FOREWORD

This booklet provides an overview of the legal framework regarding real property in Indonesia. It is presented in a systematic way in order to familiarize Canadian investors with the various types of land titles, foreign ownership rules, and acquisition procedures and costs in Indonesia.

The Canada Indonesia Business Development Office (CIBDO) is a project of the Alliance of Manufacturers and Exporters Canada and is funded by the Canadian International Development Agency, Industrial Cooperation Program. CIBDO is ready to assist prospective Canadian investors by providing them with specific information and guidance to help them develop their business ventures in Indonesia. Please see the contact information at the end of the booklet.

Executive Director

Canada Indonesia Business Development Office

Deborah Tumbull

I. General

There are two main types of land tenure: certificated land and uncertificated land. Certificated land has been mapped and recorded with the local office of the National Land Agency. whereas uncertificated land is held under unwritten customary land law (hukum tanah adat) applicable in the particular location.

As a matter of policy, customary land titles are being phased out especially in urban areas, but are still the predominant basis of land rights in rural areas throughout Indonesia. By contrast, all modern commercial and residential properties in Jakarta are built on certificated land.

The Basic Agrarian Law (Law No.5 of 1960) created a uniform, though somewhat complex, system of land rights throughout Indonesia. Land titles under the Basic Agrarian Law may be roughly classified into primary titles, i.e., those normally derived directly from the State, and secondary titles, i.e., those granted by the holder of a primary title. Following is a brief description of each of the most important primary titles, followed by a few comments on the most important of secondary titles, i.e., leaseholds.

Primary land titles are those normally obtained directly from the State, although the holder of a Hak Milik can grant certain inferior titles such as HGB and Hak Pakai, both of which are considered primary titles. All primary land titles are certificated and registered with the National Land Agency.

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Hak Milik (Right of Ownership): Hak Milik corresponds roughly to fee simple or freehold title, and is the most complete form of land ownership in Indonesia. Subject to zoning restrictions, the holder can use the land for any purpose, although it does not entitle the owner to exploit the natural resources found on or under the land. (These rights are regulated by the Basic Mining Law (Law No.11 of 1967).

This title may only be held by individuals of Indonesian nationality and special legal bodies stipulated by the government, e.g., government banks, cooperatives and religious and social bodies. Neither limited liability companies nor foreign individuals may hold such title.

The title has no time limit and may be sold, gifted, exchanged and bequeathed. Hak Milik may be made the subject of a security interest in the form of an Indonesian mortgage (Hak Tanggungan). The holder of a Hak Milik may also grant inferior titles over the land to third parties, while retaining the reversionary rights.

Hak Guna Bangunan (Right to Build): The holder of Hak Guna Bangunan ("HGB") is entitled to construct and own buildings or other structures on the land. This is the most common title for residential, commercial and industrial properties. This title can be owned by individuals of Indonesian nationality, and Indonesian legal entities including foreign capital investment (PMA) and domestic capital investment (PMDN) companies (as described more fully in Section II below.)

In principle, the right is granted for an initial period of up to 30 years, although it may be extended for another 20 years. Based on Government Regulation No.40 of 1996 regarding HGU, HGB and Hak Pakai ("GR 40/96"), an approved capital investment company (i.e., a PMA or PMDN company) may obtain HGB rights for a period of 80 years (i.e., 30-year initial term, plus 20-year extension term, plus 30-year renewal term) by payment of certain up-front official costs ( Uang Pemasukan).

Like Hak Milik, HGB can be sold, gifted, exchanged, by an Indonesian bequeathed, and/or encumbered mortgage.

Hak Guna Usaha (Right of Exploitation): Hak Guna Usaha ("HGU") is a right granted over State land to exploit the soil, and is the principal title used for agricultural projects, including plantations, fisheries and cattle ranches. The owner is also entitled to construct buildings and structures on the land related to such agricultural uses.

HGU may be held by Indonesian citizens and by legal entities established under Indonesian law, including PMA and PMDN companies.

In general, HGU is granted for an initial period of up to 35 years, and may be extended for a further 25 years. The provisions of GR 40/96 also apply to HGU titles, thereby allowing PMA and PMDN companies longer term certainty with respect to their land rights. HGU titles cannot be granted on areas of less than five hectares, and special rules apply for areas over 25 hectares.

This right can also be sold, gifted, exchanged, bequeathed, and/or encumbered.

Hak Pakai (Right of Use): Hak Pakai entitles the holder to use the subject land for the specific purposes described in the deed of conveyance. Foreign individuals and foreign representative offices, as well as Indonesian citizens and legal entities, are entitled to hold Hak Pakai titles. Traditionally, this title has been granted to various foreign governments, and religious and social institutions (e.g., embassies, consulates and churches) for an indefinite period as long as the premises continue to be used for the agreed purpose.

