Indonesian property law updates, direct investment company formation

Land rights | Securing Property | Doing Business in Indonesia

Land Rights

The Basic Agrarian Law of 1960 is the foundation of land laws in Indonesia. There are 11 land rights under this law. The following are the laws most relevant to an investor:

Right of Ownership (Hak Milik) is an inheritable right reserved for Indonesian citizens only. While legal entities are theoretically entitled to this right, in practice it is no longer issued to them. The right can be sold, exchanged, bequeathed or otherwise transferred.

Right of Exploitation (Hak Guna Usaha) is the right to use land for purposes of agriculture, fishing or cattle raising. The title may be held by PMA companies and may be used as collateral or security for financing purposes. Recent regulatory changes allow title to be granted for 35 years with a guaranteed extension of 25 years if the land is properly used and managed. Thereafter, assuming certain requirements are fulfilled, title can be renewed.

Right of Building (Hak Guna Bangunan) is the right to construct and own buildings on land. This is the right most commonly obtained by PMA companies.
 
Right of Use (Hak Pakai) is the right to use land for a specified purpose. The law prescribes the right of use for a period of 25 years with a maximum extension period of 20 years. It is commonly granted to representatives of foreign governments for construction of embassy buildings and to social, cultural and religious organizations. It has no collateral value to the holders and is not transferable.

Right of Lease (Hak Sewa) is similar to leasehold. Leasehold rights are normally granted to tenants of both residential and commercial premises. Foreign residents in Indonesia as well as foreign corporate representative offices are entitled to lease property. No law or regulation limits the duration of a lease.

The government offers foreign investors land rights that are relevant to the nature of their business. Prospective buyers of land for any purpose should consult the local government authorities on land use, planning and zoning. Based on a Presidential Decree issued in June 1996, foreigners domiciled in Indonesia are allowed to own one residential property.
To meet the regulations of ownership of a house or an apartment, a foreigner must be deemed to be “beneficial to national development” and must be either:
An Indonesian resident (domiciled permanently in Indonesia) in possession of a permanent resident permit; or A non-resident (domiciled in Indonesia only at particular times) in possession of appropriate visit and immigration stamps in his/her passport.
A foreigner can purchase or construct a house built only on land with the right of use (Hak Pakai), the right of use with the right of proprietorship, or the right of lease (Hak Sewa). An apartment can only be purchased by a foreigner on land with right of use (Hak Pakai). Foreigners are not, however allowed to purchase houses or apartments classified as “low cost housing” or “very low-cost housing”.
Ownership is limited to 25 years, and is extendible for another 20 + 25 years provided that the foreigner remains an Indonesian resident or meets the status requirements. If the foreigner departs from Indonesia, the property must be sold or transferred within one year after departure. If the foreigner or his family does not use the house for more than 12 consecutive years, then the foreigner forfeits the “being domiciled” status, for the purpose of owning residential property.
 

HOW A FOREIGNER CAN SECURE PROPERTY IN BALI

For foreigners, there are basically three options to legally secure a property in Indonesia.
- Leasehold Investment
- Indonesian Nominee Power of Attorney Agreement
- PMA Foreign Investment Company Structure

These three options are explained below in simple terms. Securing property in Indonesia can be a lengthy process which requires patience and diligence.
We recommend that you seek the best professional and legal advice to fully check all land titles, certificates of ownership and building permits, and that you have all transfer of lease or ownership documentation prepared by a reputable legal notary. We will be happy to recommend reputable lawyers.

THE TERMS EXPLAINED

1. Leasehold Investment
Until recently, this was the only means for a Foreign Investor to secure land in Indonesia. A Leasehold Investment offers complete protection to the foreigner during the term of the Lease Agreement.

A Lease Agreement is prepared, specifying the period of time, usually in terms of up to 25 years, and often with an option to extend. Any options that the Foreign Investor would like to include, such as the right to demolish, the right to extend, the right to build and the like are discussed, agreement is reached with the owner and clearly stipulated in tight legal documentation prepared by a public notary and lawyer. At the expiry of the lease period, the Agreement can be extended or the property allowed to revert to the Owner. An application to extend the Lease Agreement period should be submitted no later than a year before expiry. The Foreign Investor can negotiate directly with the landowner at the time of renegotiation in order to agree to a property lease rate for the extended lease period.

2. Indonesian Nominee Power of Attorney Agreement
Currently, Foreign Investors are not entitled to own 'freehold' property known in Indonesia as the Right of Ownership (Hak Milik).
However, it is possible to enter into a legal agreement with an Indonesian Nominee, who secures the title to the property on behalf of the foreigner. While the Indonesian Nominee is the registered owner, the Foreign Investor holds the land certificates as security. In Indonesia land cannot be sold without an authentication procedure which includes sighting of the original land certificates.

