A guide for foreigners looking to buy property in Sri Lanka

With a lot written online about what property foreigners can and cannot buy in Sri Lanka, and with various Laws and Amendments over the last 20 years, the picture can be a little murky.

To be clear, it’s useful to look at the actual current legislation.

For the sake of this note we refer to:

• The Land (Restrictions on Alienation) Act No. 38 of 2014

• The Land (Restrictions on Alienation) Act (Amendment) No. 3 of 2017, and…

• The Land (Restrictions on Alienation) Act (Amendment) No. 21 of 2018

The first is the primary legislative enactment – effectively the ‘go-to’ piece of legislation – for foreigners (and their lawyers) considering land purchase in Sri Lanka.

The second and third are amendments, easing some of the restrictions in place. We’ll reference any legal restrictions citing “Act 38”, “Act 3” and “Act 21”.

If preferring to skip all those references here's a very quick summary:

Foreigners can’t buy freehold land in Sri Lanka directly but can using a corporate structure.

They can establish a Sri Lankan company to acquire the property, with a local trustee holding at least 51% of the shares, or they can acquire property on long-term leasehold basis.

There are no taxes applicable only to foreign buyers, whether acquiring freehold or leasehold title.

As per Act 38, foreigners cannot directly acquire – purchase in their own name - freehold land in Sri Lanka:

“the transfer of title of any land situated in Sri Lanka, shall be prohibited if such transfer is...to a foreigner.”

The same Act restricts foreign companies from acquiring freehold land, prohibiting the transfer of title to:

“a company incorporated in Sri Lanka where any foreign shareholding... either direct or indirect, is fifty per cent or above.”

The same, of course, goes for “a foreign company”.

One considerable exception in Act 38 was with regard to a “condominium parcel...on or above the fourth floor”.

Foreigners, Sri Lankan companies with more than 50% foreign shareholding and foreign companies were permitted to own such property and Act 21 has gone further, allowing ownership of any “condominium parcel specified under the Apartment Ownership Law”.

Quite what defines a condominium can be contentious. A property would need to be officially registered with Land Registry as a condominium for a foreign buyer to make use of this exemption.

As per Act 38 again, leasing of land to foreigners or foreign companies, is permitted “provided the maximum tenure shall not exceed ninety nine years”.

The same Act enforced a tax of (typically) 15% payable “on the total rental payable for the entire duration of the lease.”

That tax, though, was removed under Act 3 in 2017 and, as such, no such tax is payable on leases entered into after 8th January 2017.

It’s worth noting that relative to many countries, and especially those in Asia, Sri Lanka’s laws regarding foreign ownership are not exceptional and, in some cases, should be considered attractive.

For those wishing to acquire property there are several options.

Clearly, a lease agreement is straightforward and, with the removal of the land-lease tax, has no additional cost for foreigners.

Purchasers should be cautious in considering the terms of any lease – misunderstandings with the freeholder can create issues. Some freeholders may consider their lease contracts more as rental agreements, attempting to restrict the leaseholders use or development of the property.

What’s more the lease should be drafted in such a way to make future 'sales’ – in reality sub-leases or re-assignment to new owners – as simple as possible.

Those preferring actual freehold title can establish a Sri Lankan registered company and hold the property as an asset of that company.

In such a case, the foreign buyer would typically engage a Sri Lankan trustee to hold at least 51% of the shares. An agreement, or issue of different share classes, would entitle the minority (foreign) shareholder to have full authority and economic rights over the company.

Such a setup, of course, has costs with regard to company formation, company secretarial fees, legal fees and annual filing and those, while in most cases not extreme, should be considered.

As said, Googling the legality of foreigners owning land in Sri Lanka returns any number of confidently held opinions. Many have been overtaken by more recent legislation, some were questionable from the outset, and some shouldn’t be considered as watertight as their authors claim.

Some of the most egregious include:

• Foreigners can acquire freehold land if they pay a 100% tax.

Not the case. You couldn’t if you wanted to, and why would you want to? ·

• Foreigners can lease land but pay a tax of 7%.

Act 38 allowed for a 15% tax on land leasing, which in some cases was revised to 7.5%. A number of articles still cite (more or less) that lower percentage.

The reality is that the Act 3 amendment entirely removed the tax applicable to foreigners leasing land.

Other recommendations to treat with care include the likes of two-company structures.

In such a structure, the foreign buyer owns 100% of the shares in a holding company. That company is Sri Lankan registered and so considered a Sri Lankan party. It owns 51% of the second company, which actually holds the property. The remaining 49% of the shares are held directly by the foreigner.

While some very respected parties would stick confidently to this approach, not all are so certain. Given Act 38’s restriction on land being held by companies “where any foreign shareholding in such company, either direct or indirect, is fifty per cent or more”, we’d advise some caution.