New laws prohibiting the transfer of land to foreigners will allow non-citizen children or non-citizen next of kin of Sri Lankans to inherit property through intestacy or gift, a Cabinet paper exclusively obtained by the Sunday Times states. In 2013, the Finance Ministry issued instructions barring all transfers of land to foreigners and throwing a cloud of uncertainty over inheritance rights. While the law allowed individuals to transfer property by gift or testamentary disposition to their heirs, the Ministry directive forbade it.
These and other anomalies will be righted through new legislation now held up at the Legal Draftsman’s Department. The laws will have retrospective effect from January 1, 2013. This was the date on which the prohibition of land transfers to foreigners —contained in the budget for that year — started being implemented through administrative circulars.
As a result of its retrospective nature, there are likely to be recoveries or refunds of certain taxes which were levied during the transition period. “For instance, the authorities were charging a blanket 15 per cent tax on the lease of land to foreigners since January 2013,” said a legal analyst familiar with the incoming changes. “But the new law envisages a reduced land lease tax of 7.5 per cent for certain categories of companies. The difference will be reimbursed.”
The planned amendments, first reported in the Business Times last week, are outlined in a six-page paper presented by the Ministry of Finance and recently approved by Cabinet. Lawyers who examined its contents said the changes were welcome but urged the Government to move faster in translating them into legislation.
The Cabinet paper says the draft law is being finalised with consideration to the concerns of, among others, foreign missions and investors. The Act will prohibit the transfer of State or private land to a foreigner, a foreign company or to a company incorporated in Sri Lanka under the Companies Act where any foreign shareholding is 50% or above. Yet, there are a variety of exemptions.
Transfers of land to a diplomatic mission of another State or to a dual citizen of Sri Lanka are two of them. Transfer will also be allowed to any foreign entity engaged in banking, finance and insurance, maritime, aviation, advanced technology or infrastructure development subject to approval by the Finance Minister in consultation with the Land Minister and with prior written approval of the Cabinet of Ministers.
Such investors must, however, satisfy one or more of the requirements set out in the Strategic Development Projects Act — such as “substantial inflow of foreign exchange” or generation of “substantial employment”. Again subject to approval, land may be transferred to any foreign entity involved in international operations to locate or relocate its global or regional operations or to set up a branch office. These two categories are also exempt from paying the 15 pe cent land lease tax envisaged in the new law.
Separately, a foreigner may acquire a condominium property on or above the fourth floor only if its entire value is paid upfront through an inward remittance simultaneous to the execution of the deed of transfer. If land is being transferred to a company incorporated in Sri Lanka on the basis that its foreign shareholding is less than 50 per cent, such shareholding will have to be maintained during a minimum 10 consecutive years from the date of transfer.
The lease of land is subject to a maximum of 99 years and the payment of a 15 per cent land lease tax. The Department of Inland Revenue has been charging this tax since 2013 despite the absence of relevant legislation. Exemptions include land leases to diplomatic missions of another State and to dual citizens as well as the lease of land within a bonded area or free port. The lease of condominium property on or above the fourth floor is exempt where the duration of the lease is for 35 years or more. The lease rental must, however, be paid upfront for the full duration through an inward remittance simultaneous to the execution of the indenture of the lease.
If the lease is for less than 35 years, a reduced tax of 7.5 per cent will be levied. Several other categories are entitled to the discount. This includes the lease of land in BOI areas, tourist development areas and industrial estates. Among other provisions in the proposed law is that land transferred or leased to a foreign entity cannot for any purpose be mortgaged or pledged to a bank for five years from the date of execution of the related transfer or lease. The Cabinet paper says this is to ensure that money will not be raised in Sri Lanka for such acquisition or lease, creating implications for the banking system.