Published on 15 October 2005 at 03:40 pm
Filed under: Asia:- Sri Lanka Property Guides » Sri Lanka for Property Investors
Sri Lanka, the ‘teardrop of India’ is a country that presents property investors with as many opportunities as it does challenges making the real estate sector on this Asian island one of the world’s more exciting prospects for a property purchaser.
The stunning tropical beaches and resorts are a massive draw for tourists, second homers and even retirees, and land and property for sale or development are in abundance - but the government of Sri Lanka have imposed extreme taxation on foreign buyers and while they are keen to attract foreign investment they are also keen to control it.
Lying in the warm waters of the Indian Ocean, tropical Sri Lanka is an island with over one thousand three hundred kilometres of palm fringed coastline and an interior that is floristically and faunally rich and diverse. The attractions of the island are immediately obvious - a fantastic climate, perfect beaches, a wealth of history and culture, incredibly warm and friendly people, great food and very cheap prices. And the island remains a tourist hotspot despite the devastation wrought by the 2004 Tsunami.
Direct financial aid, foreign debt relief and fiscal assistance from the IMF received after the Tsunami actually helped Sri Lanka step back from the brink of macro-economic fundamental deterioration and has helped stabilise the country’s fiscal operations. Furthermore, significant and sustained local effort has been put into rebuilding resort areas and Sri Lanka has managed to retain its strong position on the world tourism map thus ensuring the country remains a desirable destination. The far reaching positive benefits of the foreign aid received by Sri Lanka alerted the government to the fact that foreign direct investment can be good for an economy and a certain amount of effort is now being put into targeting sustained investment. However Sri Lanka still suffers from very high inflation and although it has the highest per capita income of all South Asian countries, the government have been warned by the IMF about inflation levels and foreign investment will be slow in coming until economically Sri Lanka is more stable.
The capital city of Sri Lanka is Colombo and the majority of resorts, developments, properties and pieces of land that foreign buyers are interested in are situated along the coastline south of the capital. Purpose built developments for overseas buyers are popular and house and land prices remain relatively affordable making Sri Lanka appear like a perfect destination for a developer or investor. However first impressions can be deceptive!
There is no denying the appeal of Sri Lanka and there is no denying the fact that many foreign buyers would like to purchase and own land or a home on the island, but the government have implemented a 100% property tax on any non Sri Lankans who buy freehold property on the island!
Yes indeed - 100% tax!
As a non Sri Lankan you pay double for your land or property purchase - plus you have solicitor’s fees which are usually around 3% of the purchase price as well of course, and the once comparatively cheap price often becomes too high and restrictive to make an investment viable.
The reasons behind this level of taxation can be speculated about until the cows come home - is it to restrict foreign freehold ownership, is it to raise capital, is it xenophobic - but the fact of the matter is, 100% taxation reduces the attraction of property in Sri Lanka significantly. But any real estate investor worth his salt will be able to see past this restrictive taxation and see the massive opportunity in Sri Lanka to build for the growing tourism sector or to offer the burgeoning expatriate interest something desirable in the form of second homes or retirement homes.
But how to get around this taxation problem?
It’s fair to say that the higher a government sets a tax the more creative people will become to legally avoid that tax! And in Sri Lanka property investors are using a variety of local and offshore company structures to avoid this excessive taxation. And for their target audience - i.e., expatriate, foreign retirees and those in search of a holiday home in an exotic location - there are also the company ownership routes or as an alternative, 99 year leases on a property are available which reduce an individual’s taxation liability by about 93% to just 7%!
So the desirability of Sri Lanka is undeniable, and the ongoing, timeless appeal of the island means that an investor will always have an audience of interested buyers or renters. But the need to be creative with taxation in order to afford property and land will remain until the government can firmly conceptualise the need to attract and retain foreign investment via incentives and attractive taxation breaks for example.
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