In Indonesia, property transactions involve specific taxes, especially when the ownership status shifts from freehold (Sertifikat Hak Milik/SHM) to leasehold. This situation commonly arises when a foreigner purchases property, as Indonesian law strictly prohibits foreign individuals from owning land under freehold status.
Instead, the property is converted to a leasehold for a specified period, typically up to 30 years. This conversion involves several tax implications for both the buyer and seller, which must be properly addressed to avoid legal issues.
Taxes Involved and Who Pays Them
In a property transaction where ownership changes from freehold to leasehold, both the buyer and the seller have distinct tax responsibilities. For the seller, Final Income Tax is imposed at 2.5% of the property’s selling price. This tax is the seller’s obligation and is generally deducted from the sale proceeds.
On the buyer’s side, they are responsible for paying Land and Building Acquisition Fee, which amounts to 5% of the property’s transaction value or the taxable object acquisition value, after subtracting the applicable non-taxable amount. In some cases, Value-Added Tax (VAT) of 11% may apply if the seller is a taxable entrepreneur.
However, Land and Building Acquisition Fee is the main tax the buyer must settle upon acquiring the property rights, even though the ownership is leasehold rather than freehold. For detailed explanation about what property taxes are in Indonesia, you can read more here.
Case Study: Freehold to Leasehold Transaction
Let’s consider a case where a foreigner, Mr. John, who works in Indonesia, buys a property from Mr Andi, valued at IDR 5 billion. Initially, the property is under a freehold title (in Indonesia it’s called SHM or shorten for Sertifikat Hak Milik), but since foreigners are not allowed to own land under freehold status, the property’s ownership status is converted to leasehold for 30 years.
— Seller’s Tax (Paid by Mr Andi): Mr Andi, the original owner, will be subject to Final Income Tax of 2.5%. So, from the IDR 5 billion selling price, Mr Andi must pay IDR 125 million in PPh to the government.
— Buyer’s Tax (Paid by Mr. John): Mr. John, as a foreigner buying property in Indonesia, will need to pay Land and Building Rights Acquisition Fees/BPHTB at 5% of the transaction value. For a property worth IDR 5 billion, his Land and Building Rights Acquisition Fees obligation is IDR 250 million. In addition, if Mr Andi is registered as a PKP, Mr. John might also have to pay PPN of 11%, adding another IDR 550 million to the total cost.
Through this transaction, both parties are subject to their respective taxes. The ownership conversion from freehold to leasehold ensures the transaction remains within Indonesian legal frameworks while allowing foreigners like Mr. John to enjoy long-term property use.
Simplify Your Property Transactions in Indonesia
Navigating the complexities of property transactions in Indonesia, particularly when converting ownership from freehold to leasehold, requires expert knowledge. Seven Stones Indonesia offers comprehensive property transaction management services to ensure a smooth process from negotiation to closing deal.
With our deep understanding of local regulations and extensive experience in the local real estate market, we handle all the tax filings, ownership status changes, and legal paperwork, allowing you to focus on enjoying your property investment. Partner with us today for a seamless property transaction experience in Indonesia!