Published on and written by Cyril Jarnias
Sri Lanka, this paradise island in the Indian Ocean, is attracting an increasing number of foreign investors eager to acquire real estate. However, before embarking on such a project, it’s crucial to understand the laws and regulations governing the local real estate market. This article provides a comprehensive overview of the legal and tax aspects you need to know to invest with peace of mind in Sri Lanka.
Buying Property in Sri Lanka: What Rights Do Foreigners Have?
The acquisition of real estate by foreigners in Sri Lanka is subject to significant restrictions. Indeed, Sri Lankan legislation aims to protect national interests while allowing a certain level of foreign investment.
Prohibition on Land Purchase for Foreigners
Sri Lankan law prohibits foreigners from purchasing land with full ownership rights. This restriction applies to all types of land, whether residential, commercial, or agricultural. This measure aims to preserve the national land heritage and prevent excessive real estate speculation.
Possibility of Apartment Purchase
However, foreigners are allowed to purchase apartments located above the ground floor in residential buildings. This provision enables foreign investors to participate in the Sri Lankan real estate market while limiting their impact on local land.
Long-Term Lease
An alternative to purchasing for foreigners is long-term leasing. It’s possible to enter into leasehold agreements for up to 99 years. These contracts offer great flexibility and allow foreigners to enjoy a property for an extended period without owning it.
Investment Through a Local Company
Foreigners can also invest in Sri Lankan real estate by creating a local company. However, this option is subject to strict conditions, particularly regarding foreign capital participation and government authorization.
Good to Know:
Although restrictions are significant, there are legal ways for foreigners to invest in real estate in Sri Lanka. It’s recommended to consult a local specialized lawyer to explore the options best suited to your situation.
The Legal Framework of Real Estate in Sri Lanka: What You Need to Know
The Sri Lankan real estate market is governed by a set of laws and regulations aimed at overseeing transactions and protecting the rights of the various parties involved.
The Real Estate Property Law
The main law governing real estate property in Sri Lanka is the “Land Development Ordinance” of 1935, which has been amended several times since. This law defines the different types of properties, the rights and obligations of owners, as well as the procedures for property registration.
The Title Registration System
In Sri Lanka, title registration is mandatory. The “Registration of Title Act” of 1998 established a modern title registration system, aiming to secure real estate transactions and reduce property-related disputes.
Urban Planning Rules
Construction and renovations are subject to strict urban planning rules. The “Urban Development Authority Law” of 1978 defines construction standards, urban development zones, and building permit procedures.
Tenant Protection
Tenant rights are protected by the “Rent Act” of 1972, which regulates residential and commercial leases. This law notably sets conditions for rent review and eviction procedures.
Real Estate Agent Regulation
The activity of real estate agents is regulated by the “Real Estate Agents Registration Act” of 2020. This recent law aims to professionalize the sector and ensure ethical practices in real estate transactions.
Good to Know:
The legal framework for real estate in Sri Lanka is constantly evolving. It’s essential to stay informed of the latest legislative changes and surround yourself with competent professionals for any real estate transaction.
Real Estate Taxation in Sri Lanka: A System in Full Transformation
Real estate taxation in Sri Lanka has undergone significant changes in recent years, aiming to stimulate investment while ensuring state revenue.
Property Transfer Tax
When purchasing a property, a property transfer tax is due. Its rate varies between 3% and 4% of the property’s value, depending on the region. This tax is generally the buyer’s responsibility.
Stamp Duty
Stamp duty applies to all legal documents related to real estate transactions. The amount varies depending on the nature and value of the transaction.
Real Estate Capital Gains Tax
Capital gains realized from the sale of a property are subject to tax. The tax rate is 10% of the capital gain. However, exemptions exist, particularly for the sale of a primary residence.
Property Tax
Owners of real estate properties must pay an annual property tax. Its amount is calculated based on the rental value of the property and varies by municipality.
Tax on Rental Income
Income from property rentals is subject to income tax. The tax rate depends on the taxpayer’s total income and can reach up to 24% for the highest brackets.
