Indonesian regulatory framework for real estate investment funds

In replacement of the five percent final income tax withholding for purposes of Article 23 of the Indonesian Income Tax Law, MOF Reg. 200 provides that capital gains received by the transferor in the transfer of real estate to an SPC or DIRE – KIK are to be taxed at marginal rates as the taxable income of the transferor. This change will generally result in adverse tax results and seriously detracts from the tax benefits enacted under MOF Reg. 200. Based on various sources, we understand that there will likely be a change of regulation with respect to the tax treatment of DIRE – KIK, although there is divergent information as to the expected nature and benefit of the change.

VAT is payable at the rate of 10 percent on most transfers of land which has been developed for commercial purposes under Law No. 8 of 1983 regarding VAT as lastly amended by Law No. 18 of 2000. Available exemptions are not likely to apply in most real estate transactions to which a DIRE – KIK would be party. The share of profits received by participation unit holders in a DIRE – KIK as a dividend is not subject to income tax, as clearly stipulated in Article 4(3)(i) of the Indonesian Income Tax Law.

Conclusion
With the current growth and remarkable potential of real estate investment in Indonesia, the government has identified the DIRE – KIK as an important potential source of development financing for the sector. We view the more favourable tax treatment of a DIRE – KIK under MOF Reg. 200 to be an important incentive to set up a DIRE – KIK in Indonesia. While the regulation is relatively new, there are already encouraging signs of Indonesian real estate business people expressing their interests in setting up DIRE – KIK in Indonesia.

Based on our informal consultations with OJK, we understand that OJK and the Ministry of Finance are also scrutinising the tax treatment of DIRE – KIK under MOF Reg. 200 with the potential to provide even more beneficial tax treatment for DIRE – KIK. An important change under consideration is a possible reduction in the rate of capital gains tax treatment. Various sources also indicate the government may revise the regulation on income tax on the acquisition of assets, retaining the final income tax but at a significantly reduced rate.

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