Friday 24th October 2014
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Insists it will not impact on investment, says regulations are not retrospective as in existence since Jan. 2013
Following Parliament passing new legislation on sale of land to foreigners, the Central Bank yesterday released a lengthy explanation of the fresh regulations. Given below is the full statement released by the Economic Research Department:
In 1963, a 100% transfer tax was introduced in the case of a transfer of land to foreigners. Thereafter, in 2002, such 100% transfer tax was suspended, which enabled the transfer of land to foreigners without any Transfer Tax. Subsequently, in 2004, the 100% transfer tax was re-introduced in the case of a transfer of land to foreigners, with limited exemptions.
The new Land (Restric-tions on Alienation) Act that was passed by the Parliament on 20 October 2014 is a piece of legislation, which provides clarity to the rules pertaining to sale or lease of land to foreigners. It gives legal backing to the regulative that have been in place from January 2013, and also introduces measures to address the loopholes that prevailed in the existing legal framework.
As per the new rules that were put in place in 2013 and as per the new Act that was passed in Parliament, land transfers to foreigners that were allowed previously subject to a 100% tax, have been prohibited. However, foreigners are now allowed to acquire and enjoy state and private lands on a lease basis up to 99 years, subject to a Land Lease Tax (LLT) of 15%, without any restriction.
The provision of the Act will be applicable to (a) persons who are not citizens of Sri Lanka, (b) companies incorporated in Sri Lanka under Companies Act with 50% or above foreign shareholding, and (c) foreign companies incorporated under the laws of any country other than Sri Lanka.
Certain Transfers of Land to Foreigners will be permitted In the Act, several exemptions have been granted, whereby outright transfers of land and land based properties will be.
Central Bank…
Exemptions include foreign diplomatic missions, foreign investors as per a Cabinet decision before 1 January 2013, next of kin under law of succession of Sri Lanka by way of gift, dual citizens of Sri Lanka, foreign banks at an auction for debt recovery/due to a court decree and foreign finance leasing institutions in the process of recovery of a loan.
Exemptions are also given to foreign companies that have been in active operation in Sri Lanka for not less than 10 years, between 1 January 2013 and the effective date of the Act. Foreign entities engaged in banking, financial, insurance, maritime, aviation, advanced technology or infrastructure development projects, identified and approved as Strategic Development Projects as well as foreign companies engaged in international commercial operations to locate or relocate their global or regional operations, or to set up branch offices.
The Act also exempts the transfer of lands and property to foreigners, if the properties are condominium units on or above the fourth floor.
Certain leases of land and land-based properties to foreigners, will be permitted as per the new Act, leasing of land and land based properties up to a maximum tenure of 99 years to foreigners, will be allowed, subject to a Land Lease Tax of 15% of the total lease rental payable.
To facilitate fair valuation with regard to such leases, valuations will be required from authorised Valuers as specified in the law. In the case of state land, the authorised Valuer will be the Government Chief Valuer, while in the case of a private land it will be a Licensed Valuer
Certain leases will be exempted from the Land Lease Tax (LLT) of 15%. The Act also sets out the instances where exemptions from the LLT will be applicable. In this regard, lease transactions with foreigners will be exempted from LLT, if such leases are to foreign diplomatic missions, dual citizens or Sri Lanka foreign investors under a Cabinet decision before 1 January 2013.
Foreign entities engaged in banking, financial, insurance, maritime, aviation, advanced technology or infrastructure development projects identified and approved as Strategic Development Projects as well as foreign companies engaged in international commercial operations to locate or relocate their global or regional operations, or to set up branch offices are also exempted.
At the same time, leases of the following types of properties will also be exempted from LLT. Condominium units on or above the fourth floor, if the leases are for a period of 35 years or more, and the lease rentals for the full period are remitted by the Lessees. Lands within a declared Bonded Area or a Free Port and Certain leases will attract LLT of 7.5% only.
A lower rate of LLT of 7.5% only will be applicable when the leases are granted to foreign companies incorporated in Sri Lanka, which have been operating in Sri Lanka for a consecutive period of over 10 years.
A lower rate is also applicable to subsidiaries of holding companies incorporated in Sri Lanka, provided the shareholding of the holding company in the subsidiary is 50% or above, and the holding company has been operating in Sri Lanka for a consecutive period of over 10 years.
It also includes companies incorporated in Sri Lanka, where any foreign shareholding in such companies are 50% or above, but where the Cabinet of Ministers decides that permitting such companies to lease lands at the lower rate is justifiable, on the grants that such permission will ensure that the company will enjoy a level playing field with its competitors in the related sector, and also if by then, a substantial foreign direct investment has already been realised into the related sector.
The lower rate of LLT of 7.5% will also be applicable for the following types of properties condominium units below the fourth floor where the lease period is not more than 99 years, lands within a BOI Licensed Zone, Declared Tourist Development Area, Industrial Estate, or in a Special Area declared by the Minister.
As explained above, the leasing of condominium property is exempted from the LLT, when the condominium unit is situated on or above the fourth floor, and the tenure of the lease is more than 35 years but less than 99 years. The concessionary rate of 7.5% is applied in other instances.
The new law provides clarity, the Central Bank insisted in the statement.
“The new law provides clarity to the existing rules and enhances policy transparency, while bringing the practices of property transfers and leases to foreigners on par with many of Sri Lanka’s peer economies. At the same time, exemptions and concessionary LLT are given for the lease of lands in BOI licensed zones, tourist development areas, and for projects of strategic importance. Hence, it is highly unlikely that the new Land Act would have any adverse impact on future FDI inflows,” it stressed.
A foreign company is defined as one with a foreign shareholding of over 50%, which is naturally deemed to be the controlling stake of a company. It must be noted that until end 2012, companies with foreign shareholding of more than 25% were subject to a 100% property transfer tax. In contrast, the current law exempts all companies with foreign shareholding below 50% from the payment of such tax or LLT.
The new Act is not retrospective as the rules that have now been enacted had already been in place since January 2013, there is no retrospective applicability of the law.
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