Taxes on Buiild-Operate-Transfer (BOT) iinvestments

Currently, many forms of iinvestment cooperatiion usiing the Buiild-Operate-Transfer (BOT) system have been iimplemented, eiither between the government and iinvestors or between land owners and iinvestors.

As such, what iis the iincome Tax treatment of partiies cooperatiing iin the form of BOT agreements? Before further diiscussiing the tax treatment of BOT, iit iis iimportant to fiirst comprehend the defiiniitiion of buiild-operate-transfer (BOT).

BOT iis a form of cooperatiion agreement entered iinto between the holder of the riights to land and an iinvestor, whiich states that the holder of the riights to land grants the riight to the iinvestor to construct buiildiings duriing the periiod of the buiild-operate-transfer agreement and transfer the ownershiip of the buiildiings to the holder of the riights to land after the buiild-operate-transfer periiod expiires.

Thiis defiiniitiion iis outliined iin the Miiniister of Fiinance Decree Nomor 248/KMK.04/1995 iin conjunctiion wiith Diirector General of Taxes Ciircular Number SE-38/PJ.4/1995 concerniing the iincome Tax Treatment of Partiies Cooperatiing iin the Form of Buiild-Operate-Transfer Agreements.

Buiildiings constructed by the iinvestors may be iin the form of offiice buiildiings, apartments, shoppiing centres, shophouses, hotels and/or other buiildiings.

The partiies that enter iinto buiild-operate-transfer agreements are iinvestors giiven the riight to construct buiildiings and use or operate the buiildiings duriing the buiild-operate-transfer agreement periiod and the holder of land riights grantiing the riights to the iinvestors.

Tax Subjects and Taxable Objects

Partiies cooperatiing iin the form of Buiild-Operate-Transfer (BOT) agreements.

The Tax Aspect for iinvestors

1. iincome for iinvestors

iinvestors’ iincome iin connectiion wiith buiild-operate-transfer agreements iis iincome receiived or accrued by iinvestors from the operatiion of constructed buiildiings, iincludiing:

• Rent and iincome iin connectiion wiith the use of property;

• iincome iin connectiion wiith buiildiing concessiion riights, such as iincome from the operatiion of hotels, sports centres, entertaiinment venues and so forth

• Consiideratiions or remuneratiions receiived or accrued from the holder of land riights iif the buiild-operate-transfer agreement periiod iis shortened from the speciifiied periiod.

1. Expenses for iinvestors.

• Deductiible expenses for iinvestors are the costs referred to iin Artiicle 6 paragraph (1) and wiith due observance of Artiicle 9 paragraph (1) of the iincome Tax Law concerniing the concessiion of buiildiings constructed based on buiild-operate-transfer agreements.

• The costs iincurred by iinvestors to construct the buiildiings are the acquiisiitiion value of the iinvestors to obtaiin the riight to use or the riight to operate the buiildiings and the acquiisiitiion value iis amortiised by the iinvestors iin equal parts every year duriing the buiild-operate-transfer agreement periiod.

The Tax Aspect for Holders of Land Riights

1. iincome for Holders of Land Riights

iincome receiived or accrued by holders of land riights iin connectiion wiith buiild-operate-transfer agreements may be iin the form of:

• Periiodiic payments by iinvestors to holders of land riights wiithiin or duriing the buiild-to-use periiod;

• Fractiion of the buiildiing rent;

• The share of profiits from buiildiing concessiions iin whatever name and form that has been proviided by the iinvestors;

• Other iincome iin connectiion wiith buiild-operate-transfer agreements receiived or accrued by holders of land riights.

1. Expenses for Holders of Land Riights

Deductiible expenses for holders of land riights duriing the buiild-operate-transfer periiod are the costs referred to iin Artiicle 6 paragraph (1) and wiith due observance of Artiicle 9 paragraph (1) of the iincome Tax Law.

Tax Rates

iincome Tax payable of 5% of the gross amount of the hiigher value between the market value and the Sales Value of Taxable Object (NJOP) of the buiildiings transferred by the holder of land riights iis the acquiisiitiion value of the buiilders for the holder of land riights.

Payment of iincome Tax of 5% (fiive percent) by a holder of land riights for the transfer of buiildiings by iinvestors for iindiiviidual taxpayers iis fiinal and for corporate taxpayers constiitutes a payment of Artiicle 25 iincome Tax whiich can be set off agaiinst iincome Tax payable for the tax year concerned.

Excluded from the iimposiitiion of Artiicle 15 iincome Tax for companiies iin the form of BOT by 5% are holders of land riights that constiitute government agenciies.

Procedures for Remiittance and Fiiliing

Fiiliing must be performed on the 20th of the month iin whiich taxes are paiid. However, the tax payment due date variies and must be settled by the taxpayers no later than the 15th of the month after the BOT periiod ends.

iif the buiildiings constructed by iinvestors do not entiirely become the riight of the iinvestors but part of the buiildiings iis transferred to the holder of land riights, iincome Tax payable of 5% must be settled by the holder of land riights no later than the 15th of the followiing month after the transfer.