to be terminated due to the tenant’s default.

Typical lease agreements will allow the tenant a certain period to remove any of its property from the leased object; to return the leased object to its original state (if the leased object is a land, it is common to agree on a certain elevation of the land and to revive contaminated land); and to repair any damage to neighbouring property during the restoration/decommissioning process.

To ensure that the tenant leaves on the agreed date, the lease agreement usually provides that the landlord will be entitled to do the removal/restoration process at the tenant’s cost and expenses if the tenant fails to comply with the restoration obligation within the agreed time limit.

Further, under Article 1573 of the ICC, if the lessee continues to occupy the leased premise and is permitted to be in possession of the property after the termination of lease is made, a new lease begins, the consequences of which are those under an oral lease agreement (ie, the lease will expire when one party notifies the other party that it intends to terminate the lease, with due observance of the grace period according to local custom).  However, the lessee and the lessor may negotiate the right of the lessee to occupy the premises upon the expiry or termination of the lease. For example, if the lessee does not vacate the premises upon the expiry of the lease, the lessee must pay a certain fine for every day of delay.

Common lease agreements allow a sublease by the tenant. However, there is no specific Indonesian regulation on this matter; therefore, the conditions can be freely negotiated by the lessor with the lessee, and the lessee with the sublessee. In general, the main lessor will require the sublessee to be subject to the main lease agreement as well.

Under the general contract terms, any agreement can be filed for termination if it does not satisfy the subjective conditions under the Indonesian Civil Code, ie:

• the existence of the agreement (without coercion, fraud, or oversight); and
• capacity of the parties (each party is represented by a person with capacity to execute the agreement).

There are also the objective conditions of an agreement under the Indonesian Civil Code, which renders the agreement null and void if not satisfied:

• certainty on the object of the agreement; and
• a lawful cause/object of agreement.

In addition to the above general terms, the parties may freely negotiate other conditions for termination. Common ones include:

• failure of the landlord or the tenant to maintain the required licenses to carry out their respective business in relation to the lease;
• change in applicable law;
• economic reasons of the tenant or the landlord;
• event of default, such as non-payment by the tenant;
• insolvency event of a party; and
• etc, as agreed by the parties.

In addition, it is advisable that the parties waive Articles 1266 and 1267 of the Indonesian Civil Code to the extent a prior court order is required to terminate the agreement in accordance with its terms or to claim for damages. This is so that the agreement can be terminated without any prior judiciary process.

There is no obligation for either the landlord or the tenant to do any registration for the lease to become effective. However, with the recently issued regulation on land registration in 2020, lease over a land can now be registered to the Land Office. Nevertheless, such registration is not a required procedure.

It is possible to agree on such eviction in the lease agreement in the event of default. For example, the parties may agree that the landlord will be entitled to remove the tenant’s properties from the leased object if the tenant fails to make the rent for a certain period.

It is also possible for such eviction to occur due to the landlord’s insolvency event or if there is a court ruling on the security seizure of the leased object.

Under the Indonesian Civil Code, an agreement is only applicable to the parties; therefore, only parties to an agreement can file for its termination. Third parties suffering a damage from an implementation of an agreement may sue the parties to the agreement for compensation or retribution for such damages, but not for the termination of the agreement itself.

Not even the government is allowed to singlehandedly terminate an agreement between other parties. If a leased object is ordered to be demolished or removed for public interests, usually the government side will compensate the owner of the property; however, the government will not be the party terminating any ongoing lease agreement over such property.

This matter can be freely negotiated between the parties; however, the common structure would be a fixed price for the whole project or an “agreed construction cost” paid in stages, usually per period of time (eg, per year) or per milestone or achievement (achievement payment).

In addition to the fixed agreed construction cost, the project owner and the contractor usually agree to allow an additional cost for change order based on the cost of the variation work, through particular procedures that may eventually cause a change in the agreed construction cost.

The design and construction of a project is commonly contracted to a construction company by the project owner.

There is no specific regulation on this matter. The common ones used in construction agreements in Indonesia are indemnifications, representation and warranties, limitations of liabilities, undertakings, achievement payment, etc, as agreed between the project owner and the contractor.

