Back in 2016, Seven Stones Indonesia was one of the few property and real estate businesses in Bali that called foul on the long-term trend that foreigners could legally own freehold property in Indonesia.
We think most people now know that you can’t. But it seems there is a new game in town, and like its predecessor, it is a ticking time bomb. Nobody seems to want to address the elephant in the room, but we think the legal, tax, and security issues around Hak Sewa (leasehold) compared to Hak Guna Bangunan (HGB) and Hak Pakai (HP) on top of Freehold are worth talking about, especially in the context of foreign real estate investments in Bali.
Hak Sewa (Leasehold): A Less Secure Option
Definition and Duration
Hak Sewa, or leasehold, allows a foreigner to lease property in Indonesia for a specific period, typically up to 25 years, with options to extend. Unlike ownership rights, Hak Sewa does not confer any property ownership. A foreigner can hold Hak Sewa providing they have residential status, which, by BPN and other authorities, is defined as a KITAS or KITAP, although some notary publics tend to allow any kind of visa and even a Visa On Arrival (VOA), but, in the strict interpretation of the law, this is not exactly legal.
Legal Risks
One of the significant risks associated with Hak Sewa is its lack of security. Since the lease is time-bound, once the lease period expires, the foreign lessee has no legal claim to the property. Furthermore, the renewal of Hak Sewa is not guaranteed and is subject to negotiation with the landowner, which can lead to disputes. There have been cases where lease agreements were not honoured, leaving lessees without recourse.
Additionally, leasehold agreements may not be as enforceable in Indonesian courts as other ownership structures. In some cases, landowners may decide to sell the property to a third party before the lease expires, which can lead to complex legal disputes. Other areas that could cause issues include disputes due to improper documentation or the sale of the freehold land without the registered holder’s consent; using the property for a different purpose than what was agreed in the rental agreement; subleasing without the owner’s permission; violating zoning laws; not reporting or paying tax on rental income, and; not having the correct immigration documents. Hukum Online stresses that it is important to keep in mind that although foreigners can rent property long-term, they cannot have title to land in Indonesia. Property ownership for foreigners is limited to Hak Pakai or Rental Rights for Buildings.
Tax Implications
The tax implications of Hak Sewa are relatively straightforward. Foreigners leasing property under Hak Sewa are generally subjected to a rental income tax, which is typically borne by the landowner but may be passed on to the lessee depending on the agreement. The tax rate can vary, but it generally ranges from 10 percent to 20 percent of the rental value, depending on the property’s location and the specific terms of the lease agreement.
Let’s see how this stacks up against Hak Guna Bangunan (HGB) and Hak Pakai.
Hak Guna Bangunan (HGB) and Hak Pakai (HP) on Top of Freehold: A More Secure Structure
Definition and Duration
Hak Guna Bangunan (HGB) is a right granted by the Indonesian government that allows the holder to build and maintain a building on land owned by someone else (Hak Milik or freehold land). HGB is typically granted for a period of 30 years, with the possibility of an extension for another 20 years and a further renewal for an additional 30 years, totalling up to 80 years.
Hak Pakai (HP) is another right similar to HGB, but it generally applies to residential properties. HP is often granted for a maximum period of 25 years, with extensions of up to 20 years, and can be renewed as well.
Legal Risks
HGB and HP on top of freehold land provide a more secure form of tenure for foreigners compared to Hak Sewa. However, there are still legal risks to consider. Since HGB and HP have rights over freehold land owned by Indonesian citizens, any transfer of these rights must comply with Indonesian land laws.
Another risk involves the non-renewal of HGB or HP at the end of the term. While extensions are possible, they are not automatic and require compliance with government regulations. Any changes in land laws or regulations could potentially affect the renewal process.
Tax Implications
The tax implications for HGB or HP holders are more complex than those for Hak Sewa. First, there is a land and building tax (PBB), which is levied annually based on the value of the property. The PBB rate ranges from 0.1% to 0.3% of the property’s taxable value.
Additionally, if the HGB/HP is sold or transferred, the seller is subject to a final income tax on the sale, which is typically 2.5% of the transaction value. The buyer may also be liable for a 5% acquisition tax (BPHTB) on the property’s taxable value. However, these rates can vary depending on the location and the property’s specific circumstances.
Government Initiatives and Recent Developments
Legal Reforms and Simplification Efforts
The Indonesian government has been actively working on simplifying the regulations surrounding property ownership, particularly for foreigners. Recent legal reforms have aimed to streamline the process of obtaining HGB and HP rights and to make these ownership structures more accessible to foreign investors.
One of the key initiatives is the Omnibus Law on Job Creation, which was passed in 2020. This law introduced several changes to Indonesia’s land laws, including provisions that make it easier for foreigners to obtain and extend HGB and HP rights. The law also seeks to reduce bureaucratic hurdles and improve the overall business environment in Indonesia, which has been a significant step forward in attracting foreign investment.
Legal Advice and Best Practices
Consult with Legal Experts
Given the complexities of Indonesian property law, it is strongly recommended that foreigners consult with legal experts before entering into any property agreement. Organisations like Seven Stones Indonesia and Hukum Online provide valuable resources and legal advice tailored to foreign investors. They emphasise the importance of thorough due diligence, particularly when dealing with HGB/HP on freehold land.
Avoid Common Pitfalls
Some common pitfalls to avoid include signing lease agreements without proper legal review, failing to verify the land title, and overlooking the importance of extensions for HGB or HP rights. Additionally, foreigners should be cautious of offers that seem too good to be true — as they probably are — and may involve properties with legal disputes or unclear ownership.
Foreigners must also be tax residents of Indonesia which means having a KITAS or KITAP. Hukum Online says that foreigners who stay in Indonesia for 183 days or more within 12 months are considered domestic tax subjects and taxpayers in Indonesia, adding that “it seems non-residents on various long-term visas other than a KITAS or KITAP do not automatically become tax subjects, while any position in a PMA as a commissioner or director does make you a tax subject.”
Weighing Up Options
The choice between Hak Sewa and HGB or HP on top of freehold land involves weighing the security of ownership against the associated legal risks and tax implications. While Hak Sewa offers a simpler and less expensive option, it comes with significant risks related to the lease’s expiration and the potential for disputes.
On the other hand, even though HGB and HP require more significant investment and involve more complex tax considerations, they are much more tax efficient and provide a more secure tenure, especially when properly managed and documented. Hukum Online suggests they can also be used as collateral. Banks can grant mortgage rights to a PT PMA that owns the property as long as they comply with all applicable regulations regarding foreign investment and property ownership in Indonesia.
The choice is yours at the end of the day, but, whichever option you decide to go with, you still need to carefully assess risks and rewards and seek professional legal advice to navigate the intricacies of Indonesia’s property ownership laws. With the right approach, it is possible to secure a sound investment in one of Southeast Asia’s most dynamic and rapidly growing real estate markets.
For more detailed legal advice and the latest updates on property laws, Seven Stones Indonesia is your partner in growth, and visiting resources such as Hukum Online can provide essential insights and guidance tailored to individual circumstances. Get in touch today via hello@sevenstonesindonesia.com.