Rules pertaining to sale or lease of land to foreigners
Friday, 12 September 2014 01:28
The intent of the Government to introduce restrictions on sale of land to foreigners was first announced in the annual Budget proposals for 2013 presented in Parliament in November 2012. This was emphasised again in the Budget proposals for 2014, presented in Parliament in November 2013 where President Mahinda Rajapaksa stated: “We have formulated laws to protect our land resources from outright transfers to foreign ownership. From this year, foreigners can have access to State and private land only through long-term lease arrangements. As infrastructure development has improved the value of all lands, it is necessary to implement a land lease tax structure to protect long-term value of lands. Hence a 15% upfront tax will be imposed in the event of lease of State or private lands to foreigners.” Here, KPMG Tax Attorney Suresh R.I. Perera sheds light on the salient features of the new law:Q: The much-awaited law on sale of land pertaining foreigners has been enacted. Your observations?
A: The law per se has not been enacted yet. Only the bill has been issued on 18 August 2014. For it to become a law or a statute, it has to go through the Committee Stage Amendments, passed by the Parliament and should be certified by the Speaker. However, once certified by the Speaker, it will have retrospective effect from 1 January 2013. Once the new act, referred to as ‘Land (Restriction on alienation) Act’ is enacted, it will be repealing Part VI of the Finance Act No. 11 of 1963, as amended in 2004 which currently supposed to levy 100% property transfer tax on transfer of land to foreigners and companies with more than 25% of foreign shareholdings.
I say ‘suppose’ because even by payment of 100% transfer tax, foreigners have not been able to purchase land due to the administrative circular issued. The execution of land transfers to the foreigners has been blocked in the past two years.
Q: What is provided for in this Bill?
A: This bill has 25 Sections including the definitions and deals with three main aspects:
nThe rules pertaining to prohibition of transfer of land to transfer of land to foreigners, foreign companies and Sri Lankan companies with more than 50% foreign ownership and exemptions thereto.
nThe rules pertaining to lease of land to foreigners, foreign companies and Sri Lankan companies incorporate in Sri Lanka with 50% or more foreign ownership, introduction of a new ‘land lease tax’ at the rate of 15% as a general rule and 7.5% under certain circumstances and exemptions thereto.
n25% price discount on purchase or lease of ‘State land’ for development projects by Sri Lankan citizens and Sri Lanka companies with more than 50% local shareholding
Q: So, there is no prohibition on transfer of land to company if the foreign ownership is less than 50%?
A: Yes. One must compare this with the situation which prevailed under the earlier law (Part VI of the Finance Act No. 11 of 1963 amended by way of Amendment Act No. 8 of 2004), where it states that transfer of land to a company with more than 25% of foreign ownership entails 100% property transfer tax. Hence, in the current scenario, the companies with foreign shareholding with more than 25% but less than 50% would benefit due the ability to buy land without incurring 100% transfer tax.
Under the previous law there was no prohibition for acquisition, the 100% tax was payable, but now, there is a total prohibition on acquiring land if the foreign ownership of the company is more than 50%.
Q: Can you briefly trace the history with regard to foreigners purchasing land in Sri Lanka
A: Well it was in 1963 that a law was introduced for the first time in Sri Lanka imposing 100% transfer tax on transfer of property to non-citizens. Here property covered not only land but extended to shares as well. However in 1992 the liability pertaining to transfer of shares was removed. In 2002,property transfer tax was abolished altogether. For a period of two years from 2002 to 2004 there were no restrictions for foreigners to purchase land. One may recall in 2004 this 100% transfer tax was re-introduced. The Bill that has now been introduced seeks to absolutely prohibit transfer of land to foreigners as opposed to a 100% transfer tax that prevailed earlier. There are many countries in the world that prohibits transfer of land to foreigners which includes most of the Middle Eastern countries such as Dubai and Qatar. Countries such as Singapore, Hong Kong and Thailand also have restrictions pertaining to foreigners acquiring land.
Q: What are the exemptions provided for foreigners to acquire land in the proposed Bill?
A: Section 3 of the Bill provides for seven exemptions and it includes exemptions:
non transfer to dual citizens and transfers by intestacy, gift or testamentary disposition to a next of kin (foreigner) of the owner of the land.
If the entire value is paid upfront on transfer of condominium units on or above the 4th floor is also exempt (no instalment payment).
for the transfer of land to a bank/finance leasing institution purchasing property at an auction pertaining to a security in relation to a defaulted loan
Where the cabinet of ministers has approved the investment and land transfer prior to 1 January 2013 and where the entity has complied with inward remittance ensured the compliance for inward remittance.
