In this write-up, we will go into detail on the often confusing land titles and lease agreements in Indonesia. These acquisitions until recently have been governed by Indonesian Agrarian law but are currently under reform and being superseded by the Omnibus law which, in the case of any conflict, override the Agrarian laws.
Generally, real estate agents and private land owners will refer to either leasehold or freehold property. In summary, the leasehold agreement which is either 25 years or 30 years unless taking over the balance of a pre-existing leasehold agreement, can be entered into by a foreign national without immigration status and is the most common form of property acquisition in Indonesia by foreign nationals. Freehold acquisitions however are a little more complex. First and foremost, freehold titles can only ever be held by Indonesian citizens but freehold properties can be acquired by foreign nations through a legal entity established under Indonesian law and domiciled in Indonesia such as a PT PMA company by converting the freehold certificate to an HGB certificate. Below we will go into more details.
In the case of freehold acquisitions, whether SHM or HGB, the cost is calculated based on the location and the size of the property. Cost will either be a fixed price for the full property or calculated per ARE (100m2). Therefore, cost per ARE (100m2) x (land size) = price of land purchase. e.g. 10 ARE of land at 500 million IDR per ARE = 5 Billion IDR
In the case of leasehold agreements, the rates are calculated in accordance with lease duration and property size. Therefore, cost per ARE (100m2) x land size x lease period (years) = price of lease agreement. e.g. 10 ARE of land at 10 million IDR per ARE over a 30-year lease is (10 000 000 IDR x 10 ARE x 30 years) = 3 Billion IDR
Taxes on these transactiona are conventionally the responsibility of the land owner but must be paid every time a title is transferred or lease agreement is subleased. The percentage of tax payable on each transfer is between 10% or 20% of the value of the contract depending on whether or not the seller is in possession of a valid Indonesian tax number.
Hak Milik - "Freehold" (SHM)
The ‘Hak Milik’ title, generally referred to as ‘Freehold Certificate’ or ‘SHM (Sertifikat Hak Milik)' is the strongest legal title that can be obtained. However, such rights are not absolute and the 'UUPA (Undang Undang Pokok Agraria)' who recognizes the "social functions" of land, infers a right of "peaceful occupation" of land by the titleholder. This title does not have a usage limit and does not need to be renewed by the owner.
The ‘Hak Milik’ title can ONLY be held by Indonesian citizens, or by Indonesian legal entities specifically permitted by the government. It is therefore impossible for a foreign nationals to have direct freehold ownership of land in Indonesia. Legally, no Indonesian companies, 'PT PMA' or otherwise, may possess a freehold title over land and are compelled to use other titles such as ‘Hak Guna Usaha’ and ‘Hak Guna Bangunan’. According to the 'UUPA', land that is titled ‘Hak Milik’ can be used as security for debt. However, foreign companies and individuals must take care in accepting freehold land as security, and should consult with competent advisors beforehand.
Hak Guna Bangunan - "Conditional Corporate Ownership" (HGB) 'Hak Guna Bangunan' which translates as 'Conditional Corporate Ownership' is most commonly simply referred to as an 'HGB title' or 'HGB certificate'. When purchasing land with an 'HGB' status it is generally intended for commercial use. The land never belongs to the purchaser but the infrastructure erected and installed on the property does. 'HGB' titled land and property can legally be owned by an Indonesian citizen or alternatively by a legal entity established under Indonesian law and domiciled in Indonesia such as a 'PT PMA' company. Through this, the investor will be able to take full ownership and control of the structure erected on his land holdings and with the appropriate licencing, generate revenue and profit from it. Under the legal title of ‘HGB’, the investor will be able to renew and hold ownership of this title for a maximum period of up to 80 years. It will allow the investor the freedom to operate the property in the interest of capital gain for the full duration of its legal term and afford them the flexibility to sell any interest in the property offshore, should they wish to do so.
Under Indonesian Agrarian Law, Law No. 40 of 1996, the validity period of an 'HGB' is no more than 30 years. However, it can be extended for 20 years and then renewable for another 30 years according to the agreement with the holder of the land. Applications for extension of the 'HGB' license are to be submitted no later than two years before the expiration of each applicable license validly term. 'HGB' tiled land, in most cases, are 'Hak Milik' titles which have been converted to 'HGB' status for the intent to sell commercially as non-Indonesian citizens can never own land under the 'Hak Milik' status, limiting its real estate scope and value.
