Indonesia: Land & Property Title Ownership In Indonesia: Common Misconceptions Of Foreign Investors

The tumultuous global outlook as evidenced by Russia-Ukraine war and natural gas crisis in Europe have led to pessimistic economic projections into the following years. However, the Indonesian market is still substantially attractive to foreign investors despite such outlook. According to Reuters, the year-on-year growth of Indonesia has consistently increased to 5.72%. With the freshly concluded G20 summit in Bali, the Indonesian government signalled an important message to other countries in terms of investment, as Indonesia is one of the fastest growing emerging markets with huge population, and relatively "open door" policy to foreign investors regardless their nationalities as well as political backgrounds (Note: Indonesia imposes no sanctions against Russia).

Bali has always been the "crown jewel" of tourist destinations in Indonesia. Since the pandemic, it has become the epicentre of digital nomads who work remotely from the island. This condition, in turn, provides a huge opportunity in the tourism and hospitality sectors, and attracts foreign investors of resorts, villas, or hotels in Bali.

However, the tourism and hospitality sectors have faced many challenges, prone to misconceptions and/or misunderstandings, particularly with regard to land titles. In general, land titles in Indonesia are divided into eight different rights (see section 2 below). These numerous different titles often become sources of misconceptions of foreign investors. They are usually confused on the concepts between "land lease" and "leasehold" (in common law) in terms of the rights of foreign investors over lands in Indonesia including Bali. Many lands in regions such as Bali are still held by their owners under "girik" land (i.e., hereditary or custom lands held by Bali's Indonesian citizens). With such potentials under the horizon, it is highly crucial to understand the inherent concept of land ownership, and how it is utilized in Indonesia.

This article provides our analysis on the key aspects of land ownership in Indonesia and apartment ownership by foreigners, including the general concept of land ownership, how it affects the common conception of land titles, especially of business actors of the common law countries who are more familiar with the concept of leasehold.

1. Legal Basis

This article is prepared based on the following laws and regulations:

1. Constitution of the Republic of Indonesia of 1945 ("1945 Constitution");
2. Law No. 5 of 1960 on Fundamental Regulation of Agrarian Principles ("Agrarian Law");
3. Law No. 11 of 2020 on Job Creation Law ("Job Creation Law");
4. Government Regulation No. 18 of 2021 on Right of Land Management, Land Rights, Condominium Units, and Land Registration ("GR 18/2021");
5. Government Regulation No. 38 of 1963 on Appointment of Legal Entities Having Land Ownership Rights ("GR 38/1963"); and
6. Ministry of Agrarian Affairs and Spatial Planning/ National Land Agency Regulation No. 18 of 2021 on Procedure for Determining Management Rights and Land Rights ("ATR/BPN 18/2021").

2. General Overview of the Concept of Land Ownership in Indonesia

In general, Article 33 paragraph (3) of 1945 Constitution stipulates that the lands, waters, and natural resources in Indonesia are controlled by the state, and utilized for the greatest prosperity of the people. With the emphasis on the state ownership of the lands, it is important to note that Indonesia's Agrarian Law recognizes the concept that these lands are granted by the Indonesian government to be utilized by their recipients, within the applicable provisions in the prevailing Indonesian laws and regulations.

Agrarian Law recognizes eight types of land ownership, namely:

1. Ownership Right (Hak Milik or "HM");
2. Building Use Right (Hak Guna Bangunan or "HGB");
3. Cultivation Right (Hak Guna Usaha or "HGU");
4. Utilization Right (Hak Pakai);
5. Lease Right (Hak Sewa);
6. Land Clearing Right (Hak Membuka Tanah);
7. Right to Collect Forest Products (Hak memungut hasil hutan); and
8. Other Rights as regulated by the prevailing laws and regulations.

Please note, the land titles are organized and registered by the land offices (Badan Pertanahan Nasional or BPN) of where the relevant lands are located.

For the purpose of this article, we only provide our analysis with particular focus on HM and HGB land titles, as well as ownership of apartment units by foreigners.

3. Differences between HM and HGB

HM is the strongest land ownership title under Agrarian Law. Under HM, the land is owned by exclusively Indonesian individuals (i.e., natural persons) whose right is considered "hereditary" and can be passed down from generation to generation. Any utilization of such HM would be considered as Utilization Right. Based on GR 18/2021 Article 52 paragraph (3), Utilization Rights can be given to a person for a period of 30 years, which is extendable for 20 and 30 years through the deed of utilization right on the HM land. Any foreigner who wants to buy land in Indonesia is permitted to own the land under a Utilization Right certificate.

