Indonesian Regulatory Framework for Real Estate Investment Funds

Legal Updates
Indonesian Regulatory Framework for Real Estate Investment Funds
29 February 2016

In late 2015, the Indonesian Minister of Finance issued Regulation No. 200/PMK.03/2015 regarding Tax Treatment of Taxpayers and Taxable Entrepreneurs Using Specified Collective Investment Contract Schemes for the Enhancement of the Finance Sector (MOF Reg. 200). The stated aim of this regulation is to encourage the growth of real estate investment funding in the form of Collective Investment Contracts (Dana Investasi Real Estate dalam bentuk Kontrak Investasi Kolektif or DIRE - KIK).

A DIRE - KIK is the Indonesian equivalent of a Real Estate Investment Trust (REIT) frequently found in common law jurisdictions. A DIRE - KIK is a collective investment contract for a Real Estate Investment Fund, signed between an investment manager and a custodian bank. It also binds holders of participation units, who are the investors in the DIRE - KIK.

DIRE - KIK are not a new concept in Indonesia and have been regulated since 2007 by the Capital Markets Supervisory Agency and its successor institution, the present-day Financial Services Authority (Otoritas Jasa Keuangan or OJK). However, DIRE - KIK are not yet a common business practice in Indonesia notwithstanding the remarkable potential of the Indonesian real estate sector. MOF Reg. 200 is an effort to change this.

DIRE - KIK Taxation Highlights

The government's stated aim in issuing MOF Reg. 200 is to provide more beneficial tax treatment for DIRE - KIK. MOF Reg. 200 provides that:


  • A Special Purpose Company (SPC) established by a DIRE - KIK for the purpose of holding real estate assets is now deemed an integral part of the DIRE - KIK itself (i.e., the investment contract pursuant to which the DIRE - KIK is created). Consequently, the dividend received by a DIRE - KIK from an SPC is no longer included in the calculation of the DIRE - KIK's taxable income for purposes of Article 25 of the Indonesian Income Tax Law and is no longer subject to withholding in respect of dividends under Article 23 of the Indonesian Income Tax Law, but is instead made tax free.
  • The transfer of real estate to an SPC or DIRE - KIK is no longer subject to 5% final income tax withholding pursuant to Article 4(2) of the Indonesian Income Tax Law and Government Regulation No. 48 of 1994 regarding Income Tax Payment on Income from the Transfer of Rights to Land and/or Buildings, as lastly amended by Government Regulation No. 71 of 2008.
  • An SPC or DIRE - KIK is now considered a low-risk Taxable Entrepreneur, which refers to a taxpayer liable for VAT under Indonesian tax laws, upon stipulation from the Directorate General of Tax, and is therefore entitled to accelerated refund of VAT overpayments.

In replacement of the 5% 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% on most transfers of land that 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.


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 favorable 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 businesspeople 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 scrutinizing 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.

This publication is intended for informational purposes only and does not constitute legal advice. Any reliance on the material contained herein is at the user's own risk. You should contact a lawyer in your jurisdiction if you require legal advice. All SSEK publications are copyrighted and may not be reproduced without the express written consent of SSEK.
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Michael S. Carl
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