Foreign Ownership of Property in Sri Lanka

Foreign ownership of land in Sri Lanka has been a controversial subject in the country for many years.

Until recently, foreigners were permitted to own land in Sri Lanka subject to a requirement to pay a tax equivalent to 100% of the value of the land being purchased. Even with such a tax in place, it was seen that there was a significant level of foreign ownership of land in this island nation, particularly, along its beautiful coastline.

To tackle what many considered to be a problem, the Government of Sri Lanka passed the Land (Restrictions on Alienation) Act No. 38 of 2014 which imposed a prohibition on transfer of land in Sri Lanka to foreigners and foreign owned companies, other than in certain specified circumstances.

It is evident from the preamble of the Land (Restrictions on Alienation) Act (the “Land Alienation Act”) that the intention of the legislature in passing the law was to ensure the sustainable use of land in Sri Lanka, in a manner which preserves the interests of Sri Lankan nationals and local companies while providing certain exemptions for foreign investors to acquire lands in Sri Lanka, to encourage the types of foreign investment sought by the Government.

The Land Alienation Act also repealed Part VI of the Finance Act No.11 of 1963 which imposed the aforesaid 100% tax on transfer of immovable property situated in Sri Lanka, to foreigners.

This came in to operation with retrospective effect from 1st January 2013 and has since then been amended twice by Act No. 3 of 2017 and Act No. 21 of 2018 respectively.

Key provisions of the law

Restrictions on transfer of lands

According to the Land Alienation Act, the transfer of title to a land situated in Sri Lanka is prohibited from 1st January 2013, if suchtransfer is –

  1. to a foreigner;
  2. to a company incorporated in Sri Lanka, where any foreign shareholding in such company, either direct or indirect, is 50% or above; or
  3. to a foreign company

unless exempted by the Land Alienation Act.

The Land Alienation Act also provides that, for the purpose of maintaining the legal validity of a transfer of land to a company incorporated in Sri Lanka, with less than 50% of foreign shareholding, the foreign shareholding of such company shall remain less than 50%, for a minimum period of 20 consecutive years from the date of such transfer.

Subsequent to a transfer of land to a company with less than 50% of foreign shareholding, if the foreign shareholding of such company reaches or exceeds 50%, due to –

  • the change of ownership of shares directly or indirectly; or
  • the death of a shareholder of such company and the shares of the deceased shareholder devolving, in accordance with the applicable laws of succession of Sri Lanka, on his next of kin who is a foreigner,

such transfer of land is void and has no effect in law, with effect from the date of increase of the foreign shareholding, unless the company takes steps to reduce its foreign shareholding toless than 50% within the prescribed period.

A further restriction imposed by the Land Alienation Act is that any land transferred to a foreigner, a foreign company or a company incorporated in Sri Lanka, with 50% or above of foreign shareholding, after 29th October 2014, shall not be mortgaged to any bank licensed under the Banking Act, for a period of 5 years from the date of execution of such instrument of transfer.

Exemptions

The restriction imposed on transfer of immovable property in Sri Lanka to foreigners and foreign owned companies is subject to the following exemptions:

  1. A transfer of land to a Diplomatic Mission of another State;
  2. A condominium parcel under the Apartment Ownership Law provided that the entire value is paid up front and in advance through an inward foreign remittance;
  3. A transfer of land to a foreign investor consequent to a decision of the Cabinet of Ministers taken prior to 1st January 2013, involving direct investment of foreign currency;
  4. Any land, the title of which is transferred by intestacy, gift or testamentary disposition to a next of kin (who is a foreigner) of the owner of such land, in accordance with the law of succession of Sri Lanka;
  5. A transfer of land to a dual citizen of Sri Lanka;
  6. A transfer of land to any bank licensed under the Banking Act, in which the foreign shareholding is 50% or above –
    • at an auction conducted by such bank in terms of the Recovery of Loans by Banks (Special Provisions) Act; or
    • in execution of a decree of court to enforce the recovery of a loan given by such bank
  7. A transfer of land to any finance leasing institution in which the foreign shareholding is 50% or above –
    • where such land has been mortgaged to such finance leasing institution as a security for a lease;
    • in order to execute a lease and an agreement to sell or a loan and an agreement to sell;
    • in execution of a decree of court to enforce the recovery of a loan given by such institution
  8. A transfer of land to a company of which foreign shareholding is 50% or above, during the period 1st January 2013 – 29th October 2014, provided such company has been in active operation in Sri Lanka for  not less than 10 consecutive years;
  9. A transfer of land on or after 1st April 2018, to a company, with more than 50% of foreign shareholding, listed in the Colombo Stock Exchange.

Further, the Land Alienation Act also empowers the relevant Minister to, in consultation of the Minister of Lands with the approval of the Cabinet of Ministers, exempt any foreign entity engaged in a project identified as a Strategic Development Project under the Strategic Development Projects Act and any foreign company engaged in international commercial operations, from the application of the restriction on purchasing lands in Sri Lanka.

Effect of the Land Alienation Act 

Any alienation of land effected in contravention of the provisions of the Land Alienation Act, is void and has no effect in law.

On the question whether the Land Alienation Act achieved its desired objectives, it is noteworthy that since the enactment of this law most of the foreign companies and the companies with majority of foreign shareholding which are not exempted by the Land Alienation Act, now acquire lands in Sri Lanka on leasehold basis as the law allows such acquisition subject to a maximum tenure of 99 years. The land lease tax that was imposed by the Land Alienation Act was also repealed by the Amendment Act No. 03 of 2017.

Therefore, whether the law actually made a difference in a practical sense to the problem it was seeking to address is worthy of serious consideration.

Questions frequently raised:

  • What is direct and indirect foreign shareholding in a company? – while it is easy to recognize the term ‘direct shareholding’, in the absence of a definition in the Land Alienation Act, of the term ‘indirect’ shareholding, nor any guidance as to the degree to which, ‘indirect shareholding’ should be considered, such term ‘indirect’ foreign shareholding, should be determined, on a case by case basis, within the context of the Land Alienation Act and in light of the intent objective of the Legislature.
  • Purchase of Condominiums – The exemption which allows foreigners, foreign companies and companies with more than 50% of foreign shareholding to purchase condominium parcels could be availed of only if the entire value of the condominium parcel is paid in advance through an inward foreign remittance.
  • Who is a “Next of kin”? – The term ‘next of kin’ should be determined in accordance with the applicable law of succession of Sri Lanka as per the Land Alienation Act;
  • Would a change of shareholding of a company which acquired a land prior to the Land Alienation Act, affect the validity of such acquisition of land? No

 

Authors

Manjula Ellepola
Partner

Pabasara Chathurangi,
Senior Associate