At the time of property purchase, the Indonesian Nominee and the Foreign Investor simultaneously sign a legal Power of Attorney. The Power of Attorney waives all rights of the Indonesian Nominee and gives full beneficial rights of the property to the Foreign Investor. The Foreign Investor is then able to build on the property, onward sell or lease the property and transfer the property to their next of kin. Additionally it is possible to specify that if the laws in Indonesia change allowing Foreigners to own land, that the titles will automatically be transferred into the Foreign Investor's name.
The Indonesian Nominee may receive a pre-agreed fee for their responsibilities as the titleholder. The amount largely depends on the relationship the Foreign Investor has with the individual Nominee.

3. PMA Foreign Investment Company Structure
Property acquisition through a PMA (Penanaman Modal Asing) Foreign Investment Company structure enables Foreign Corporations to own land in Indonesia, without having to have Indonesian partners. The PMA can be 100% owned by the Foreign Investor. This was originally established for large Multinational Corporations but has been extended to land holdings by smaller off-shore companies.

Audited accounts must be regularly furnished to the Government showing the PMA trading position, and operating taxes must be paid. The cost of setting up a PMA structure varies depending on the line of business and can take 4 months or more to set up. Once completed the company can apply for work permits for foreign directors, with a total of 3 work permits in the first year of operation.

The disadvantage of a PMA Company property acquisition is that the property should be used for company projects only, and that a PMA Company, like any other corporate entity (Indonesian or Foreign), is not eligible for 'Freehold' (Hak Milik) Title. Whenever freehold land is transferred to a corporate entity, the property title is changed to Right to Build (Hak Guna Bangunan - HGB).
 

SUPPLEMENTARY INFORMATION : LAND CATEGORIES AND PRINCIPLES OF OWNERSHIP

Property and Land Rights of Indonesia are based on the Agrarian Law (1960). Below are the various land categories and principles of ownership that are frequently used.
Currently under this law, there are two categories of land:

Community Land - Tanah Adat
- is land belonging to a certain registered community, wherein 2 individual rights and 6 community rights can be eventually converted to a certified title.
Certified Owned Land - Tanah Hak Milik
- is land belonging to an individual, registered under a local land agency, and legally documented through a Notary.

There are also 5 Principles of Ownership:

1. Right of Ownership (Hak Milik)
The right of ownership, which can be sold, transferred, bequeathed and mortgaged to another individual. This is often referred to as 'Freehold' land.
2. Right to Build (Hak Guna Bangunan - HGB)
The right to build on the property for up to 20-30 years with the option to extend. This right can be sold, transferred, bequeathed and mortgaged to another individual.
3. Right to Lease (Hak Sewa Bangunan)
The right to lease a property. This right is transacted between the lessee and the lessor, and can be properly officiated by a Legal Notary under local law. Lease periods vary, with up to 25 years being usual, with an Option to Extend often being successfully negotiated.
4. Right of Use (Hak Pakai)
The right to use land for a specified period of time, usually a maximum of 10 years. This right cannot be sold, transferred, bequeathed and mortgaged to another individual, unless a special grant has been approved. This right is applicable to Indonesians, foreigners permanently domiciled in Indonesia, or a foreign company with a representative office in Indonesia.
5. Right of Managing (Hak Guna Usaha - HGU)
The right to manage state-owned property for agriculture or husbandry for up to 35 years with the option of a 25 year extension. This certificate can be mortgaged.

Doing Business in Indonesia - Foreign Direct Investment

The new government has been transforming Indonesia into a country with one of the most liberal policy and regulatory frameworks for investments in Southeast Asia. Serious efforts are being made to give investors clearly spelled out investment laws, rules and regulations.

This chapter briefly discusses the general policies and basic guarantees; sectors closed for foreign direct investment; forms of doing business and allowable share ownership; other forms of doing business; direct foreign investment application and approval; employment of foreign nationals and work permits; and environmental concerns.

1. General Policy and Basic Guarantees for Foreign Direct Investment
Indonesia welcomes foreign direct investment, whether by individuals or entities. The investment is made in the form of a limited liability company.

With regard to the percentage of allowable foreign ownership, foreign direct investment is conducted in two ways; namely joint venture with domestic investors or full (100%) foreign investment. The government is continuing to review those lines of business open to foreign direct investment and the allowable percentage of foreign ownership.

