Tax Implications on Acquisition Levy over Land and/or Building Rights on Conditional Sale and Purchase Agreement

Real estate transactions in Indonesia are governed not only by contractual arrangements but also by tax obligations arising from the acquisition of land and building rights. Recent regulatory changes under the HKPD Law have shifted the timing of BPHTB liability to the execution of conditional sale and purchase agreements (PPJB), raising important legal and practical considerations in property transactions.

Tax Liability on the Acquisition of Land and/or Building Rights

Land rights were initially established through Article 4 of Law Number 5 of 1960 on Basic Provisions on the Principals of Agrarian, which provides that the right over land is a right that may be granted to and owned by individuals, as well as legal entities. This right provides the landholder the authority to use the land, and everything situated upon it. Further, the Government Regulation Number 18 of 2021 on Management Rights, Land Rights, Condominium Units, and Land Registration, has more specifically stated that:

“Land Rights are rights arising from a legal relationship between the right holder and the Land, including the space above the Land and/or the space below the Land to control, possess, use, and utilize, as well as maintain the Land, and/or the space below the Land.”

Ownership of a plot of land or even a building, which thereby gives rise to a right over such property, may arise from various causes, mainly, either due to a transfer of rights, as well as the creation of new rights. Through Article 1 number 38 of Law Number 1 of 2022 on Financial Relations between the Central Government and Regional Governments (“Hubungan Keuangan antara Pemerintah Pusat dan Pemerintah Daerah/HKPD Law”), the acquisition of rights over land and/or building is defined as a legal act or event resulting in the obtaining of rights over land and/or building, either by individuals or legal entities.

When such acquisition occurs, which creates or transfers rights in respect of the land and/or building, the legal obligations between the parties  also arise. One such obligation concerns taxation. This tax, which is imposed on the acquisition of land and/or building right, is what is known as the Acquisition Levy over Land and Building Rights (“Bea Perolehan Hak atas Tanah dan Bangunan/BPHTB”).

The previous provision governing BPHTB, namely Law Number 28 of 2009 on Regional Taxes and Retribution (“Regional Taxes and RetributionLaw”), has been repealed and replaced by the HKPD Law. This amendment has introduced several changes to BPHTB provisions that may have some implications for its implementation. Moreover, this amendment also gives rise to challenges in the process of acquiring rights over land and/or buildings.

Understanding BPHTB

Essentially, BPHTB is a tax imposed on the acquisition of rights over land and/or buildings. While BPHTB is generally imposed on nearly all forms of rights acquisition, however, not all acquisitions of land and/or building rights automatically trigger BPHTB liability. Article 44 paragraph (4) of the HKPD Law provides the BPHTB liability exceptions for acquisitions of land and/or building rights under the following circumstances:

1. For government offices, regional governments, state administrators and other state institutions that are registered as a state or regional property;
2. By the state for governmental administration and/or for development in the public interest;
3. For international bodies or representative institutions, provided they do not conduct business or activities outside of the functions or duties of such bodies or representative institutions which regulated by Ministerial Regulation;
4. For diplomatic and consular representatives on the basis of reciprocity;
5. By individuals or entities due to the conversion of rights or other legal acts without any change of name;
6. By individuals or entities due to waqf;
7. By individuals or entities for religious purposes;
8. For low-income communities in accordance with the provisions of laws and regulations.

Moreover, the acquisition of rights over land and/or buildings itself occurs either through the transfer of rights or the granting of new rights. Whereas the transfer of rights, covers the following:

1. Sale and purchase;
2. Exchange;
3. Grant;
4. Bequest;
5. Inheritance;
6. Contribution to a company or other legal entity;
7. Separation of rights resulting in transfer of rights;
8. Appointment of buyer in auction;
9. Execution of a judge’s decision that has permanent legal force;
10. Business merger;
11. Business consolidation;
12. Business spin-off;
13. Gift.

