Structuring the investment
Foreign citizens and foreign companies are not allowed to conduct business activities directly in Indonesia. Indonesian investment law requires foreign investment to be conducted through direct capital participation in a PMA company. Therefore, the most common practice for investment in the real estate business in Indonesia is to set up a joint venture project company in the form of a PMA company.
General foreign investment in Indonesia is subject to certain limitations under the Negative Investment List (a list of the business areas that are closed to investment, including those reserved for small and medium-sized enterprises), which is updated periodically by the government. Based on the prevailing Negative Investment List, real estate business (i.e., purchasing, selling, renting and operating either owned or rented real estate, as well as land sales and operational activities in residential areas) is open to 100 per cent foreign participation. While previously the Indonesia Investment Coordinating Board was in charge of issuing licences for a PMA company, since June 2018 with the launch of the OSS system, licensing for a PMA company is integrated through an online system, overseen by the OSS Agency.
In general, the most common practice for investment in the real estate business in Indonesia is to set up a PMA company because foreign citizens and entities are not allowed to conduct business activities directly in Indonesia. The following paragraphs highlight the general rules on ownership of the most common land title rights in Indonesia, including the one that may be held by a PMA company.i Right of ownership (hak milik or freehold)
Only Indonesian citizens and certain limited Indonesian legal persons or entities may hold the right of ownership (hak milik). A PT, including a PMA company, is not allowed to hold a right of ownership.ii Right to build (HGB)
An HGB may be held by Indonesian individuals and Indonesian legal entities, including a PMA company.iii Right to cultivate (HGU)
An HGU may only be held by Indonesian individuals or Indonesian legal entities, including PMA companies.iv Right of management (hak pengelolaan)
Right of management (hak pengelolaan) can be granted only to the following agencies or bodies:
- government agencies including regional governments;
- state-owned companies;
- regional government-owned companies;
- limited liability state-owned companies;
- special-authority agencies; and
- other governmental legal entities appointed by the government.
Some state-owned companies manage industrial estate compounds with a hak pengelolaan. When such state-owned companies 'sell' hak pengelolaan land to PMA companies, the state-owned company as the seller and the PMA company as the buyer will enter into a cooperation agreement, by which the PMA company is granted the right to 'use or utilise land' and to apply for a HGB title over the hak pengelolaan land.v Right to use (hak pakai)
The right to use (hak pakai) may be granted over:
- state-owned land;
- hak milik; or
- hak pengelolaan.
The right to use (hak pakai) is available to Indonesian citizens and Indonesian legal entities, foreign citizens who reside in Indonesia and foreign legal entities with representation in Indonesia, representatives of foreign countries and representatives of international institutions, departments and non-departmental government institutions, regional government, and religious and social institutions.