With regard to the size of foreign investment, in practice, the Investment Board (the Indonesian government office with jurisdiction over foreign and domestic investment matters)
determines the minimum reasonable paid up capital of the limited liability company to be established, depending on the nature and type of business. For example, the reasonable paid up capital for a company in the service sector is normally US$100,000. The Indonesian constitution guarantees foreign investors’ the following basic rights:
- Freedom from expropriation without just compensation.
- Right to remit profits, capital gains, and dividends within the guidelines of the Bank of Indonesia, the country’s central monetary authority.
- Right to remit the proceeds of the liquidation of investments.
-Right to obtain foreign exchange to meet principal and interest payments on foreign obligations.

Indonesia is a full member of the Multilateral Investment Guarantee Agency (MIGA), which is a member of the World Bank Group. Investments entered through MIGA are protected against various political risks. The agency was designed to encourage foreign investment by providing viable alternatives for investment insurance against non-commercial risks in developing countries, thereby creating investment opportunities in those countries. Indonesia also has bilateral agreements with 54 countries concerning the promotion and protection of foreign investments. A standard bilateral agreement contains provisions to create favorable investment conditions for nationals of Indonesia and the contracting party on the basis of sovereign equality and mutual benefit. This is designed to stimulate investment in both countries.

2. Lines of Business Closed to Foreign Direct Investment
In principle, all lines of businesses are open to foreign investment, except for those business activities or lines of business that have a vital role in national defense and security, such as the production of weapons, ammunitions, explosives and martial/war equipment.

In addition to these vital business activities, the Government can also determine other lines of business closed to foreign investment as set forth in the Presidential Decree on the “Negative List of Investment” and other regulations. This decree describes not only
the lines of business that are closed to foreign investment, but also the lines of business closed to all investment (foreign and domestic), the ratio of ownership between foreign and domestic investors in a joint venture, and the special criteria to be complied with by investors in investment in special lines of business.

According to the current Presidential Decree on the “Negative List of Investment” (Presidential Decree No. 96/2000 dated July 20, 2000 as amended by the Presidential Decree No. 118/2000 dated August 16, 2000), the lines of business that are totally closed to foreign investment include 1) germ plasma cultivation, 2) natural forest exploitation, 3) lumber contractors, 4) taxi/bus transportation services, 5) small-scale shipping, 6) trading and trade supporting services except large scale retailers (malls, supermarkets, department stores, shopping centers), wholesale trading (distributors/wholesalers, exporters and importers), exhibition/convention providers, quality certification service providers, market research service providers, warehousing service providers other than Line 1 and ports, and after-sales services,7) radio and television broadcasting, and 8) cinema operation.

The government has been showing a trend towards relaxing the negative list of investment, with more lines of business being opened up to foreign investment and foreign investors being
allowed a greater percentage of ownership.
A summary of the new ruling on foreign investment restrictions is included at the end of this chapter and marked Attachment 1.

3. Setting Up a Foreign Direct Investment Company
A foreign direct investment company in Indonesia (known locally as “Penanaman Modal Asing” or PMA), can take the form of a 100% foreign owned limited liability company or can be established as a limited liability company through a joint venture with Indonesian partners. In the case of a joint venture, the Indonesian partner is required to own at least 5% of the shares. The Corporate Law requires that there are at least two shareholders in a PMA company, or any limited liability company. The shareholders can be two individuals, two
companies, or a mixture of both. Therefore, in the case of a PMA company with full foreign ownership, the foreign investor initially planning the investment in Indonesia must invite another foreign party to participate in shareholding of the proposed company.

When a PMA company is established, the initial investment approval from the Board of Investment will be valid for three years. Once the PMA company is ready to start its commercial operations, it is required to apply for a permanent business license. To obtain the permanent business license, the company has to secure the approvals, permits, and licenses required by the different government agencies.

Allowable Share Ownership
Foreign investors may own a maximum of 95% of the shares of PMA companies involved in construction and operations of ports and harbors; processing and provision of clean water for the public; electricity production, transmission and distribution; generation of atomic power; public railway service; shipping and medical services (covering among others building and operation of hospitals, medical check-ups, clinical laboratories and mental rehabilitation service). In the case of telecommunications and regular/non-regular/chartered commercial airlines, foreign investors who wish to participate in these industries must form a joint venture with an Indonesian company. Previously, the foreign ownership in these industries was limited to a maximum of 49%. However, based on Presidential Decree No. 118/2000 dated August 16, 2000, there is no limitation on the percentage. A more conservative interpretation
based on the Investment Law, suggests foreign investors may own a maximum of 95% of the shares. A 100% foreign-owned PMA company is required to divest part of its shares to Indonesians within a maximum period of 15 years from the start of its commercial operation.