Under GR 40/96, Hak Pakai for most commercial uses can be granted for up to 25 years and extended for another 20 years, and like HGB and HGU a longer term of fixed rights may be obtained by an up-front payment of the Uang Pemasukan. Slightly different procedures apply to Hak Pakai titles granted by the owner of a Hak Mi/ik title. Hak Pakai titles may be sold, gifted, exchanged and/or bequeathed, unless the deed of conveyance specifies otherwise. With the enactment of the new Mortgage Law (Law No.4 of 1996), Hak Pakai titles derived from State land or HPL titles (but not those derived from Hak Mi/ik titles) may be encumbered for security purposes.

The most prevalent commercial use of Hak Pakai titles is in connection with modern condominium and other strata title projects aimed at attracting direct purchases by foreign individuals and companies. Such arrangements, however, are still relatively uncommon and present certain issues and concerns as discussed in Section II.C below.

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Hak Pengelolaan {Right of Management): Hak Pengelolaan ("HPL ") is normally granted to State-owned companies as well as Provincial (Level I) and Regional (Level II) Governments for purposes of developing State land. It is commonly used for industrial estates, low-cost housing projects and port facilities. The duration of the right is usually tied to the length of time the holder uses the land for the intended purpose. This title may be sold and transferred but may not be encumbered by a mortgage.

Secondary land titles, i.e., those contractually granted by the holder of a primary title, include Hak Sewa (Right of Lease), Hak Usaha Bagi Hasil (Right of Share Cropping), and Hak Menumpang (Right of Lodging). Of these, the only significant one for most foreign investors is Hak Sewa which is briefly described below.

Hak Sewa (Right of Lease): Hak Sewa grants the holder the right to build or to use buildings on someone else's land for a fixed period of time. The period of lease must be specified, but there is no limit on the duration of the lease.

In accordance with general principles of lease law, the right cannot normally be sold or otherwise transferred without the consent of the lessor. Hak Sewa cannot be encumbered by an Indonesian mortgage nor can it be registered with the National Land Agency (although in practice some local land offices will allow a notation of the lease to be made in the official land records and/or on the title certificate itself).

Hak Sewa may be acquired by Indonesian individuals, Indonesian legal entities, and foreign individuals and legal entities resident in Indonesia.

Leases of office space, factory buildings and residential premises are all examples of Hak Sewa titles.

Residential properties in Jakarta include apartments, condominiums, town houses and stand-alone houses. Rental arrangements vary, but one or two years rental in advance is common, especially for privately leased houses. VAT and withholding tax provisions apply and should be addressed early in rental negotiations.

Strata title is a relatively new concept in Indonesia, but can be acquired in numerous office and residential properties in Jakarta. The qualifications for ownership of a strata title depend on the underlying land title, e.g., if the underlying title is HGB, only persons qualified to hold HGB title may purchase a floor or unit within the strata title building.

The rules relating to foreign ownership of real property in Indonesia have again recently been relaxed, but are still far from unrestricted Notwithstanding that acquisition procedures have been simplified and clarified, and the duration of land titles has been extended under GR 40/96, land rights continue to be among the mo~ sensitive topics facing foreign investors.

Most direct foreign investment in Indonesia other than in the oil ( gas and financial sectors is carried out by foreign capital investment (Penanaman Modal Asing or "PMA") companies approved througl the Board of Investment and State-Owned Enterprises ("BPM PBUMN'!), (which has recently replaced the Capital Investment Coordinating Board generally referred to as "BKPM"). Domestic capital investment (Penanaman Modal Oalam Negeri or "PMDN" companies require similar approvals and obtain similar duty exemption and other facilities.

The rules applicable to PMA companies, Foreign Representative Offices and foreign individuals are discussed below.

A. PMA Companies

PMA companies are entitled to hold HGB, HGU and Hak Paka, titles, thereby permitting them to purchase land and buildings for nearly any type of commercial or residential use. PMA companies can enter into short- or long-term leases of land and/or buildings and can acquire strata title in many commercial and residential properties, particularly in Jakarta.

B. Foreign Representative Offices

"Foreign Representative Office" refers to any of the various types of representative offices permitted under Indonesian law, including Trade Representative Offices (approved by the Minister of Industry and Trade), Regional Representative

Offices ( approved by the Board of Investment and State-Owned Enterprises), Bank Representative Offices (approved by the Minister of Finance), Construction Representative Offices (approved by the Minister of Public Works) and other similar offices.

Foreign Representative Offices can hold Hak Pakai titles and also enter into short- or long-term leases for both commercial and residential property. They are not permitted to hold HGB or HGU titles.

C. Foreign Individuals

Foreign individuals are still severely restricted in their access to the Indonesian property market. Recent regulatory changes, however, allow foreign individuals to purchase Hak Pakai titles over State-owned land or enter into long-term leases for residential (but not commercial) purposes. As explained in the inset box below, the "domiciled" requirement has been relaxed virtually to the point of non-existence. Moreover, the leasing out of the premises during the owner's absence is expressly authorized. A foreign individual is permitted to purchase only one residence unless the area is otherwise regulated by the local regional authority.