It is common for construction agreements in Indonesia to agree on a “delay liquidated damage” from the contractor if certain completion is not achieved as scheduled. The common provisions on this delay liquidated damage would cover:

• an “excused delay” precluded from the obligation to pay a delay liquidated damage;
• the date on which the delay liquidated damage would start counting;
• the cost of delay liquidated damage per day;
• if the project owner has the right to unilaterally terminate the construction agreement due to the delay;
• if the project owner can take over the remaining work from the contractor, and the legal consequences of such takeover; and
• etc.

This matter is not regulated under the law and therefore can be freely negotiated between the parties.

It is common for more than one performance guarantee to be agreed in a construction agreement, in order to protect the rights of the project owner and to ensure performance by the contractor. This issue can be freely negotiated between the parties.

Under the Indonesian Civil Code, a party can only put a lien or encumbrances over its own property and therefore a contractor cannot encumber a property it is contracted to construct, as such property is not legally owned under the name of the contractor.

However, a contractor can put the work order letter as a guarantee for loan. In such case, the contractor’s repayment can be completed through the cessie or assignment of the billing right arising from the work order letter.

The owner of the building/installation must obtain a Certificate of Worthiness (Sertifikat Laik Fungsi – “SLF”) before the utilisation of a building. SLF is required for a building based on its complexity and its condition. It is valid for five years and must be extended as long as the building is utilised.

VAT at a rate of 11% of the purchase price is applicable if the seller is a real estate company. Please refer to 2.10 Taxes Applicable to a Transaction for further explanation on VAT.

In a real estate development project, it is common for the real estate (usually land) owner and the developer to enter into a Joint Operation agreement because under a Joint Operation agreement the ownership of the land remains under the name of the owner. Since there will be no transfer of land/real property in any manner, the parties will not be charged any other land-related taxation (primarily BPHTB).

In Indonesia there is a Land and Building Tax (“PBB”) and all land and buildings attached thereto are included as taxable objects. The subject of PBB is every person or entity that has the right to the land and/or obtains a benefit over the land/building, and/or owns or controls the land/building. The tariff of PBB is at 0.5% of the Taxable Object Value.

Taxable Objects exempted from PBB are:

• objects used to serve public interests in the field of religious activities, social, health, education and national culture not intended for profit such as mosques, churches, government hospitals, schools, orphanages and temples;
• objects used as cemeteries, ancient relics and the like;
• protected forests, nature reserves, tourist forests, national parks, grazing lands controlled by villages and state lands that have not been encumbered with a right;
• used by diplomatic representatives under a reciprocity principle; and
• used by international bodies and representatives determined by the Minister of Finance.

Since foreign investors will have to establish an Indonesian legal entity, the legal entity will be subject to withholding tax under Article 23 of the Income Tax Law (PPh 23). For rental income from real estate, under Government Regulation No 34 of 2017, a taxpayer’s income from rent over a land or building is subject to income tax at a rate of 10% of the gross amount of the rent. In addition, this 10% income tax under Government Regulation No 34 of 2017 also applies to income deriving from the periodical payment during the build-transfer-operate period, income in the form of building transferred before the end of a build-transfer-operate agreement, and other income related to a build-operate-transfer partnership. For the disposal of property, please see 2.3 Effecting Lawful and Proper Transfer of Title and 2.10 Taxes Applicable to a Transaction.

Since income tax is a subjective tax, therefore the income tax will be deducted from the taxpayer's (the investor's) income. However, it is also common for the calculation of the withholding tax to be included in the agreed project cost, so that the income tax is technically borne by both parties of the project.

Exemptions to income tax is discussed in 2.10 Taxes Applicable to a Transaction.

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Not in general, but business actors in a special economic zone are entitled to a reduction or relief from land and building acquisition tax (BPHTB) (see 2.10 Taxes Applicable to a Transaction) and land and building tax (PBB) (see 8.3 Municipal Taxes) of at least 50%, subject to the applicable local regulation.

For your information, a special economic zone is a zone within certain boundaries that is stipulated to serve the economic function entitled to certain facilities. There are currently 18 special economic zones in Indonesia, which each have their own designated main activities such as industry, technology development and tourism.