Client Update 18 November 2015

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Real Estate Investment Vehicles Recognized and Facilitated for First Time in Indonesia

The Minister of Finance has issued a new regulation (MOF Regulation No. 200/PMK.03/2015 - the “New Regulation”) that formally recognizes, defines and affords favorable tax treatment for the first time to collective investment contracts (Kontrak Investasi Kolektif / “KIK”) focused on real estate (the Indonesian equivalent of the real estate investment trust/REIT).

The key points of the New Regulation, which entered into effect on 10 November 2015, are as follows:

  1. A “Real Estate Investment Fund” (Dana Investasi Real Estat / “DIRE”) is defined as a “vehicle to collect funds from investors for subsequent investment in real estate and real estate-related assets, and/or cash or cash equivalents.
  2. A “Special Purpose Company” (“SPC”) is defined (for the purposes of the New Regulation) as a limited liability company whose share capital is at least 99.9 percent owned by a DIRE that is established in the form of a KIK (“KIK DIRE”), where such SPC is incorporated solely for the purpose of administering the said KIK DIRE.
  3. An SPC established to administer a KIK DIRE shall be treated as an integral and inseparable component of the KIK DIRE. As a result, dividends received by a KIK DIRE from an SPC shall not be included in the calculation of the KIK DIRE’s taxable income and dividends paid by an SPC to a KIK DIRE shall not be subject to Article 23 Income Tax.
  4. The transfer of a real estate asset to an SPC or KIK DIRE shall not be construed as a conveyance of title to lands and buildings under Article 1(2) of Government Regulation No. 48 of 1994 and its amendments, and so shall not be subject to Income Tax under Article 4(2) of the Income Tax Law (under which transfers of property, land and/or buildings are normally subject to final tax at 5 percent of the transfer value). However, capital gains on a transfer of real estate to an SPC or KIK DIRE are still considered as taxable income for the transferor of the real estate and are thus subject to income tax charged at the normal rate.
  5. An SPC or KIK DIRE is classified as a low-risk taxable enterprise (Pengusaha Kena Pajak / ”PKP”). Therefore, an SPC or KIK DIRE is entitled to preliminary refunds on overpayments of Value Added Tax.   

Paragraph 4 above means that if a loss is suffered by the transferor, no tax liability will arise. However, all in the garden is not rosy, particularly for investors or developers that purchased real estate assets before the property boom of the last few years significantly inflated their value. As the corporate income tax rate is 25 percent, the capital gain accruing to such investors must not exceed 20 percent if they are to benefit from the exemption from Article 4(2) of the Income Tax Law. If the capital gain exceeds 20 percent, then they will actually end up worse off if they transfer property assets to an SPC or KIK DIRE. As most of the longer established real estate players have seen capital gains of 30-40 percent on their property holdings over the last few years, they are likely to be unwilling to transfer such assets to a DIRE.” 

Please contact us if you would like further information:

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AHP Client Alert is a publication of Assegaf Hamzah & Partners. It brings an overview of selected Indonesian laws and regulations to the attention of clients but is not intended to be viewed or relied upon as legal advice. Clients should seek advice of qualified Indonesian legal practitioners with respect to the precise effect of the laws and regulations referred to in AHP Client Alert. Whilst care has been taken in the preparation of  AHP  Client Alert, no warranty is given as to the accuracy of the information it contains and no liability is accepted for any statement, opinion, error or omission.

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