4. Other Business Forms
Representative Office
A foreign company may establish a Representative Office in Indonesia. There are three types of Representative Office in Indonesia:

1. Representative Office under the Department of Trade and Industry, which may only conduct promotional activities, market research and information gathering functions.

2. Representative Office under the Construction Service Development Agency (formerly this type of Representative Office was under the State Ministry of Public Works). This type of
Representative Office allows a foreign contracting company to enter into a Joint Operation Agreement with a local contractor to execute a public works contract of limited scope and
duration. One company may be the main contractor with the other as the sub-contractor.

3. Regional Representative Office under the Board of Investment, which may only supervise and coordinate the affiliates/branches/subsidiaries for, and on behalf of, its parent company.

Agency and Distributorship
A foreign business firm may appoint an Indonesian person or company to act as its agent or distributor to engage in trading activities. Expatriate personnel may be assigned to and be
employed by the Indonesian person or company. However, for those foreign business firms who want to have a business presence in Indonesia, the recent regulations allow the foreign company to set up a PMA company, which can engage in large-scale retail and distribution/wholesale activities.

Cooperation Agreement
A business agreement with a domestic enterprise to provide technical assistance, management, and financial arrangements.

5. Foreign Investment Application and Approval
Foreign investment application and approval, except for investments in the oil and gas and financial sectors, can be obtained at any one of the following: 1) the Office of the Board of Investment (BKPM) in Jakarta, 2) the Regional Investment Coordinating Board (BKPMD) in
the province where the project will be located and 3) the representative office of the Republic of Indonesia where the prospective investor resides.
To apply for investment approval, the foreign investor has to submit to any one of these entities two copies of form Model 1/PMA containing the following information:

1. Names and descriptions of the applicants
2. Name of the company, location and main line of business
3. Annual production and sales of products
4. Land area, foreign and local manpower, and infrastructure requirements
5. Capital structure
6. Project timetable

Foreign investors have therefore the choice of where to apply and secure investment approval. However, for foreign investment projects located in the Bonded Zones, investors should submit the application to the BKPM through the respective Bonded Zone Authority.
After securing the PMA approval, the foreign investor has to secure the permits and licenses required to obtain a permanent business license to operate. For details on Investment Applications visit the Investment Coordinating Board’s website at http://www.bkpm.go.id/.

6. Employment of Foreign Nationals
PMA companies are allowed to appoint foreign managerial staff and technical experts for whom qualified Indonesian nationals are not yet available. A company wishing to have expatriate employees must obtain a work permit for them. Work permits are usually valid for a 12-month period. To obtain them the employer or sponsor must submit to the Ministry of Manpower, a Manpower Plan. This should include a plan to train Indonesians who will later take over the positions for which the firm is seeking approval.
Within seven days of arrival in Indonesia the expatriate worker and immediate members of his/her family must report to the District Immigration Office of the district where they are residing to obtain a resident (KIM/S) card.

7. Environmental Issues
Foreign investors should always consider environmental protection in connection with their activities located in Indonesia. Disregard of this issue can increase the risk that operations will be closed or interrupted as a result of pressure from non-government organizations or local residents.
Law Number 23 Year 1997 pertaining to the Environment Law, states that compliance with the environmental regulations is mandatory in Indonesia. Therefore, companies operating in
Indonesia should be increasingly aware of the need for environmental protection and preservation.

Attachment 1: Negative Investment List
(As regulated in the Presidential Decree No. 96/2000 as amended by
Presidential Decree No. 118/2000)

Business Fields Totally Closed to Investment:

Agricultural Sector

1. Cultivation and processing of marijuana and the kinds

Marine and Fishery Sector

2. Collection/utilization of sponge

Industrial and Trading Sector
3. Industries of chemical products harmful to the environment, like penta chlorophenol, Dichloro Dipenhyl Trichloro Ethane (DDT), dieldrin, chlordane, carbon tetra chloride, Chloro Fluoro Carbon (CFC), methyl bromide, methyl chloroform, halon, etc.
4. Industries of chemical products stipulated in the Schedule I of the Chemical Weapon Convention (sarin, soman, tabun, mustard, levisite, ricine and saxitoxin)
5. Industries of weapons and components
6. Industries of cyclamate and saccharine
7. Industries of alcoholic drinks (liquor, wine and drinks containing malt)
8. Operation of casinos/gambling
Communications Sector
9. Air traffic system providers (ATS providers) as well as ship statutory and classification surveys

10. Management and operations of Radio Frequency Spectrum and Satellite Orbit Monitoring Stations
Mining and Energy Sector
11. Mining or Radioactive minerals

Business Fields Closed to Investments with Ownership of Foreign Citizens and/or Statutory Bodies in Corporate Capital
Forestry and Plantation Sector
1. Germ plasma cultivation

2. Concessions for natural forest

3. Contractors in the field of lumbering
Communications Sector
4. Taxi/bus transport services

5. Small-scale sailing
Trading Sector
6. Trading and trading supporting services

EXCEPT: large-scale retailer (malls, supermarkets, department stores, shopping centers), wholesale trading (distributors/wholesalers, exporters and importers), exhibition/convention service providers, quality certification service providers, market research service providers, warehousing service providers other than Line I and seaports and after-sale service providers.
Information Sector
7. Radio and television broadcasting service providers, radio and television broadcasting subscription service providers, print media information service providers.