While the acquisition by granting a new right occurs in the case of:

1. Continuation of relinquishment of rights; or
2. Other than the relinquishment of rights.

Within the BPHTB framework, the provision of when the “BPHTB becomes payable” (“saat terutang BPHTB”) is crucial. This moment determines when BPHTB liability arises and therefore becomes collectible from the party acquiring the land and/or building rights. Depending on the acquisition methods, as mentioned above, the applicable moment as to when BPHTB becomes payable also varies.

Accordingly, in this writing, by referring back to earlier discussion regarding the amendments on the BPHTB provisions by the HKPD Law, there is a significant point of change which will become the focus of the discussion, namely, on the imposition of when BPHTB becomes payable in the case of acquisition of right over land and/or buildings through a sale and purchase transaction.

BPHTB Provision on Acquisition due to Sale and Purchase Transaction

The HKPD Law has amended the previous provision of the moment when BPHTB becomes payable in the case of a right acquisition due to a sale and purchase transaction. Article 49 letter a of the HKPD Law, stipulates that:

“The moment BPHTB becomes payable is determined:

1. on the date of creation and signing of the conditional sale and purchase agreement for sale and purchase;…”

The HKPD Law determines that, in the case of acquisition of land and/or building rights through sale and purchase, the BPHTB becomes payable the moment the conditional sale and purchase agreement (“Perjanjian Pengikatan Jual Beli/PPJB”) is executed. This differs from the previous provision, which stipulated that, by the same form of acquisition, the BPHTB becomes payable only upon the execution of the sale and purchase deed (“Akta Jual Beli/AJB”). As previously stipulated under Article 90 paragraph (1) letter a Regional Taxes and Retribution Law:

“The moment the tax on Duty on the Acquisition of Land and Building Rights is determined for:

1. sale and purchase is as of the date of creation and signing of the deed;…”

Concerning this amendment, therefore, what are the implications? In fact, while this amendment may raise concerns for the relevant parties, however, when looking at the surface, the practical implications of this specific amendment may actually not be significant. This is because both the previous and present regulations ultimately require full payment of the BPHTB prior to the full execution of the AJB. As previously stipulated under Article 91 paragraph (1) of the Regional Taxes and Retribution Law:

“The Land Deed Officials/Notary can only sign the deeds on the transfer of Rights on Land and/or Building after the Taxable Subject submits proof of the tax payment.”

Additionally, under the same law through Article 90 paragraph (2), it has explicitly required the tax payable to be settled at the moment the acquisition of rights occurs. This indicates that even though BPHTB was deemed payable when the AJB is executed, prior payment for the BPHTB was still required in order for the AJB to be fully executed.

Despite BPHTB is now deemed payable at the execution of PPJB, the provisions on the deadline for BPHTB payment in the previous and current regulations remain the same. By referring to Article 60 paragraph (1) letter a of the Government Regulation Number 35 of 2023 on the General Provisions of Regional Taxes and Regional Retribution (“GR 35/2023”), which serves as the implementing regulation of the HKPD Law, it has stipulated that:

“Land deed officers or notary in their authority must:

1. request proof of BPHTB payment from the Taxable Subject, before signing the deed transferring Rights over Land and/or Building;…”

Nonetheless, the main issue that arises is, in fact, does not lie on the payment and/or the payment period of BPHTB, but rather in the nature of the PPJB itself. It should be understood that not all PPJB reflect a complete transaction (fully paid). PPJBs are often executed with an installment schemes. Thus, when the new provision requires the BPHTB to become payable at the execution of PPJB, how should BPHTB be implemented in the case where the execution of the PPJB is before a full settlement of the sale and purchase transaction?

Provisions on BPHTB Becomes Payable over an Unpaid PPJB

When transferring land and/or building rights through a sale and purchase transaction, it is lawfully valid when being carried out through an AJB. In practice, however, PPJB is often executed beforehand, prior to the execution through AJB. This occurs due to various conditions where the requirement for immediate AJB cannot be met, including when the object of the transaction is yet to be transferable, or even when the full payment of the traded object has yet to be fully completed.