The law also provides the minister in charge to provide exemptions by issuing gazettes. This involves exemptions for foreign entities involved with banking and finance, insurance, maritime, aviation, advanced technology.SDP projects involved in infrastructure would also obtain exemption via gazette notification. Exemptions via gazette would also be available for companies engaged in international commercial operations to locate or relocate global or regional operations or to set up branch offices.
Q: What would happen to land already held by foreigners or those specified companies with majority shareholding by foreigners?
A: The Bill does not seem to have an impact on land acquired by foreigners prior to 1 January 2013. However, a provision has been introduced to restrict such land being mortgaged or pledged to any bank for a period of five years counted from the execution of the relevant instrument of transfer or lease.
Q: You mentioned a 25% price discount on purchase or lease of State land. Please elaborate?
A: Here a State land would be available at a 25% price or rental discount for either a Sri Lankan citizen or a Sri Lankan company with a local shareholding of more than 50%, buying or leasing State land for development projects.
What type of projects would be identified as a ‘development project’ would be a question on everyone’s mind. It might be appropriate to include a proper description to avoid any uncertainty.
Q: Who is the enforcing authority to ensure that land will not be transferred to specified prohibited persons?
A: The Registrar of Land registering the deed should be satisfied that any transfer of lands is in accordance with the provisions of the act. If the land is transferred to a company incorporated in Sri Lanka, with more than 50% foreign shareholding, the Registrar of Lands should inform the fact it to the Registrar of Companies.
Q: Explain the distinction introduced by the Bill with regard foreigners buying land and foreigners leasing land?
A: Acquisition of land by foreigners or foreign companies or Sri Lankan company with more than 50% foreign shareholding is prohibited subject to a few exemptions. However under the previous law, there was no prohibition in the acquisition of land by foreigners and only a 100% transfer tax was levied.
The new Bill, although it prohibits acquisition of land by foreigners, allows lease of land to foreigners or foreign companies or Sri Lankan companies with more than 50% foreign shareholding subject to payment of land lease tax. The Land Lease Tax is payable upfront by the lessee. The maximum tenure of the lease is 99 years. The rate of such Land Lease Tax would be 15% of the total rental payable for the entire duration of the lease.
Q: Is there a concessionary rate of land lease tax?
A: Yes, there are two rates in the Bill, 15% and 7.5%. The 7.5% rate would apply in relation to any land leased:
nto Sri Lankan company which is operated for more than 10 years prior to the date of the lease agreement and with more than 50% foreign shareholding
nto a Sri Lankan subsidiary of a Sri Lankan holding company which is operated for more than 10 years prior to the date of the lease agreement and with more than 50% foreign shareholding.
nto condominium units situated on or above the fourth floor if the period of lease is less than 35 years and for condominium units situated below the 4th floor, but where the period of lease is less than 99 years.
Additionally, the lease of a land situated in a BOI licensed zone, tourist development areas, and industrial estate, or in an area declared by the Minister would also qualify for the concessionary rate.
Q: How would multinational companies be affected by the new law? Is it correct to say that their operations would be hindered due to this Bill?
A: Well, one must read the provisions of the Bill carefully before jumping to conclusions! On the face of it, it looks as though the multinationals cannot acquire land or would be subject to Land Lease Tax if they wish to expand or make new investments here in Sri Lanka. However, if one looks at Section 3 and Section 7 of the Bill, it would reveal the Bill contains flexibility to allow foreigners to acquire land or lease land without being subject to land lease tax
The Bill has provided for exemptions to foreign entities engaged in banking, financial insurance, maritime, aviation or advance technology to purchase land via a Gazette notification which is a process involving approval from Minister following the laid-out procedure. This exemption could also be enjoyed by a Strategic Development Project (SDP) involved with an infrastructure development project.
This same category of foreign entities could also enjoy an exemption from application of Land Lease Tax via a Gazette notification to be published by the Minister in charge.
The two sections of the Bill which provide for the two exemptions mentioned above, i.e Section 3(2) and 7(2) of the Bill refers to a “foreign entity” which is eligible for exemption via Gazette notification. Likewise Sections 3(3) and 7(3) of the Bill also contains exemptions to purchase land as well as lease land sans 15% tax by a ‘foreign company’ engaged in “international commercial operations” to locate or relocate its global or regional operation or to set up a branch office. Here too the exemptions should be gazetted by the Minister.