8. Film industry (film making businesses, film technical service providers, film export and import businesses, film distributors and movie house operators and/or film showing service).
Business Field Open to Foreign Investment on Condition of Joint Venture between Foreign and Domestic Capital
1. Building and operation of seaports

2. Electricity production, transmission, and distribution

3. Shipping

4. Processing and provision of clear water for public purpose

5. Public railway service

6. Atomic power plants

7. Medical services, covering the building and operation of hospitals, medical check-ups, clinical laboratories, mental rehabilitation service, public health maintenance security, rent of medical equipment, assistance services for health aid and evacuation of patients in emergency condition, hospital management services and services for testing, maintenance and repair of medical equipment

8. Telecommunications

9. Regular/non-regular/chartered commercial airliners
Business Field Open to Investments on Certain Conditions
Marine and Fishery Sector

1. Cultivation of fish in fresh waters
a. open to foreign investment for freshwater turtles, nila gift, sidat, kodok, lembu, freshwater giant shrimps and thillapya.
b. in cooperation with small-scale fishery businesses.
2. Fishing of demersal fish (big fish, grouper, and other sea fish)
- except ZEEI areas of the Malacca Strait and Arafura sea.

Industrial Sector

3. Industries of pulp made of wood
a. raw material coming from imported chips or guarantee of raw material supply from industrial timber estates (HTI).
b. other than sulfonating and/or chlorination (C12).
4. Industries of pulp made of other cellulose fibres or other materials
- other than sulfonating and chlorination (C12).
5. Chloro alkali producing industries
- other than those using mercury.
6. Processing of finished/semi finished goods of mangrove wood
- raw material coming from mangrove cultivation.
7. Money printing industry
- must secure operational licenses from BOTASUPAL-BAKIN and approval from Bank Indonesia.

8. Special printing industries (postal stamps, duty stamps, Bank Indonesia negotiable papers, passports, and stamped postal matter)
- must secure operational licenses from BOTASUPAL-BAKIN.

9. Milk processing industry (powder and sweetened condensed milk)
- processing, not merely repacking.

10. Plywood and rotary veneer industries
- only for Irian Jaya province (Papua).

11. Sawn timber industries
a. only for Irian Jaya province (Papua).
b. outside Irian Jaya province (Papua), only using logs from non-natural forests.

12. Ethyl alcohol industries
- technical grade, being only used as raw materials and auxiliary
materials of other industries.

13. Industries of raw materials for explosives (ammonium nitrates)
- must be in cooperation with business entities securing recommendation from the Ministry of Defense.

14. Industries of explosives and components for industrial (commercial) needs
a. must be in cooperation with business entities securing recommendation from the Ministry of Defense.
b. only manufacturing activities, while storage and distribution are executed by companies appointed by the government.

15. Electricity planning and supervision consulting services.
Open to foreign investment with the provisions that:
a. PLTA (hydro power plant) with a capacity of above 50 MW.
b. PLTU (steam power plant) with a capacity of above 100 MW.
c. PLTP (geothermal power plant) with a capacity of above 55 MW.
d. main electrical relay station with a voltage of above 500 KV.
e. transmission networks with a voltage of above 500 KV.

16. Electricity equipment construction, maintenance, installation services, development of technology supporting the supply of electricity and testing of electricity installations.
Open to foreign investments with the provisions that:
a. main electrical relay stations with a voltage of above 500 KV.
b. transmission networks with a voltage of above 500 KV.

17. Petroleum and natural gas drilling services
Open to foreign investments with the provisions that:
a. only for offshore drilling.
b. especially for locations outside the Eastern Indonesian Region, must cooperate with national partners operating in the similar business field.

18. Power plant businesses
- open to locations outside Java, Bali and Madura.

Trading Sector

19. Restaurants
- open to foreign investments with the special provisions that they must be located in tourism areas/zones and/or integrated with hotels.

20. Games services
- open to foreign investments with the special provisions that they must be located in tourism areas/zones and/or integrated with hotels.