It should be understood that, in practice, the execution of PPJB is mainly conducted through two types of PPJB, namely paid-off PPJB and unpaid or partially-paid PPJB. When a paid-off PPJB is executed, it means that the buyer has fully paid for the land and/or building concerned. On the contrary, in an unpaid or partially-paid PPJB, at the time the PPJB is executed, the buyer has not yet made full payment, or the purchase of the land and/or building is conducted under an instalment scheme.

With regard to both types of PPJB, therefore, the concern of this discussion becomes clear when we refer back to the discussion above on when BPHTB becomes payable. If a buyer enters into an unpaid or partially-paid PPJB, where the payment for the object of sale and purchase has not yet been completed, are they still required to comply with the provision under HKPD Law on the payable timing of BPHTB liability? Moreover, does BPHTB payment obligation in an unpaid or partially-paid PPJB still have to be immediately effective and fully paid in the same manner as under a paid-off PPJB?

When referring to the existing laws and regulations on BPHTB, neither the HKPD law nor GR 35/2023 explicitly regulates the distinctions in BPTHB obligations arising from a paid-off PPJB or an unpaid or partially-paid PPJB. Nonetheless, such issue is actually addressed under the Announcement of the Jakarta Regional Revenue Agency Number 499/UD.02.01on the Non-Taxable Acquisition Value (Nilai Perolehan Objek Pajak Tidak Kena Pajak/NPOPTKP) and the Duty on the Acquisition of Land and Building Rights (BPHTB) on Conditional Sale and Purchase Agreement (PPJB) in 2024, which explicitly stated that:

“PPJBs for land and building where the payment is made in several instalments (instalment payment scheme) remain subject to full BPHTB payment based on the Object Acquisition Value as of the date of execution and signing of the PPJB.”

Although this provision only applies at the regional level, which is in Jakarta, however, when referring to it and considering it generally provides an accurate interpretation of the PPJB’s scope referred to under the HKPD Law and GR 35/2023, such provision may actually lead to an issue. This is because, considering the fundamental objectives of BPHTB, BPHTB should have been a liability upon the acquisition of rights. Therefore, it might be contrary to subsequently impose a tax liability for a right acquisition when, by law, a right acquisition has not yet occurred or yet to be completed.

Concerning this matter, while as stated above that a lawful transfer of land and/or building rights occurs upon the execution of AJB, however, by referring to the Supreme Court Circular Letter Number 4 of 2016 (“Supreme Court Circular Letter 4/2016”), where it has stated that:

“The transfer of rights over land based on a Conditional Sale and Purchase Agreement (PPJB) legally occurs when the buyer has fully paid the price of the land, has taken possession of the object of sale and purchase, and the transaction is carried out in good faith.”

Thus, when referring to the provision under the Supreme Court Circular Letter 4/2016 above, besides AJB, a PPJB may be considered as a valid transfer or acquisition of land and/or building rights, when executed through a paid-off or partially-paid PPJB. Therefore, it will actually become questionable when BPHTB becomes payable immediately in an unpaid or partially-paid PPJB, where even the object of the sale and purchase transaction has yet to be fully settled, which consequently also means that no transfer or acquisition of rights has legally occurred.

In addition, it should be understood that the provision under the Supreme Court Circular Letter 4/2016 may be regarded as an exception. This Circular Letter was issued in response to numerous cases in which the buyers of condominium units had only entered into a PPJB, and the developer was subsequently declared bankrupt. This provision is designed to provide protection for the buyers who would otherwise suffer losses due to the AJB and subdivision land certificates that have not been carried out by the developer. As a result, those condominium units that are only subject to PPJB are required to be included in the bankruptcy estate (boedel pailit).

A jurisprudence also emphasizes the same, namely, the condition of transfer of rights is only deemed valid after the execution of the AJB, and not merely through PPJB. Decision Number 1797 K/Pdt/2017 provides:

“That Conditional Sale and Purchase Deed does not transfer rights to the Plaintiff, therefore the seller does not need to be sued, therefore the parties of the Plaintiff’s claim is sufficient.”