Unfortunately I the relevant regulations and decrees are somewhat inconsistent and confusing and may, as a matter of law, be in conflict with the Basic Agrarian Law, particularly in respect of the definition of "domiciled in Indonesia". Any discussion of this topic is, therefore, necessarily somewhat tentative.

Every transfer of a primary land title in Indonesia must be prepared bya land Deed Official (Pejabat Pembuat Akta Tanah or "PPAT"), who is normally a local notary.

The procedures for large land acquisitions have recently been improved, as reflected in State Minister of Agrarian Affairs/Chairman of National Land Agency Regulation No.2 of 1999 regarding Location Permits (February 10, 1999). Different procedures apply depending on whether the land is State-owned or privately owned.

Government Regulation No.41 of 1996 regarding Ownership of Residences by Foreign Persons Domiciled in Indonesia (cGR 41/96") grants to foreigners who are "domiciled" in Indonesia and whose presence "benefits national developmenr the right to own a residential property built on a Hak Pakai title over State land. Such residence may be a single family dwelling or a strata title condominium unit, as long as the underlying land title is Hak Pakai over State land. GR 41/96 also reaffirms existing law and practice under which foreigners are permitted to enter into lease agreements with holders of Hak Milik and HGB titles.

A fundamental question arising under GR 41/96 is the meaning of the terms "domiciled" and "benefits national development. After a period of some uncertainty, this question appears to have been answered in a somewhat circular fashion. Under a 1996 implementing regulation and a separate letter, both issued by the State Minister of Agrarian Affairs/Chairman of National Land Agency, a foreigner who is in Indonesia "from time to time" and who "maintains an economic interest in Indonesia by making an investment in the ownership of a house" is deemed to be both a person domiciled in Indonesia (at least for purposes of this regulation) and a person whose presence benefits national development. [Although not specifically addressed in any of the applicable regulations, query whether such a "domiciled" foreigner would be deemed a resident tax subject under the Indonesian Income Tax Law, particularly if the property were rented out during the owner's absence.]

This appears to be a clear policy statement that Indonesian residential and holiday homes are now available to foreigners willing to make a modest personal investment and periodically use the property .Given the sensitivity and complexity of such purchases, however, competent professional advice should be obtained regarding the details of any particular transaction prior to making a financial commitment.

For most developments, a Location Permit (/zin Lokas/) .should first be obtained by the investor from the Regional (Level II) Government. The Location Permit is essentially a preliminary approval for the acquisition of land for a particular investment project. It authorizes the investor to enter into discussions and negotiations with the land owners, but these are open negotiations -the land owners are under no obligation to sell their land. Obtaining a Location Permit normally requires public participation in the discussion.

Various minimum and maximum size restrictions are imposed depending on a multitude of factors. Location Permits are valid for one to three years, depending upon the size of the area governed by the Location Permit. A Location Permit is not required for several types of acquisitions including, among others, in-kind contributions to a company, land located in industrial zones, and adjoining land required for business expansion.

Following is a brief summary of the transaction costs involved in typical transfers of land title in Indonesia.

• Acquisition Fee: The purchaser is charged an acquisition fee of 5% of the transaction value in excess of Rp. 30 million. If the transaction value is less than the officially assessed value of the property, tax will be calculated on the assessed value.

• Capital Gains Tax: Real estate companies and individual sellers are charged 5% of the transaction value (or the assessed value, if greater) as a final withholding tax. Other classes of sellers.(e.g., other types of companies) must also pay a 5% withholding tax, but a credit equal to the value of this withholding tax may be claimed on the seller's annual tax return.

• PPAT and Legal Fees: All transfers of primary titles must be handled by a PPAT (notary) who usually charges a fixed percentage of the transaction value, although reduced fees can frequently be negotiated. Legal fees typically depend on the complexity of the acquisition and the scope of services requested by the investor.

• Value Added Tax: VAT is generally not imposed on land and building transfers. VAT at 10% is applicable to residential and commercial leases (4% on service charges}, and VAT at 8% is applicable on a one-time basis to development projects.

• Sales Tax on Luxury Goods: Upmarket residences, i.e., luxury houses, town houses and condominiums, buyers are charged a 10% Sales T ax on Luxury Goods.

• Withholding Tax (Rentals): Rental Income is subject to a final withholding tax on gross receipts applied at 6% for companies and 10% for individuals.

• Stamp Duty: Stamp Duty is negligible, a maximum of Rp. 2000 on any document executed or to be used in Indonesia.

IV. Land and Building Tax

The general rate of the annual Land and Building Tax is 0.1% of the assessed value of the land and building. Values are reassessed every three years (or every year in rapidly developing areas). Luxurious residential properties valued in excess of Rp. 1 billion are taxed at to a rate of 0.2%.

Exemptions are granted for buildings valued at under Rp. 8 million, and land and buildings used for religious, social, educational and other public uses.