The use of the phrase ‘foreign entity’ and ‘foreign company’ may go against the intention of the policy makers for providing discretionary exemptions via gazette notification. I don’t think policy makers intended to exclude Sri Lankan companies with majority foreign shareholding from being eligible to enjoy this discretionary exemption. Though a ‘Foreign Entity’ is not defined in the Bill, a ‘Foreign Company’ is defined in the Bill to confine companies incorporated outside Sri Lanka. Hence to ensure the hands of the policymakers would not be tied in granting these discretionary exemptions to local companies with majority foreign shareholding, appropriate amendments must be introduced during the committee stage amendments. Thereby it would appropriate to allow the exemptions under Section 3 (2), 3 (3), 7 (2) and 7 (3) to include both foreign companies and Sri Lankan companies with more than 50% foreign ownership.
This is important as if this is not addressed subsidiaries of multinationals operating in Sri Lanka would be curtailed from expanding their activities to contribute to the Sri Lankan economy. Hence it is difficult to say that the doors are shut for multinationals to expand their operations in Sri Lanka as there is a discretionary exemption regime has been established. If the amendments are introduced the multinationals may purchase as well as lease land sans 15% tax.
Also the concessionary rate of 7.5% land lease tax would apply as opposed to 15% for a multinational company that has been in operation for more than 10 years in Sri Lanka or a 50% or more subsidiary of such a company.
The proviso to the Section 6 (3) of the Bill should also be relooked at. I think it has been included as an anti-avoidance measures but it has other repercussions. The proviso will only make sense if the only if the dilution is in favour of another foreign company or a local company controlled by foreigners. However if the dilution is in favour of locals then this proviso creates an injustice.
Q: What are rules applicable for foreigners buying or leasing condominium properties?
A: The three categories, that is, a foreign individual, a foreign company or a Sri Lankan company with 50% or more foreign ownership, cannot purchase condominium units up to the third floor (including the third floor). However, these three categories are permitted to purchase units on or above the fourth floor or above. Under the earlier rule, foreigners were permitted to buy fourth floor and above freely but they were charged with a 100% transfer tax if they were buying a unit in the third floor or below.
Earlier there was no prohibition on foreigners leasing a condominium unit in any floor, but now the land lease tax of 15% or 7.5% would apply depending on the circumstances or could be exempt from the application of the land lease tax altogether!
In order to enjoy the exemption a foreigner must lease a unit on or above the fourth floor for a period exceeding 35 years and remit the full payment for the entire duration in foreign currency to Sri Lanka before signing the deed of lease. Then he could enjoy the exemption from the Land Lease Tax of 15%.
On the other hand, if the unit is on or above the fourth floor and the lease period is below 35 years, the applicable rate of Land Lease Tax would be 7.5%. If the unit is on the third floor or below and the lease period is below 99 years, the lower rate of 7.5% could be enjoyed.
Q: Some have pointed out that application of the Bill on quoted companies would create a hindrance on the operations. Can you explain this?
A: Shares of quoted companies are continuously being traded and the foreigners could purchase shares via Securities Investment Account, hence the percentage of the foreign ownership of companies continues to change.
Section 2(2)(b) of the Bill, which has been formulated with the intention of defeating a scheme by foreigners to purchase land into a company when the foreign ownership is below 50% and subsequently increasing the foreign stake beyond 50%, could pose a real challenge for trading of shares of quoted companies on the stock exchange.
Section 2(2)(b) of the Bill states that the foreign ownership should not exceed 50% for a period of consecutive 20 years from the date of transfer of land. In the event, the foreign ownership exceeds 50% during the 20 year period, the company stands to be deprived of the title to the land from date of shareholding crossing the 50% foreign ownership.
The Bill states that the land transaction will be null and void i.e. have no legal effect from the date of foreign shareholding reaching 50%. This mechanism formulated is to prevent foreigners owning land via a company with a scheme to gradually increase its ownership after the acquisition of land should be re looked at the committee stage amendments.
Once the transaction is considered null and void who would own the land? Would the ownership of the land revert to the original owner or would the title vest on the State? This is an issue even for an unquoted company, though due to the nature of share trading quoted companies could get seriously impacted, but then what is the solution? Is it to provide an exemption for quoted companies from the application of the new Statute? These are some of the grey areas that the policy makers should look at. Whilst appreciating the need for an anti-avoidance measure to prevent foreigners by passing the rule and acquiring land via a company, more thinking should go into establishing an improved counter mechanism in this regard
Q: Do you think this Bill is appropriate at this stage?
A: Well there are diverse opinions in relation to the appropriateness of a law of this nature. We have to look after the national interest. Sri Lanka is not introducing a unique concept by restricting foreigners acquiring land. However mechanism in the Law must be practical. I would think the policy makers have tries to create flexibility by introducing a discretionary exemption regime.
During the committee stage process amendments to Section 2(2) (b), Section 3 (2) and 3 (3), Section 7 (2) and 7 (3) and proviso to Section 6 (3) should be looked at.