New Land Act provides clarity
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 suspened, which
enabled the transfer of land to foreigners without any tax.
However, in 2004, the 100% transfer tax was re-introduced in the case
of transfer of land to foreigners, with limited exemptions.
The new Land (Restrictions on Alienation) Bill that was passed in
Parliament on October 20, 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 regulatiions that have been in place
from January 2013, and also introduces measures to address the loopholes
in the legal framework.
As per the new rules that were put in place in 2013 and as per the
new Bill that was passed in Parliament, land transfers to foreigners
that were allowed previously subject to a 100% tax, have been
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.
Several exemptions have been granted, whereby outright transfers of
land and land based properties will be allowed to Foreign diplomatic
missions, Foreign investors as per a Cabinet Decision before January 1,
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, Foreign finance leasing institutions in
the process of recovery of a loan, Foreign companies, that have been in
active operation in Sri Lanka for not less than 10 years, between
1.1.2013 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, 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
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 needed 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
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 of Sri Lanka, foreign
investors under a Cabinet Decision before January 1, 2013, foreign
entities engaged in banking, financial, insurance, maritime, aviation,
advanced technology or infrastructure development projects identified
and approved as Strategic Development Projects, Foreign companies
engaged in international commercial operations to locate or relocate
their global or regional operations, or to set up branch offices.
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, A condominium unit on or above the fourth floor, if the lease
is for a period of 35 years or more, and the lease rental for the full
period is remitted by the lessee.
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,
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
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:
Condominium units on or above the fourth floor, where the lease period
is less than 35 years, 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.
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 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.
In determining the applicability of the law, 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