Forbes Indonesia - July 2019

64 | FORBES INDONESIA JULY 2019

INDONESIAN law derives

its tradition from continen-

tal European practice, in

contrast with the Anglo-

Saxon tradition. This is evi-

dent from the concordance

principle used by the Dutch

East Indies administra-

tion when it applied its civil

code in Indonesia. To date,

the Indonesian Civil Code (ICC) is still applicable as

the main source of civil relationships between private

parties in Indonesia.

It is clear from the Investment Law of 2007 that

Indonesian law does not recognize the concept of trust

law. The Investment Law stipulates that domestic and

foreign investors are prohibited from entering into

agreements or declarations that emphasize that the

ownership of shares in a limited liability company is

for and on behalf of another party. Under the law, the

legal owner is also considered the beneficial owner.

Despite clear prohibitions under the Investment

Law, there are still issues as to whether or not the same

provision applies to Indonesian land law. Factually,

there are many arrangements resembling trusts exist-

ing in Indonesia where a foreigner or foreign legal en-

tity holds the benefit of a land right as beneficial owner

where the legal owner is an Indonesian who acts as

trustee. In this arrangement, the trustee is considered

the legal owner but not necessarily the “true owner”

since the foreigner or foreign legal entity is the “true

owner” of the right to the land as its beneficial owner.

Indonesian land law through the Agrarian Law

of 1960 revoked Book II of the ICC on property. This

includes all types of land rights including their provi-

sions based on Dutch law. But Book III on agreements

is still valid, especially on agreements not related to

real property, but to movable property. Article 1317 of

the ICC stipulates that “An individual may also enter

into an agreement for the benefit of a third party, if

such an agreement, which the individual concludes on

his own behalf or as a gift granted by him to another

party, contains a provision to this effect.”

This provision is regarded as an arrangement re-

sembling a trust that may be conducted under the

ARRANGEMENTS RESEMBLING TRUSTS

UNDER INDONESIAN LAND LAW

ICC. By the provi-

sion, there is the

first party who

agrees to some-

thing i.e on his

own behalf or as

a grant (settlor),

the second party

as receiver of the

grant (trustee - In-

donesian) and the

third party who

gets the benefit

(beneficiary – usu-

ally a foreigner).

Indonesian land

law adopts a na-

tionality principle.

This means that

only an Indonesian national is entitled to have the

right to land ownership (hak milik). This principle

encompasses even an Indonesian national who has

dual citizenship. The law stipulates that if the hak

milik is obtained by a foreigner due to mixed assets in

a marriage or inheritance, the hak milik must be re-

linquished within one year, or else ownership will be

considered as having reverted to the state.

Reading the land law, the question arises whether

Article 1317 of the ICC may be used for land transac-

tions in Indonesia? There is a precedent from 1979

regarding an arrangement resembling a trust decided

by the Supreme Court, which stated that “The sale

and purchase of a land/house was illegal since in ac-

cordance with the testimony of the seller’s proxy, the

original Defendants are not the actual buyers, but

only lent their identities, whereas the real buyer is

the original Plaintiff who was still a foreigner at that

time.” The judges then ruled that the sale and pur-

chase agreement was null and void since it was pro-

hibited by the law.

Based on land law and the 1979 legal ruling, it is

therefore clear that an arrangement resembling a

trust in a land transaction, to the extent that it vio-

lates Indonesia’s nationality principle, is to all intents

and purposes illegal. F

LEGAL VIEW EDDY LEKS

EDDY M. LEKS IS THE MANAGING PARTNER OF LEKS & CO, A MULTI-SERVICES LAW FIRM BASED IN JAKARTA.

“An individual may

also enter into an

agreement for the

benefit of a third

party, if such an

agreement, which

the individual

concludes on his

own behalf or as a

gift granted by him

to another party,

contains a provision

to this effect.”