Published on and written by Cyril Jarnias
Sri Lanka, a paradise island in the Indian Ocean, is attracting more and more foreign investors eager to purchase real estate in this country with its diverse landscapes and rich culture. However, the purchasing process for non-residents involves certain specificities that are essential to know before embarking on such a project. In this article, we will explore in detail the various steps and regulations to consider to realize your dream of property acquisition in Sri Lanka.
The Legal Framework: What You Need to Know Before Investing
First and foremost, it is crucial to understand the legal framework governing the purchase of real estate by foreigners in Sri Lanka. Contrary to some misconceptions, it is entirely possible for a non-resident to acquire property in this country, but certain restrictions apply.
The Land Ownership Act (Restrictions on Alienation) of 1963 is the main legislative text regulating the purchase of real estate by foreigners in Sri Lanka. This law has been amended several times, notably in 2013, to ease certain restrictions and promote foreign investment in the country.
Here are the main provisions to remember:
- Foreigners can purchase apartments located above the ground floor of a building without any particular restrictions.
- The purchase of land or individual houses is subject to a special tax of 100% of the property’s value, known as the “Land Lease Tax.”
- Foreigners cannot acquire more than 50% of the shares in a condominium.
- Certain coastal areas and historical sites are prohibited for purchase by foreigners.
It is important to note that these restrictions do not apply to expatriate Sri Lankans or persons of Sri Lankan origin with dual citizenship. The latter benefit from a special status allowing them to acquire real estate without constraints.
Good to Know:
Despite these restrictions, the Sri Lankan real estate market remains attractive to foreign investors, particularly due to competitive prices and significant growth potential.
International Taxation: A Crucial Aspect Not to Overlook
Purchasing real estate in Sri Lanka as a foreigner involves important tax considerations, both in the buyer’s home country and in the host country. It is essential to understand these aspects well to avoid any unpleasant surprises and optimize your investment.
In Sri Lanka, the main taxes to consider are:
- Property transfer tax: It amounts to 4% of the property’s value for foreigners.
- Property tax: Its rate varies by municipality but is generally between 0.5% and 1% of the estimated property value.
- Rental income tax: If you decide to rent out your property, the income generated will be subject to Sri Lankan income tax, with rates ranging from 4% to 24% depending on the income amount.
On your home country’s side, you will also need to consider:
- Possible reporting obligations related to holding real estate abroad.
- Taxation of rental income generated in Sri Lanka, depending on the tax treaties in force between your country and Sri Lanka.
- Rules regarding real estate wealth tax, if such exists in your country.
It is highly recommended to consult an international tax expert to assist you with these procedures and optimize your tax situation. Indeed, the rules can be complex and vary by country, hence the importance of personalized advice.
Good to Know:
Sri Lanka has signed tax treaties with many countries, including France, to avoid double taxation. These agreements can have a significant impact on your tax situation.
The Administrative Process: What Documents Are Required?
Acquiring real estate in Sri Lanka requires the preparation of a number of documents, both for the foreign buyer and the seller. Here is a non-exhaustive list of the main documents to anticipate:
For the foreign buyer:
- Valid passport
- Entry visa to Sri Lanka
- Proof of address in the home country
- Bank statements for the last 6 months
- Proof of income (pay stubs, tax notices)
- Bank reference letter
For the real estate property:
- Seller’s title deed
- Property plans
- Building permit (for recent constructions)
- Certificate of conformity
- Cadastral survey
- Certificate of absence of easements
It is strongly recommended to hire a local lawyer specialized in real estate law to assist you in preparing and verifying these documents. They can also conduct the necessary research to ensure the legality of the transaction and the absence of disputes regarding the property.
Good to Know:
Most official documents in Sri Lanka are written in English, which generally facilitates procedures for foreign buyers. However, it may be useful to have some documents translated into your native language for better understanding.
Investment Opportunities: What Options Are Available for Foreigners?
Despite the restrictions mentioned earlier, Sri Lanka offers numerous real estate investment opportunities for foreigners. Here are the main options available to you:
1. Purchasing Apartments
This is the simplest and most common option for foreign investors. You can freely purchase apartments located above the ground floor in any building in the country without having to pay the 100% tax on land.
2. Investing in Real Estate Development Projects
The Sri Lankan government encourages foreign investment in large-scale real estate development projects. By investing in these projects, you can benefit from tax exemptions and more favorable purchase conditions.
3. Long-Term Lease
If you do not wish to purchase directly, you can opt for a long-term lease (for example, 99 years) of a property. This option allows you to bypass restrictions on land purchase while benefiting from long-term usage rights.
4. Purchase via a Sri Lankan Company
It is possible to create a Sri Lankan legal entity to purchase real estate. This option can be interesting if you are considering significant investments or wish to develop a commercial activity alongside.
5. Investment in Commercial Real Estate
Restrictions are generally less strict for purchasing real estate for commercial use. This option can be interesting if you plan to develop an economic activity in Sri Lanka.
Good to Know:
The Sri Lankan real estate market is experiencing sustained growth, particularly in major cities like Colombo and tourist areas. Rental yields can be attractive, especially for seasonal rentals in coastal regions.
Key Steps in the Purchasing Process
Once you have identified the property that interests you and ensured your eligibility to purchase, here are the main steps to follow to finalize your acquisition:
1. Negotiation and Purchase Offer
After visiting the property and negotiating the price, you will need to submit a formal purchase offer to the seller. It is recommended to do this through a local lawyer.
2. Verification of Title Deeds
Your lawyer will conduct a thorough search on the title deeds to ensure their validity and the absence of disputes.
3. Signing a Preliminary Contract
A preliminary contract (or promise of sale) is usually signed at this stage, accompanied by a down payment.
4. Obtaining Necessary Authorizations
If necessary, you will need to obtain the required authorizations from Sri Lankan authorities for the property purchase.
5. Transfer of Funds
The property payment must be made via an international bank transfer. Ensure you comply with exchange control regulations.
6. Signing the Deed of Sale
The final deed of sale is signed before a Sri Lankan notary, in the presence of your lawyer.
7. Property Registration
The final step is to register the property transfer with the competent authorities.
Good to Know:
The purchasing process can take several months, particularly due to the necessary administrative checks. It is important to be patient and surround yourself with competent professionals to successfully carry out your project.
In conclusion, purchasing real estate in Sri Lanka as a foreigner is entirely possible but requires good preparation and a thorough understanding of local regulations. By following the steps described in this article and surrounding yourself with experienced professionals, you can realize your investment project in this country with multiple assets.
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Cyril Jarnias is an independent expert in international wealth management with over 20 years of experience. As an expatriate himself, he is dedicated to helping individuals and business leaders build, protect, and pass on their wealth with complete peace of mind.
On his website, cyriljarnias.com, he shares his expertise on international real estate, offshore company formation, and expatriation.
Thanks to his expertise, he offers sound advice to optimize his clients' wealth management. Cyril Jarnias is also recognized for his appearances in many prestigious media outlets such as BFM Business, les Français de l’étranger, Le Figaro, Les Echos, and Mieux vivre votre argent, where he shares his knowledge and know-how in wealth management.
