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e Bill, any company that has minority shareholders at the point of acquisition of land finds a foreign shareholding exceeding the threshold of 50% will be penalised by making the land acquisition transaction null and void from the date of the foreign shareholding exceeding 50%. There was a lot of criticism with regard to this provision and the amendment seems to be a direct response to it. According to the Committee Stage Amendment, if a quoted company takes steps to reduce its foreign shareholding to less than 50%, within a period of 12 months from the date of increase of its foreign shareholding, the land transaction would deemed to be legally valid, with effect from the date of restoring the foreign shareholding of such company to less than 50%.
In fact this mechanism is not restricted to quoted companies, and has been introduced for other companies where foreign shareholding exceeds 50% also. However, for other companies the time granted to take steps to reduce its foreign shareholding is only six months. Hence, this is applicable to private companies, public companies not quoted in the stock exchange, companies limited by guarantee.
Q: Is the amendment with regard to quoted companies satisfactory?
A: Well, the criticism levelled against Section 2 (2) (b) had two distinct aspects. First and foremost, the desirability of the application of such restrictions to quoted companies in the context of the development of the capital market was pointed out. The second aspect is with regard to mechanism or methodology used to control the increase of the foreign shareholding beyond 50% after the acquisition of land, i.e. the land transaction being null and void. This criticism with regard to mechanism was not restricted to quoted companies and was applicable to all the companies.
The policymaker has not accepted the first criticism i.e. that such a restriction should not be applicable to quoted companies. It is the mechanism or methodology that the policymaker has attempted to rectify. In other words, the thinking seems to be that quoted companies with more than 50% foreign shareholding should not acquire land or companies with land should not increase their foreign shareholding beyond 50%.
The Committee Stage Amendment is to provide relief to companies where the foreign shareholding inadvertently exceeds the 50%. The new mechanism is, upon realisation of such increase, if a company takes steps to rectify it within a specific period, the relief is being granted. The time period granted for quoted companies is 12 months while for other companies it is six months.
The language is not clear whether within the specified time period the quoted company should bring down the foreign ownership below 50% or it is sufficient merely to commence action to bring the foreign ownership below 50% and the quoted company could complete the action after the specified period and the land transaction would be deemed valid from the date of completion, which may be a date after the specified period.
This amendment also presumes that a company is in position to control its shareholders. In fact this may not be the case. According to the Company Law, the shareholder and the company are two different legal persons. Hence the company may not be in a position to reduce its foreign shareholding according to its desire without complications. In my mind this amendment does not provide the solution to the impractical aspect of the methodology. There is ambiguity as to the ownership of the land during the time gap! Who will own the land during the time gap where foreign ownership remains above 50%? What about the issue of accounting depreciation and capital allowance for tax purposes during the time gap? What would happen if the land has been pledged as security to a bank? These are some of the issues to be considered.
Q: Then what is the solution you propose?
A: Perhaps we could adopt the methodology used in Thailand, the Land Code Act promulgating Act B.E.2497 (1954). While our Law prohibits acquisition by foreigners, foreign companies and foreign controlled companies, the Law is silent on actual acquisition unlawfully. The methodology couched in the Land Code Act promulgating Act B.E.2497 (1954) is that within a period of six months to 12 months, such prohibited person is compelled to dispose the property. And if such company does not dispose the land within the stipulated time period, a forced sale of land is effected by the Director General of Land. Hence the better methodology would have been instead of making the land acquisition transaction null and void, which leads to many other complications, to compel the company where a company exceeds foreign ownership threshold to make it mandatory to dispose land within a specific time period or if the land is not sold within the stipulated time to empower an authority to execute a forced sale of land.
This concept of mandatory disposal is also found in Singapore under the Residential Property Act (Chapter 274).
Q: You mentioned the role and duties of company secretary has been extended by the Amending Act. Your comments?