Therefore, in fact, when referring back to the definition of BPHTB itself, it has clearly provided that BPHTB is a form of tax which is imposed due to the acquisition of rights over land and/or buildings and the PPJB is not considered as evidence of transfer of document, except for the circumstances set forth under the Supreme Court Circular Letter 4/2016. Accordingly, the tax should have only been imposed once such acquisition, by law, has taken place.

The implementation of this new provision regarding when BPHTB becomes payable would, at the very least, be more reasonable if it is only imposed on a paid-off PPJB. Even when BPHTB must also be imposed on an unpaid or partially-paid PPJB, it might be more appropriate if it is imposed only once the payment for the relevant land and/or building has been fully settled (the instalments have been paid in full). Especially, when compared with the provision on the imposition of Income Tax and Value Added Tax (VAT), which may be paid gradually based on the installment payments. Therefore, these conditions will naturally raise a question as to why only the BPHTB that must be paid in full immediately, even in an unpaid or partially-paid PPJB. Nevertheless, given that the implementation of this regulation is already in effect, and unpaid or partially-paid PPJBs are still subject to the immediate imposition of BPHTB in full, what must be subsequently taken into account in its implementation?

Implementing BPHTB under the New Provisions

Considering the practical conditions, the amendment to the BPHTB provision under the HKPD Law and GR 35/2023 may have been done in order to reduce the number of PPJB cancellations before the actual execution of the AJB. From such perspective, this new provision may be aiming to ensure that the PPJB between the parties truly reflects a sale and purchase transaction that will proceed to AJB, where the transfer of rights will occur completely. On the other hand, this amendment could also lead to some issues in practice. Having to be subject to taxation, when the payment of the sale and/or purchase object has not even been settled, might cause the potential buyer to a financial burden, especially those who rely the sale and purchase transaction on an instalment scheme. Not to mention the consequences to the BPHTB that have been paid in full in the cancellation of PPJB or even to the unpaid PPJB.

In this regard, in the event that the PPJB is canceled for any reason whatsoever, before the execution of the AJB, GR 35/2023 has actually provided a safeguard. As expressly stated under Article 59 paragraph (9) letter a of GR 35/2023:

“In the event of an amendment or cancellation of a conditional sale and purchase agreement before the signing of the sale and purchase deed resulting in:

1. the amount of BPHTB is overpaid or not payable, the Taxable Subject may submit a request for a refund of the overpayment of BPHTB; …”

While it may be concluded that the new provision introduced through HKPD Law and GR 35/2023, regarding the moment when BPHTB became payable, is not fully align with the legal principles or with the objectives of BPHTB itself, however, the regulation has also provided some sort of safeguard that can be used to protect the relevant parties in a sale and purchase transaction over a land and/or building. With the ability to file a request for a BPHTB refund in the cancellation of PPJB, such provision indicates that the existing regulation actually still accommodates the potential issues that may arise in practice, with the implementation of the new provision.

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Reference:

1. Law Number 5 of 1960 on Basic Regulations on Agrarian Principles
2. Law Number 28 of 2009 on Regional Taxes and Retribution;
3. Law Number 1 of 2022 on Financial Relations between the Central Government and Regional Governments;
4. Government Regulation Number 18 of 2021 on Management Rights, Land Rights, Condominium Units, and Land Registration;
5. Government Regulation Number 35 of 2023 on the General Provisions of Regional Taxes and Regional Retribution
6. Supreme Court Circular Letter Number 4 of 2016;
7. Announcement of the Jakarta Regional Revenue Agency Number 499/UD.02.01 on the Non-Taxable Acquisition Value (NPOPTKP) and the Duty on the Acquisition of Land and Building Rights (BPHTB) on Sale and Purchase Binding Agreement (PPJB);
8. Supreme Court Decision Number 1797 K/Pdt/2017.