On 29 March 2016, the Indonesian Coordinating Ministry of Economy officially announced the 11th Economic Policy Package (“11th Package”). The 11th Package outlines several policy changes, including lowering the tax rate on the sale of property under the real estate investment trusts (“REITs”) scheme.
REITs have been regulated in Indonesia since 2007 under the form of “Real Estate Investment Funding in the form of Collective Investment Contracts” (Dana Investasi Real Estat Berbentuk Kontrak Investasi Kolektif or “DIRE”). REITs established under the DIRE scheme are permitted to raise funds from investors for subsequent investment in real estate assets, real estate-related assets, and/or cash and cash equivalents.
Despite having been regulated for almost nine years, Indonesian REITs have been unpopular as a result of high tax rates applicable on the sale of property and the issue of double taxation. Under relevant central and local government regulations, taxes on the sale of property (including those under REITs) comprise:
- a 5 percent income tax on the land and building transfer (Pajak Pendapatan Untuk Pengalihan Hak Atas Tanah dan Bangunan or the “Seller Tax”), borne by the seller; and
- a 5 percent land and building acquisition duty (Bea Perolehan Hak atas Tanah dan Bangunan or the “Buyer Tax”), borne by the buyer.
In November 2015, the Indonesian Government introduced tax incentives under MOF Reg. 200. MOF Reg. 200 addressed the double taxation issue by exempting from income tax, dividends received by a REIT from a special purpose company owned by the REIT (“SPC”). The tax incentives also exempted the Seller Tax in the case of sponsors transferring property to an SPC. However, MOF Reg. 200 imposed a capital gains tax on sponsors which generally resulted in adverse tax consequences and detracted from the tax incentives provided under the regulation.
What is new
The 11th Package addresses the high tax rates applicable on the sale of property under REITs. Under the 11th Package, central government regulations will be issued to (i) reduce the Seller Tax to 0.5 percent from its current 5 percent; and (ii) reduce the Buyer Tax to as low as 1 percent from its current 5 percent. The Buyer Tax will require the cooperation of local governments and the issuance of local government regulations, as the local governments administer the Buyer Tax. The 11th Package is silent as to whether the new central government regulations, when issued, will replace MOF Reg. 200, and the capital gains tax which MOF Reg. 200 imposes.
The 11th Package demonstrates a clear and strong intention on the part of Indonesian policymakers and lawmakers to boost the competitiveness of the domestic REIT market and to encourage Indonesian REITs to be listed domestically. Although some uncertainties remain until central and local government regulations are issued, the 11th Package is a welcome change for investors and domestic real estate developers.