Indonesia Issues Incentives for New Capital City Project

Indonesia has issued various incentives to attract investments into its new capital city project. The incentives range from income tax holidays to import tax exemptions as well as the permission for hiring foreign workers for up to 10 years.

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Indonesia’s government recently issued Government Regulation 12 of 2023 (GR 9/2023), which offers various fiscal and non-fiscal incentives to businesses seeking to invest in Indonesia’s new capital city, Nusantara.

The incentives afforded to investors include corporate income tax exemptions, tax holidays, and personal income tax exemptions for investments in priority projects in the new capital, such as ports, airports, renewable energy systems, and healthcare services, among many others.

Nusantara is estimated to cost US$35 billion to construct and the central government is expected to begin operations in the new city in 2024. Public funds would only be used for 20 percent of the project with the remainder from foreign investors. The government is expecting the presidential palace to be finished in time for the country’s Independence Day anniversary on August 17.

President Joko Widodo has assembled a team of political and business-heavyweights as part of the new capital’s steering committee. These include Abu Dhabi Crown Prince Muhammad bin Zayed Al Nahyan and former British Prime Minister Tony Blair.

The new capital sits on a 632,000-acre site, which is roughly four times the size of the current capital, Jakarta. The project presents ample opportunities for foreign investors in a variety of sectors ranging from infrastructure to manufacturing to healthcare and education.

Income tax reductions and holidays

The government will provide income tax holidays and reductions for investments in Indonesia’s new capital city. Further, the government will issue future implementing regulations on how the tax facilities will be regulated.

The government will provide up to 100 percent corporate income tax exemption of between 10 and 30 years for domestic taxpayers that invest at least 10 billion rupiah (US$650,745) in the new capital. The duration of the incentive depends on the sectors in which the investment is directed.

For instance, investing in public services will receive the longest tax holiday up until 2035. Banks and insurers that invest before 2035 can enjoy up to 25 years of income tax exemption whereas those that invest before 2045 can receive up to 20 years of income tax exemption.

Developers of other critical infrastructure, such as public works, airports, seaports, and housing, can also benefit from the incentives, as well as businesses that engage in economic development through the construction of hotels, malls, energy infrastructure, and software, among many others.

Corporate income tax reductions will be available for investors that develop financial centers in the new capital, as well as for companies that relocate their head offices to the new capital. Moreover, investors that implement certain research and development activities will be afforded a reduction in their gross income.

Further, micro, small, and medium-sized enterprises in certain business activities will also pay a zero percent corporate income tax rate.

Utilization of foreign workers

Businesses operating in the new capital city will be allowed to employ foreign workers for a period of 10 years; this can also be extended. The foreign worker can also secure residency permits for 10 years, which is also extendable depending on their employment contract.

The employer is also exempted from paying the Foreign Worker Compensation Fund, which is the amount of US$100 paid every month to the Ministry of Manpower.

The residency permits of foreign workers who hold management positions in companies operating in the new capital will remain valid as long as they retain that said position.

Land rights

The government is offering investors 95-year land use permits, which can be extended for another 95 years and thus totaling 190 years for land use.

There will be two categories of land in Indonesia’s new capital: a) state-owned property that will be managed by the Nusantara Capital City Authority (a special agency tasked with governing and managing the new capital city) and b) assets that have been granted to the capital city authority through the right-to-manage (Hak Pengelolaan – HPL) deed titles.

The capital city authority can allocate these HPL lands to businesses for the following land rights/titles:

• Right to cultivate (Hak Guna Usaha – HGU);
• Right to build (Hak Guna Bangunan – HGB); and
• Right to use (Hak Pakai – HP).

The right to cultivate title (HGU) gives the user the right to work/cultivate the land for a specific period. This type of land title is usually granted for agricultural activities, such as plantations. In Indonesia’s new capital, holders of the HGU title will be allowed to cultivate the land for 95 years, which can then be extended for another 95 years, totaling 190 years.

This is a huge increase compared to other parts of Indonesia where the HGU title is valid for 35 years and extendable for another 35 years upon expiration.

The right to build title (HGB) is granted to Indonesian citizens and foreign companies for the purpose of erecting a building on the land. HGB title holders will be eligible to hold the title for 80 years, which can be extended for another 80 years, totaling 160 years.

Outside of Nusantara, HGB title holders can only hold the title for 30 years, and extendable for 20 years. Once this period has expired, the title can be renewed for another 30 years, so 80 years in total.

Finally, right-to-use (HP) title holders will also be given 80 years and extendable for another 80 years. This title refers to the right to use or harvest the land owned by the state or private persons.

Outside of the new capital city, the HP title is granted for 25 years and extended for another 20 years, before a final renewal of 25 years, totaling 70 years.

Customs

The government offers exemptions on import duties for the import of goods used for the construction and development of Indonesia’s new capital. Further, there is import duty exemptions for the import of goods and materials used in the construction and development of industries within the new capital.

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