Property Ownership by Foreigners in Indonesia
Foreigners living and working in Indonesia may wish to take advantage of a number of regulations recently enacted in favor of foreign property ownership in Indonesia. It is common practice for foreigners in Indonesia who own properties to do so through a nominee arrangement; however, such practice presents complicated legal and tax risks, trust issues and estate planning inconveniences.
What are the current legal means for foreigners to own property in Indonesia?
There are two legal means for foreigners to own property: Individual direct ownership and ownership through a Foreign Investment Limited Liability Company (PT PMA).
Foreigners holding a valid KITAS or KITAP may own a landed house or an apartment in Indonesia, according to Article 3 of Regulation of the Minister of Agrarian Affairs and Spatial Planning / Chief of National Land Bureau (BPN) No. 29 Year 2016 regarding Ownership of Residential Property by Foreigners in Indonesia enacted 26 September 2016. The ownership is in the form of Rights of Use (Hak Pakai) and subject to a minimum property value based on location, e.g. minimum Rp 10 billion for landed house or Rp 3 billion for apartment in DKI Jakarta. The conversion into Hak Pakai occurs upon sale and purchase, bequest, exchange, and auction or other means of transfer from Ownership Rights (Hak Milik) or Building Use Rights (Hak Guna Bangunan). Hak Pakai is valid for up to 30 years and is extendable for an additional 20 years, upon expiration of which it may be renewed for another 30 years.
The new regulation has greatly simplified the process to own residential property. It creates a new form of Hak Pakai for apartments whereby the underlying land with Hak Milik or Hak Guna Bangunan does not need to be converted to Hak Pakai. Furthermore, Article 16 of this regulation specifically allows residential property owned by foreigners in Hak Pakai to be pledged as collateral against a loan. The Hak Pakai title may also be converted back into Hak Milik or Hak Guna Bangunan as appropriate upon transfer to a third party, as stated in Article 17. However, it is yet unclear which financial institutions would accept these in practice.
What happens when my KITAS or KITAP expires?
The Hak Pakai ownership is contingent upon the foreigner maintaining a valid residence permit (KITAS or KITAP), and specifically at the time of purchase and sale of the property. The foreigner owning property under Hak Pakai should strive to renew his or her residence permit in a timely manner throughout the period of ownership. However, it is yet unclear how such requirement will be enforced.
What taxes are incurred in a transfer of property?
Prior to 8 August 2016, any transfer of property was subject to 5% income tax (PPh) and 5% title deed duty (BPHTB), as well as government administrative fee (PNBP). President Jokowi has enacted Government Regulation No. 34 Year 2016 regarding the Income Tax from Transfer of Property, reducing the PPh to 2.5%. During the tax amnesty program, currently ongoing until 31 March 2017, the PPh is waived for the transfer of ownership of property from a nominee, pursuant to Article 15 of Law No. 11 Year 2016 regarding Tax Amnesty. Foreigners owning property through a nominee may receive amnesty by declaring the nominee property and paying the appropriate redemption fee (uang tebusan), currently at 3% until 31 December 2016 and 5% from 1 January until 31 March 2017. This is not a ransom fee as participating in the tax amnesty program is a free choice, albeit with many future considerations.
The basis for redemption rate is a reasonable self-assessed value of the property. An affidavit may be signed before a notary declaring that such asset actually belongs to the taxpayer receiving amnesty and transfer of property must be completed, i.e. change of name on the certificate, by 31 December 2017. The 5% title deed duty (BPHTB) will still use the taxable land value annually set by the government (NJOP).
So, foreigners are eligible to participate in Indonesia’s current tax amnesty?
Yes, foreigners who have been earning an income, reside in Indonesia for more than 183 days a year, desires to stay in Indonesia, and/or maintain residence in Indonesia, are eligible. An Indonesian tax identification number (NPWP), may participate in tax amnesty if they declare previously untaxed assets and are not in the midst of investigation, proceeding or sanction for tax crime. This is an excellent opportunity to claim tax residence in Indonesia and gain tax-legitimate access to income previously received overseas for a fraction of the tax cost, i.e. at the current 3% rate instead of the 30% progressive tax that the income would have been subject to, pursuant to Article 17 of the Income Tax Law.
