The Sri Lankan government is scrapping the 100% tax levied on foreigners buying land, in favour of a new special land tax to be unveiled in the 2012 budget.
The new tax will remove restrictions on foreigners buying and developing land anywhere in the country, and will also close loopholes which have allowed many foreigners to buy land in Sri Lanka tax free. It is also thought that removing the tax will increase tourism and property sales to foreigners. The overall aim of the decision is to increase the revenues coming into government coffers from the sale of land to foreigners, sources from the Finance Ministry told reporters.
The amount of the new tax hasn’t been finalised yet, but it is aimed at improving the system of foreign land and property sales in Sri Lanka.
For example, under the current system foreigners can buy land tax-free if their investment in the entire project is over $10 million. Because of this, land is often sold at inflated prices, allowing huge profits to be made tax-free. Another example is when foreigners buy Sri Lankan companies that are holding land, or to use as a vehicle for buying land, and thus avoid paying the 100% tax. Whenever there’s a prohibitive tax in place, foreign investors find a way around it and Sri Lanka is no exception, a senior official of the Finance Ministry said.
In order to buy shares in a company in Sri Lanka it is necessary for a foreigner to open a SIERA Share Investment External Rupee Account. Foreigners then bring any money into Sri Lanka directly into their SIERA account for any investments in shares. When the shares are sold the foreign investor is entitled to repatriate all the initial investment and profits. Foreign investors are not liable to tax on any profits made on the sale of shares.
When the time comes to sell property, if selling to a local, there is no issue. If a foreign buyer is found and the property is held in a company, the foreign buyer can simply sell the shares of the company, place the funds in the SIERA account, and repatriate the monies, a member of the Finance Ministry revealed.
The 100% tax was only reintroduced in 2004, to appease leftwing parties, who blamed the property boom on foreign speculators investing in the country. But it has now become apparent that this was a bad way to combat the problem. The buyers who didn’t know about the loopholes were being put off altogether, and those who did know about them were buying land tax free, so the government was losing out both ways.
Photo credits: Mr.T via Flickr