COLOMBO, Oct 21 (Reuters) - Sri Lanka passed legislation banning land purchases by foreigners, a move the government said would curb tax evasion but critics said could hinder its offshore investment ambitions.
The Land Bill adopted by parliament late on Monday prohibits foreign individuals, companies and locally incorporated firms with over 50 percent foreign ownership from buying land in the South Asian island nation.
President Mahinda Rajapaksa, who is also finance minister, had flagged the ban plan in his November 2012 budget speech.
Deputy Finance Minister Sarath Amunugama said that since 2004 foreign individuals had been able to buy land by paying a 100 percent transfer tax, and locally incorporated firms with over 25 percent foreign ownership were also subject to the levy.
But Amunugama said some foreigners with a minority stake in company had sidestepped the tax system by buying land in the firm's name and then transferring remaining shares of the company into their name to end up as sole owner of the land.
"This was used to evade tax (by buying land through companies and then transferring shares). These common malpractices associated with transfer of land to foreigners disguised under the veil of incorporation have been prevented through this act," he told parliament.
The new act will allow foreigners to acquire land only on a lease basis of up to 99 years with an annual 15 percent tax on the total rental paid upfront.
"Though it is not unprecedented to restrict foreign ownership, Sri Lanka has just given a red light to foreign investors, specially at a time the country is trying to attract long term foreign investments," said Anushka Wijesinghe, a research economist at the Institute of Policy Studies.
The bill, however, said all strategic development projects under its Board of Investment are exempt from the new rules.
Sri Lanka's foreign direct investment rose 49 percent in the first nine months of 2014 from the same period a year earlier to $1.3 billion. Colombo has set a $2 billion FDI goal this year, after it failed to meet that target for two years in a row. (Reporting by Shihar Aneez; Editing by Mark Heinrich)