Real Estate Taxes in Sri Lanka: A guide for foreign Investors

Real Estate Taxation in Sri Lanka, cure How to Purchase Land & Property

Each Country has its own set of rules, this site guidelines that need to be adhered to and taxes that need to be paid when it comes to the purchase of land and buildings by Non-Citizens. Sri Lanka is no exception, and as a potential investor it is always compulsory to be aware of these rules, government taxes and levies.

Purchase of Land and Buildings
All such purchases must be registered with the Registrar of Lands through the submission of relevant documents such as the ‘Deed of Transfer’ certified by a Notary Public. These documents are required to be properly stamped as required by the ‘Stamp Duty Laws’. The stamp duty can be paid directly to the provincial council that governs the area to which the property belongs to. Additional Duty consists of 100% of market value, and the lowest value of the property may be specified by the Minister of Finance. There are several exemptions on additional duty as well. These exceptions should be discussed in relation to the property by seeking professional legal advice.

Mortgages of Land & Building
 According to Sri Lankan law, all mortgages of land and buildings must also be registered with the Registrar of Lands. The taxing procedure remains the same for both Citizens and Non-Citizens. Though the stamp duty for mortgages was removed in May 2002, it was reintroduced an April 2006. The current tax rate for mortgages lies at Rs.1/- for each Rs.1000/- or a part there of value of the mortgage. Unlike the Purchase of Land and Buildings, the stamp duty for mortgages is only payable to the Department of Inland Revenue. Mortgages executed for housing loans not exceeding LKR tree million have been exempted from the tax.

Income from Rent / Lease of Land & Buildings
Income from Rent/Lease of Land and Buildings is liable to three forms of taxation. Stamp Duty, Income Tax and Value added Tax.

Stamp Duty:

In this type of transactions it is also advised to enter into an agreement and register it with the registrar of Lands. According to  the amendments introduced to the ‘Stamp Duty Law’ in 2006, Stamp Duty is charges at Rs. 10.00 for each Rs. 1000/- or part thereof of the value of such agreement including any premium (key-money) recovered. Stamp Duty in this regard needs to be paid to the Department of Inland Revenue.

Income Tax:

Rent income on Land and Buildings calculated according to the Inland Revenue act is liable to income tax. If this income has been accrued to a corporate entity, such income is treated as business income.  If the rented premises is not used for residential purposes, and if  the rent paid by a tenant is not less than Rs. Fifty Thousand per month or Rs. Five Hundred Thousand per year, a withholding tax  at 10% can be deducted by the tenant on each payment made. The Owner (Land Lord) may claim this tax as Tax credit.

Value Added Tax:

The Value added tax (VAT) is Currently charged at 15%, if it is not on a residential premises and in addition, the rent/lease is accrued to a VAT Registered person.

Key Money
In some instances the Land Owner may Charge Key Money, apart from the rent/lease. This Key Money is liable to income tax and will also be liable to VAT if it is accrued by a VAT registered person.

Sale Of Land And Buildings.
The profit acquired through the sale of land and buildings is not liable to income tax unless it is carried out as a trade. Other than that the sale of land and buildings not used for residential purposes is liable to VAT at 15% as calculated by the VAT law.

Payment Rates
In almost all cases, land and buildings are subject to ‘payment rates’ charged by the respective local authorities. These rates are charged upon the estimated value of the property and not on the current market value. These rates vary from one area to another. The Highest rates (30%) being charged in Colombo.

Construction Industry Guarantee Fund Levy
The Construction Industry Guarantee Fund Levy is an annual levy payable by any construction contractor working in Sri Lanka. This levy is managed and Commissioner General of Inland Revenue. The levy is payable on the total value of the contract, including the sub-contracts covered by the contract at rates based on the total value of the contract.

Service Charge on Development Permits

The Urban Development Authority enforces a service charge on non-low cost residential development permits. These charges are estimated based on the Size or Floor Area of the property in consideration.

This document contains the general information based on the current legal provisions. Professional advice may be obtained before acting on such Information. Date: 15.10.2007

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