Twitter Logo Youtube Circle Icon LinkedIn Icon

Indonesia > Legal Developments > Law firm and leading lawyer rankings

Editorial

PROPERTY OWNERSHIP BY NON-INDONESIAN NATIONALS

Early this year, the State Ministry of Housing Affairs sent the public a message in favor of amending the current rules on property ownership by non-Indonesian nationals for their occupation.

Besides providing more comfort for non-Indonesian nationals while they develop their interests in Indonesia, widening the chances for property ownership by non-Indonesian nationals is expected to also bring Indonesia multiplier effects, in, for example, investment, banking, financing, labor, and even new construction technologies. As prices of properties in Indonesia are considered very competitive within the region, this would attract a higher level of appetite for investment in this business. While the reasons are plenty, changing the rules requires a comprehensive approach and mutual commitment among related government authorities to create an synergical effect.

These days, there are three lawful ways for a non-Indonesian national to directly own a house in Indonesia, i.e., (a) by purchasing or building a house on a plot of state land or freehold (Hak Milik) land with Right of Use (Hak Pakai) land title , (b) by purchasing an apartment unit with strata title within an apartment built on state land with Right of Use (Hak Pakai) land title, or (c) by purchasing or building a house on freehold land by virtue of a written agreement with the land owner. The properties covered by the foregoing are further limited to properties that are not intended for low-income families.

Non-Indonesian nationals who can enjoy the above chances are only those whose presence in Indonesia makes an economic contribution to Indonesia. "Presence in Indonesia" doesn't necessarily mean that the person permanently physically lives in Indonesia, but could mean that he/she regularly comes to Indonesia to run his/her interests in Indonesia.

As a matter of fact, the current regulations already give non-Indonesian nationals the chance to own property for a total of 70 years. Long enough, but this 70-year period doesn't come all at once. The initial tenure is 25 years, extendable for another 20 years and then renewable. If the regulations prevailing at the end of the first 45 years remain the same as now, the renewed period would probably be for another 25 years. Concerns some people have with the current regulations are that the 70-year period requires extension and renewal which would be burdensome and could bring less certainty. A more notable concern is that the land title available for this purpose is limited to the Right of Use (Hak Pakai) land title. Comparing to freehold (Hak Milik) and Right of Use for Building (Hak Guna Bangunan/HGB), it is very rare for plots of land to have Right of Use (Hak Pakai) land title. Unless they intend to use the plots of land for properties with non-Indonesian nationals as a captive market, land owners would logically tend to have the other two land titles that give more benefits.

In the case of owning a house over a leased plot of land, the lease will be good for only 25 years, renewable for another 25 years.

The present limitation on land title available for houses owned by non-Indonesian nationals has pushed some people to create some fancy yet risky legal structures to get around obstacles when the targeted locations do not have Right of Use (Hak Pakai) land title. Schemes like a nominee arrangement with an Indonesian who legally owns the plot of land for and at the cost of the non-Indonesian national principal, long term lease agreements, and lease agreements with option to buy are quite common. To further strengthen the main contracts, the foregoing schemes are generally also combined with the Indonesian partner giving the non-Indonesian partner an extensive power of attorney for the latter to control or even to transfer the plot of land. A more extreme way also found in practice is a pretended marriage with an Indonesian national subject to certain contractual terms. While all the foregoing could be subject to legal challenges against the interest of the non-Indonesian parties, there have been some cases where the non-Indonesian parties trust their Indonesian partners so much that the former have already spend huge amounts of funds on the properties (legally registered in the name of the local parties) yet they don't even have written contracts at all or only have non-enforceable contracts. It is essential to note that Indonesian laws don't recognize beneficial ownership, but only legal ownership. This means that in the case of property ownership, only those whose names are registered with the competent government agencies can enjoy legal protection. Beneficial ownership between parties is considered a private matter between those parties enforceable only to the extent they agree in a contract subject to applicable legal restrictions.

In a legitimate case where a non-Indonesian lawfully marries an Indonesian in accordance with Indonesian laws, a legal concern could also arise. The legal concern here is that in the absence of a valid prenuptial agreement, assets acquired within the marriage would be considered as marital, joint assets. This could then deny the right of the non-Indonesian spouse to have title over plots of land and/or risk the land title of the Indonesian spouse over land plots assets registered in his/her name.

A less risky and more advisable way to overcome the ownership obstacle is by establishing an Indonesian company. This company is set up to own the plot of land and the building under HGB land title. To avoid the company from becoming a PMA company, the shareholders must be the Indonesian spouse holding all but one share and a trusted Indonesian national co-shareholder holding the remaining single share.

Given the potential complications of the matter, the improvements of Indonesian laws on property ownership by non-Indonesian nationals must therefore be undertaken after working out comprehensive studies and discussions, involve all related government agencies and stakeholders, and produce workable legislation. A situation that requires study and resolution is the case when even if the Right of Use (Hak Pakai) land title is given a more favorable tenure, as said above, most if not all of the most desired residential locations are not under the Right of Use (Hak Pakai) land title, but HGB. This will certainly still create a barrier and limit the opportunities for non-Indonesians to choose and own the locations they want. As long as the locations do not have Hak Pakai and HGB is not available for non-Indonesians, merely extending the Hak Pakai tenure is not likely to serve the purpose. There is something more to do indeed.

The long journey above must therefore start with a bold step by, at least, the Ministry of Housing Affairs and the Land Office seriously sitting together to draw up a comprehensive policy and technical roadmap for further studies and discussions with other stakeholders within or outside the government. The foregoing must include any required amendments to the Law No. 5 of 1960 concerning Basic Agrarian Law and those concepts on the restrictions applicable to such ownership by non-Indonesians, e.g., minimum value of properties, which storeys of apartment units, forms of security deposits for compliance with applicable regulations, approval mechanisms for exceptions and mechanisms for transfer of ownership at the end of the stay in Indonesia.

Although time is a luxury in the fast pace of competition among nations to attract as much foreign investment as possible, the steps above still have to take a reasonable amount of time for a comprehensive, workable breakthrough in favor of advancing a competitive investment policy of Indonesia.


By Fabian Buddy Pascoal

Fabian Buddy Pascoal is a Partner at the law firm Hanafiah Ponggawa & Partners and reachable at fab.buddy@alum.berkeley.edu

Hanafiah Ponggawa & Partners is one of Indonesia's premier law firms engaged in a transnational practice. With roots in one of Indonesia's first post-independence law firms, the Law Offices of Mr. L. Hanafiah, established in 1953

 

www.hplaw.co.id

 

Interview with...

Law firm partners and practice heads explain how their firms are adapting to clients' changing needs

GC Powerlist -
Southeast Asia Teams