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Foreign Entities Providing Loans and Holding Mortgage Rights in Indonesia

In the realm of real estate development and financing, foreign entities have shown a growing interest in contributing to infrastructure development and investment in various countries, including Indonesia. One mechanism that has gained attention is the concept of foreign entities providing loans and holding mortgage rights, also known as "Hak Tanggungan" in Indonesian law. This practice has the potential to support the expansion of infrastructure projects and foster economic growth. In this article, we will delve into the legal framework established by Indonesian Law No.4 of 1996 concerning Mortgage Rights ("Law 4/1996") that allows foreign entities to participate in providing loans and holding mortgage rights in the country.

Mortgage Rights or Hak Tanggungan is a legal concept that serves as collateral for specific debts or obligations. In Law 4/1996, Mortgage Rights provide creditors with priority over other creditors in recovering debts. This legal instrument applies to land and its related assets, such as buildings, plants, and other immovable property that are above the land. The essence of Mortgage Rights lies in its accessory nature, as they are typically established alongside a primary agreement that creates a debt-creditor relationship.

According to Law 4/1996, foreign entities can engage in providing loans and holding Mortgage Rights in Indonesia under specific conditions. The law allows for a foreign individual or foreign legal entity to act as a creditor, participating in debt-creditor agreements that trigger the establishment of Mortgage Rights. These foreign entities can enter into agreements that generate debt-creditor relationships either within Indonesia or abroad, as long as the credit is utilized for development purposes within Indonesian territory.

Key Considerations and Procedures

  1. Primary Agreement: For foreign entities to provide loans and hold Mortgage Rights, a primary agreement establishing a debt-creditor relationship must be formed. This agreement can be made through written or authenticated deeds, depending on the legal requirements governing the specific agreement.
  2. Purpose of Credit: The credit extended by foreign entities must be directed towards development activities within Indonesian territory. This condition ensures that the funds contribute to the growth and advancement of the country's infrastructure and economy.
  3. Registration and Authentication: The process involves the issuance of an authenticated deed by an authorized official, usually a Land Deed Official or Pejabat Pembuat Akta Tanah (PPAT). This deed includes provisions related to Mortgage Rights and serves as legal evidence of the creditor's involvement.
  4. Priority and Rights: Mortgage Rights provide creditors, including foreign entities, with a privileged position in recovering their debts. In case of default, creditors can execute the Mortgage Rights to satisfy their claims.

Foreign entities, whether individuals or legal entities, can actively participate in financing infrastructure projects in Indonesia by providing loans and holding Mortgage Rights. This practice, regulated by Law 4/1996, underscores the country's openness to international investment and collaboration. By leveraging Mortgage Rights, foreign creditors contribute to the development and modernization of Indonesian infrastructure while securing their interests. As the country continues to grow and attract foreign investments, the implementation of such legal mechanisms plays a crucial role in fostering economic progress and prosperity.

If you, as a prospective client, have further inquiries about the topic discussed above, Schinder Law Firm is one of many corporate law firms in Indonesia that has handled numerous similar matters, with many experienced and professional corporate and civil lawyers in its arsenal, making it one of the top consulting firms in Indonesia. Feel free to contact us at info@schinderlawfirm.com for further consultation.

Author: Dewi Susanti

Schinder Consultant London Ltd.


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