A property investor's reading of the 2016 Budget Proposals

Sri Lankan property-related law and tax regulation has been back and forth over the last 20 years; especially with regard to the investments of non-Sri Lankans.

There’s a general sense, though, that the current Government is friendlier to foreign investment and involvement than the last, both in property and in the Sri Lankan economy more widely. 

The 2016 budget proposals tend to back that view. Below are our notes on key points – ten of them. As ever, some caution’s needed when considering if and when these proposals will reach enactment.

  1. Share transaction levy to be removed

This, indeed, is now in place. For those that have bought, or are considering buying property under a company structure the reduction of costs at point of sale is a significant plus.

  1. Tourism Development Levy will be removed

Not a dramatic shift – the levy was 1% on turnover for businesses licensed under the Tourist Development Act (not obligatory). Does show positive intentions of Government with regard to the tourist sector.

  1. Land (Restriction on Alienation) Act amendments
    1. Restriction on transfer to be removed for identified investments
    2. Tax on leasing of lands to be removed

These are probably the key points. Removal of the 15% tax payable upfront on the value of a lease is clearly positive for those considering that buying option.

There’s limited clarity with regard to which investments would qualify for exemption on ownership restrictions but again there’s indication of a warming attitude towards foreign property ownership.

  1. Mansion tax on condominium units to be removed

There’s been a series of U-turns and amends from the government following the introduction of the Mansion tax in early 2015. It’s no doubt a punitive tax but subsequent restriction to properties valued over LKR 150 million, or over 10,000 square feet and the exemption of properties built before the year 2000 will limit the number effected.

Those buying old properties and renovating/expanding will rightly question the detail around that last exemption.

  1. New residence visa structure for foreigners to encourage foreign investment
    1. USD 250,000 for 3 years
    2. USD 5 million for permanent residence

My word! Our initial reading of this saw the figures in Rupees. We applaud the sentiment but shan’t be scrambling to pay the $5 million fee.

(Some have read those figures to relate to total investment sum, a different thing altogether. Here’s the wording from the Budget: “To encourage foreign investment, I propose to introduce a fee of USD 250,000 for residence visa for a three year period and USD 5 million for a permanent residence visa for foreigners, with the approval of the Cabinet of Ministers.”)

  1. Companies registered with the Registrar of Companies to pay an annual Private Companies License fee of LKR 60,000

Those considering buying through a company structure, for whatever reason, do need to consider the costs of doing so. This license fee will add to a number of charges which can escalate quickly if not managed efficiently.

  1. Revision of corporate income tax structure to two tiers – 15% and 30%

Those investing to generate ongoing revenue will welcome a significantly reduced corporation tax rate of 15%. The standard corporate tax rate currently is 28%.

  1. Government lands and tax concessions – 50% reduction for 5 years – for qualifying investments in ‘lagging regions’

Once again showing a willingness to back those prepared to invest and develop property. The minimum investment of USD 10 million, though, will make it an incentive for a select few.

  1. Engagement of international agencies to provide insurance for foreign investments made in Sri Lanka

This sounds the dream ticket for, what would no doubt have to be, considerable foreign investment. We’d be mightily surprised to see it in action in any meaningful way, though.

  1. Removal of the Securities Investment Account (SIA) and allowance for foreign investment to be channeled through any bank account.

The SIA has, to date, offered the security for foreign investors of knowing money brought in will be allowed back out. We’ve not, in fact, found its use too onerous. Of course, use of any bank account is simpler. The budget proposals aren’t explicit in confirming the rights attached to an SIA will be extended to any other bank account used – for now, one would have to assume so.