A: Pursuant to the Committee Stage Amendment the duty to monitor, the transfer of land to companies with majority foreign shareholding is now on the Registrar of Lands and the Company Secretary also has to pay a role. Every time a land is registered in the Land Registry, the Company Secretary should provide documentary evidence that foreign ownership is less than 50% to the registrar of Lands. Every six months the Company Secretary has the duty to report to the Registrar of Lands the foreign shareholding of the land has not exceeded 50% during the six-month period. If the foreign shareholding exceeds 50%, the Law requires the relevant Registrar of Land to make a “note” in the relevant folio.
Q: How are the condominium properties getting affected by the amendment to the Bill?
A: The Committee Stage Amendments has only clarified the aspect of floors with a common element. Now the Law reads that in counting the number of floors, a floor with ‘only’ common elements should be disregarded. Other than that there is no change with regard to the rules that were there in the bill.
Q: What about the retrospective effect of the Bill? Has it been addressed in the Amendment?
A: The Law continues to be retrospective, i.e. it will be apply with effect from 1 January 2013. However, if a land has been transferred after 1 January 2013, but prior to the certification of the Law by the Speaker and such company has been in active operation for more than 10 consecutive years, the Law will not apply retrospectively to such a transaction. This amendment has been introduced to ensure the Land (Restriction on Alienation) Act is in line with the letter that was issued by the Ministry of Finance and Planning dated 27 March 2013. As per the letter, companies with majority foreign shareholding that have been in operation for more than 10 years had the right to purchase land. Hence this is a reconciliation of the Law with the circular issued in 2013.
Q: How would this Act impact individuals with land migrating to other countries or parents with children who have obtained foreign citizenship and given up Sri Lankan citizenship?
A: The Law is silent with regard to Sri Lankans who own land but subsequently losing the citizenship. The indications are that the policymaker has no objection for such Sri Lankans to continue to hold land in Sri Lanka. I say this because there is a specific exemption afforded where the land is transferred to a next of kin who is a foreigner by gifting, or testamentary disposition or intestacy. When we compare with the Thailand Law, Sri Lankan Law is liberal. In Thailand when a person gives up his citizenship, the land should be disposed within a six-month period subject to the quota allowed.
In fact there is a new provision introduced in the Committee Stage Amendments also with regard to the death of individual shareholder and shares devolving on a next of kin who is a foreigner. Due to this kind of a share ownership change, if the companies’ foreign shareholding exceeds 50%, the land acquisition by the company becomes void.
I see a contradiction in the policy. Assume Mr. A owns land directly and the law permits his next of kin to continue to own the land by obtaining the title. However if Mr. A happens to own the land via a company with 100% shareholding and pursuant to his death where the shares devolve to a next of kin who is a foreigner, the company stands to lose the land. Maybe in a future amendment to the Land Act, this aspect should also be addressed to allow the next of kin to hold the land via the company.
Q: In your view, what are the other areas to be addressed??
A: In addition, I would like to point out the anomaly contained in Section 6 (3) of the Act. The Law provides the concessionary Land Lease Tax Rate of 7.5% to be enjoyed by a subsidiary company, where the subsidiary company is held by a holding company with majority foreign shareholding which has been actively in operation for more than 10 years. However, if the holding company dilutes its shareholding in the subsidiary company, the law also provides the rate applicable for the remaining lease period to increase to 15% from the 7.5% concessionary rate of tax. This provision makes sense where the new shareholder is also a foreigner. However there is an anomaly resulting if the dilution of the shareholding results in the local shareholding becoming the majority. Why would a company with majority local shareholding pay Land Lease Tax at a higher rate of 15% let alone at 7.5%? In such an instance, there should not be a Land Lease Tax at all, since the company has local shareholders as majority.
In my previous observations, I pointed out the need for amendments to Section 3 (2) and 3 (3), Section 7 (2) and 7 (3) and this has not been accommodated and this may lead to complications when granting exemptions. It should be noted that there are no concessions or exemptions granted for operational leases as opposed to long term leases. In addition to reviewing this aspect, going forward, specified geographical areas where foreigners may be allowed to acquire or lease land sans the lease tax, should be considered. Performance of the capital market should also be monitored.
This law is applicable is to foreign individuals, foreign companies and local companies with direct or indirect foreign shareholdings 50% or above. This does not address other entities such as associations, foundations and Non-Governmental Organisations.