Hak Sewa - "Leasehold"
The ‘Hak Sewa’ title, translated as a ‘Lease Hold’ agreement is the right that gives authority to use land owned by other parties with the obligation to pay rent in accordance with a legal rental agreement between the leaser and the lessee. In customary law, this rental right is referred to as ‘Annual Sale’ and may legally be entered into by foreigners, Indonesian citizens as well as any legal entity such as a ‘PT PMA’, ‘PT’ company or any other entity recognized by Indonesian legislation. This is considered to be a legal and binding agreement between 2 parties and does not involve the transferal of any physical land titles.
Hak Sewa leasehold agreements are generally entered into for a period of either 25 years or 30 years. The exception to this would be in the case of taking over the balance of an existing lease agreement. Such a lease agreement can be extended and if agreed upon with the land owner and stated in the notary agreement.
The cost of extending this agreement is usually evaluated at the time of extension by assigning 3 assessors to evaluate the cost of the property. One assessor appointed by the land owner, one appointed by the lessee and a third independent assessor appointed by the notary. The agreed price is calculated as average from the 3 assessments.
In the case of a lease agreement where the lease was for a plot of land without any structure erected on the property forming part of said agreement, the structure erected on this property, whether permanent or temporary, remains the property of the lessee who retains the right to remove, demolish or reclaim any elements thereof if the lease is not extended.
Hak Pakai - "Right to Use"
The ‘Hak Pakai’ title, which translates as ‘Conditional Ownership’, generally referred to as ‘right to use’ certificate, provides the holder of this title with the right to develop the land. This title is generally not to be used for commercial means and if the development constructed on this property is to be leased out, it must coincide with the relevant zoning regulations and annual taxes must be paid in full to avoid any legal ramifications. The ‘Hak Pakai’ title can legally be sold directly to any Indonesian citizen but can also be acquired through a legal entity established under Indonesian law and domiciled in Indonesia as well as any foreign national holding of a valid KITAS or KITAP. This title does have a usage time limit, in accordance with Indonesian Agrarian Law, Law No. 103 of 2015, which states that the ‘Hak Pakai’ has a validity period of not more than 30 years. However, it can be extended for 20 years and then renewable for another 30 years according to the agreement with the holder of the land. Therefore, the total renewable period for this title is 80 years as in the case of the ‘Hak Guna Bangunan’. The full period, cost and conditions of this contract can be be negotiated and agreed upon upfront. This more often than not, requires full upfront payment of the full lease term agreed upon with the land owner.
Hak Guna Usaha - "Right to Cultivate" (HGU)
'Hak Guna Usaha', abbreviated as 'HGU', is the title given to state owned land leased for a set period of time with the commercial intention of cultivating the land. This title is sold as either agricultural, fishery or livestock companies. In accordance with Indonesian Agrarian Law No. 5 of 1960, this land may be no less than 5 hectares. Ownership of 'HGU' titles are transferable to another party and can be used as collateral for debt. This title can legally be obtained by any Indonesian citizen or legal entity established under Indonesian law and domiciled in Indonesia. In accordance with Government Regulation (PP) No. 40 of 1996, 'HGU' holders must operate the land in accordance with its use Rights. If a person or legal entity that holds an 'HGU' title does not comply with the requirements of their agreement, they will be obliged to release or transfer the 'HGU' title to another party. If the 'HGU' title is not released or transferred within 1 year, the right will be eliminated. These obligations are generally as listed below but not limited to:
Paying relevant taxes and revenues to the state
Carrying out agricultural, plantation, fishery and / or livestock businesses according to the designation and requirements as stipulated in the decision to grant their rights
Cultivate the 'HGU' land by himself properly according to business feasibility based on the criteria set by the technical agency
Build and maintain environmental infrastructure and land facilities in the 'HGU' area
Maintain soil fertility, prevent damage to natural resources and maintain capacity
The ecological environment is kept in accordance with the prevailing laws and regulations
Submit a written report at the end of each year regarding the use of 'HGU'
Submitting the land granted with the 'HGU' title to the state after the 'HGU' term expires
Submit the expired 'HGU' certificate to the Head of the Land Office.