It is also important to note that a legal entity, not privately owned, may also hold a HM. Under GR 38/1963, legal entities that are allowed to hold HM certificates are:

1. State owned Banks;
2. Association of Agriculture Cooperatives established under Law No. 79 of 1958;
3. Religious agencies appointed by the Minister of Agriculture, as recommended and approved by the Minister of Agrarian Affairs and Spatial Planning;
4. Social agencies appointed by the Minister of Agriculture or Agrarian Affairs and Spatial Planning, as recommended and approved by the Minister of Social Welfare.

(the "Specific Legal Entities")

On the other hand, HGB is considered as the right to establish and have building(s) on the relevant land. It is important to note that a HGB land is not owned by the building owner. Based on GR 18/2021, the land is approved by the HM holder as a HGB over HM land. The HGB can be granted for a period of 30 years, which is extendable for 20 years, and transferable. The parties holding HGBs are limited to Indonesian individuals and/or companies domiciled and established under the laws of Indonesia ("Indonesian Company").

The Indonesian companies include Foreign Investment (Penanaman Modal Asing or "PMA") Companies and Local Investment (Penanaman Modal Dalam Negeri or "PMDN") Companies. Please refer to the elaboration below for the differences:

1. A PMDN Company is wholly owned by Indonesian entities/persons.
2. A PMA Company has one or more foreign shareholders as a foreign person/entity. The definition of a PMA Company is still applicable even if one of the foreign shareholders owns just a fraction of the company's shares.

For your ease of reference, please see the table below:

4. Common Misconceptions between Leasehold and Lease Rights in Indonesia

As already mentioned, a foreign individual is not eligible to hold HM or HGB and such stipulation is well established under Agrarian Law. But in practice, foreign investors, especially those of common law countries who enter Lease Agreements with the relevant HM and/or HGB owners, often have the impression that they "own" the leasehold. It is a common understanding that a leasehold allows the lessee to retain the property rights based on the leasehold agreement upon the issuance of leasehold certificate. However, this is not the case in Indonesia. BPN land office does not issue leasehold certificates.

We envisage the differences between Leasehold and Lease Rights in the following table:

The above table confirms that in a '"lease", the rights over the property are not handed over to the Lessee. The ultimate ownership is still retained by the owner (i.e., holder of HM or HGB). In essence, the lessee will remain as a tenant of the landowner during the validity of the lease period.

Please also note that a "lease" cannot be a subject of sale-and-purchase under Indonesian law. If the lessee wants to transfer the land lease to another party, such lease should be assigned, not sold to the other party. It is crucial to note that no foreign individual is permitted to own land in Indonesia. Alternatively, any foreign investor can "purchase" land leases through their PMA company thereafter such PMA company will be the party in the sale-and-purchase agreement.

5. Apartment Unit

Since the enactment of Job Creation Law, Article 144 paragraph 1 of Omnibus Law allows foreigners to hold HM of apartment units (satuan rumah susun) in Indonesia, under certain conditions, meaning, such units are located in the special economic zones, free trade areas, free port zones, industrial estates, or other commercial zones.

Article 69 of GR 18/2021 further explains that the foreigner can be any foreigner who has the required immigration document based on the prevailing laws and regulations. If the foreigner passes away, he/she can pass down the ownership of the apartment unit to a local or foreign individual. This type of HM is also transferrable to another party through sale-and-purchase transactions.

6. Limitations to House and Apartment Unit Ownership

Pursuant to GR 18/2021, the housing or apartment ownership by a foreigner has a few limitations:

1. The apartment meets the minimum price;
2. The building is located in a specified area;
3. A foreigner can own a limited number of land plots and/or apartment units; and
4. The apartment is located in a designated residential or housing area.

(Article 72 of GR 18/2021)

The limitations above are regulated under ATR/BPN 18/2021. Based on Article 186 of ATR/BPN 18/2021, a foreign individual may hold Utilization Right over a maximum 2,000 m2 plot of HM land dedicated to that one person or a family, or own a house categorized as a luxurious house in a maximum 2,000m2 plot of land. A foreigner can only own one apartment unit categorized as a commercial apartment. These limitations are not applicable to foreign country representatives and/or international organizations.

Concluding Remarks

Land ownership is stipulated under the highest order of regulation in Indonesia, the 1945 Constitution. Although lands throughout Indonesia are inherently owned by the state, they are given to the Indonesian citizens to be utilized according to the laws and regulations, as evidenced by land ownerships under HM (the ownership right) and HGB (the utilization right).

Land titles (such as HGB over HM land) can be transferred to foreign investors, albeit they must utilize PMA companies incorporated in Indonesia for such purposes. Although many real estate developers have marketed land lease arrangements as "land purchases", such purchases are not the same as leaseholds under the common law. This is where the relevant foreign investors have often misunderstood the concept of Indonesian land leases.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.