Good to Know:
The Sri Lankan tax system is complex and constantly evolving. It’s recommended to consult a local accountant to optimize your tax situation and ensure compliance with reporting obligations.
Rights and Obligations of Real Estate Owners in Sri Lanka
Owning real estate property in Sri Lanka involves a number of rights, but also significant responsibilities.
Right of Enjoyment and Usufruct
The owner of a property in Sri Lanka has the right to fully enjoy it, occupy it, rent it, or sell it. However, these rights may be limited by certain local regulations or easements.
Maintenance Obligation
Owners are required to maintain their property in good condition. This obligation applies to both private areas and common areas in the case of condominiums.
Respect for Neighborhood Rules
Sri Lankan law requires owners to respect neighborhood rules, particularly regarding noise pollution, visual pollution, or encroachment on adjacent properties.
Payment of Taxes and Charges
Owners must pay all taxes and charges related to their property, including property tax, condominium fees where applicable, and water and electricity bills.
Mandatory Insurance
Although not legally required, it’s highly recommended for owners to take out home insurance to protect against risks such as fires, natural disasters, or water damage.
Good to Know:
The rights and obligations of owners may vary depending on the type of property and its location. It’s advisable to inquire with local authorities to know the specific regulations for your area.
Regulatory Developments: Towards a Progressive Opening of the Sri Lankan Real Estate Market
The regulatory framework for real estate in Sri Lanka is undergoing significant developments, aiming to attract more foreign investment while preserving national interests.
Relaxation of Restrictions for Foreigners
The Sri Lankan government is considering relaxing some restrictions on property purchases by foreigners. Discussions are underway to allow land acquisition in certain designated areas, particularly for tourism or industrial projects.
Development of Special Economic Zones
The creation of Special Economic Zones (SEZs) offers new opportunities for foreign investors. In these zones, real estate acquisition rules are often more flexible, allowing for greater foreign participation.
Modernization of the Title Registration System
The government is continuing the digitalization of the property title registration system. This modernization aims to increase transparency and security in real estate transactions.
Strengthening Investor Protection
New laws are being prepared to strengthen investor protection, particularly regarding real estate dispute resolution and guarantees on new constructions.
Tax Incentives for Sustainable Projects
Sri Lanka is implementing tax incentives to encourage environmentally friendly real estate projects. These measures aim to promote sustainable construction and energy efficiency.
Good to Know:
The regulatory framework for real estate in Sri Lanka is constantly evolving. It’s crucial to stay informed of the latest legislative changes and consult local experts before any investment.
Conclusion: A Promising Real Estate Market Despite Regulatory Challenges
Real estate investment in Sri Lanka presents interesting potential, particularly due to the country’s economic growth and the development of the tourism sector. However, foreign investors must navigate a complex and constantly evolving regulatory environment.
Although restrictions on property purchases by foreigners remain significant, there are viable options to participate in the Sri Lankan real estate market. Long-term leasing, apartment purchases, or investment through a local company are all possibilities to explore.
Real estate taxation, although relatively heavy, offers certain advantages, particularly for sustainable and innovative projects. Ongoing regulatory developments suggest a progressive opening of the market to foreign investors, which could create new opportunities in the coming years.
Nevertheless, it’s crucial to research thoroughly and surround yourself with competent professionals before embarking on a real estate investment in Sri Lanka. Understanding local laws, administrative procedures, and cultural nuances is essential to succeed in this promising yet complex market.
Disclaimer: The information provided on this website is for informational purposes only and does not constitute financial, legal, or professional advice. We encourage you to consult qualified experts before making any investment, real estate, or expatriation decisions. Although we strive to maintain up-to-date and accurate information, we do not guarantee the completeness, accuracy, or timeliness of the proposed content. As investment and expatriation involve risks, we disclaim any liability for potential losses or damages arising from the use of this site. Your use of this site confirms your acceptance of these terms and your understanding of the associated risks.
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.
