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Sri Lanka Imposes Land Transaction Tax On Foreigners

by Mary Swire,, Hong Kong

29 October 2014

Non-residents will only be able to purchase land in Sri Lanka through long lease agreements and purchases will be subject to payment of a land lease tax (LLT), under the Land (Restrictions on Alienation) Act, which was recently given parliamentary approval.

In accordance with regulations which have been provisionally applied since a Cabinet decision on January 1, 2013, non-residents are now allowed to "acquire and enjoy" state and private lands only on a lease basis for up to 99 years, subject to an LLT of 15 percent. A lower rate of 7.5 percent is applicable in certain circumstances.

The provisions of the Act will be applicable to individuals who are not citizens of Sri Lanka, companies incorporated in Sri Lanka with a foreign shareholding of 50 percent or more, and foreign companies incorporated in other countries. Exemptions have been given, for example, to foreign diplomatic missions; to investments made before the Cabinet decision on January 1, 2013; and to next of kin for property gifted under the Sri Lankan law of succession.

It is anticipated that the new tax law will have a negligible impact on future foreign direct investment inflows into Sri Lanka, as LLT exemptions or concessions have been granted for the lease of land in Board of Investment licensed zones, tourist development areas, and for projects of strategic importance.

However, it has also been stressed that the means by which non-residents have previously attempted to avoid their tax payments, by, for example, purchasing real estate in the name of a local company, before transferring its shares into their name, will be prevented in the future.

During his recent 2015 Budget speech, Sri Lanka's President Mahinda Rajapaksa proposed "to enforce exchange control regulations to prevent foreigners from engaging in illegal land transactions through the use of local names and local companies."

TAGS: individuals | compliance | tax | investment | business | real-estate investment | tax compliance | Sri Lanka | property tax | foreign direct investment (FDI) | law | real-estate | enforcement | legislation | tax rates | regulation

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