Once I transfer my property, is there a way to dispose of the PT PMA without going through liquidation?
Yes. During the tax amnesty period, we are offering a special PT PMA disposal program at an attractive rate. Contact us for more information.
What about foreigners who wish to invest in more than a residential property, and non-residential property?
The only legal means of owning property(ies) other than for the purpose of residence is through a PT PMA. Land ownership is usually in the form of Building Use Rights (Hak Guna Bangunan) or Commercial Use Rights (Hak Guna Usaha), with a variety of business fields possible for the PT PMA as regulated by the Investment Coordinating Body (BKPM). Placing property ownership in a Limited Liability Company (PT) is common business practice among Indonesian investors who believe in the potential gains to be reaped in the property sector, specifically in owning and developing strategic land as well as for estate planning.
I am concerned about the tax exposure when selling the property owned through a PT PMA.
The options are to sell either the property or the shares of the company. Selling the property would incur PPh, BPHTB and PNBP burdens previously mentioned. In addition, any PT (PMA or local) selling property incurs a 10% Value Added Tax (PPN). The proceeds from the sale of property is retained within the company until dividends are disbursed to shareholders, upon which dividend tax of 10% would be incurred pursuant to Article 4(2) of the Income Tax Law. There is withholding tax for foreign shareholders depending on country of tax domicile and tax treaty with Indonesia. You could liquidate the company; however, liquidation is a complicated process that may take over a year, involving a tax audit, newspaper announcements, notarial deeds, Ministerial approval and appointment of liquidator. Alternatively, selling the shares in the company would incur a progressive income tax (PPh 21) of a maximum of 30% from the capital gains, i.e. the difference between the transaction and nominal value of the shares in the company. It is not advisable to sell company shares at their nominal value if the company holds a property of much higher value.
That is a LOT of tax. What should I do if I want to keep the ownership under PT PMA?
Fortunately, for ownership of property through a PT PMA, there is a revaluation program running through 31 December 2016, whereby the capital gains would be subject to a reduced rate of 6%, pursuant to Article 1(2)(c) of Minister of Finance Regulation No. 191/ PMK.010/2015 on Revaluation of Fixed Assets in 2015 and 2016. Article 9(2) of the Regulation also waives the 10% dividend tax normally incurred on the issuance of additional shares to shareholders subject to Article 4(1) (g) of Law No. 7 Year 1983 and as amended in Law No. 36 Year 2008 Article 2(b). If the property is revalued on or after 1 January 2017, the capital gains would be subject to 10% revaluation tax and the additional shares issued to shareholders would be subject to 10% dividend tax, as per the original revaluation program outlined in Minister of Finance Regulation No. 79/PMK.03/2008.
Where can I get more advice?
For tailored solutions on property ownership, tax amnesty, PT PMA, and matters relating to individual or corporate compliance in Indonesia, please do not hesitate to contact us.
Jalan Denpasar Raya Blok C4 No. 23
Kompleks Menteri Kuningan
Jakarta Selatan 12950, Indonesia
Tel: +62 21 520 4989
Fax: +62 21 520 4990
About Putranto Alliance
Putranto Alliance is a synergy of professional services companies, carefully selected to provide comprehensive tailored solutions to meet your legal and corporate requirements. Our experience and expertise come from understanding and applying corporate, finance, accounting and tax laws and regulations, leveraging our strong business network to improve business outcomes and results for you. Navigating Indonesia’s myriad regulations can be confusing, and we are here to listen, guide, advise, clarify and assure – so you can focus on growing your business.
This article is not meant to provide stand alone legal and tax advice. Specific situations may vary among individuals and corporations.
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