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Sri Lanka’s Investment policy is geared towards the realization of national sustainable development goals and grounded in the country’s overall development strategy. Investment policy priorities are based on a thorough analysis of the country’s comparative advantages and development challenges and opportunities.
Its strategic priorities include:
In this context, the key legislation’s facilitating investments in Sri Lanka are;
1.Board of Investment Law No. 4 of 1978
The Board of Investment Law No. 4 of 1978 and its amendments is the principal law applicable to investments in Sri Lanka. This Law established the national investment promotion agency, the Board of Investment of Sri Lanka, which is structured to function as the ‘Central Facilitation point’ for investors and is empowered to enter into agreements with investors, providing incentives to attract investments.
2.Finance Act No. 12 of 2012 (Hub Operations)
This legislation is introduced to promote Sri Lanka as an emerging trading hub and facilitates related specific trading and services activities. Free Ports and Bonded Areas have been set up to create trade-related infrastructure to facilitate Sri Lanka’s import and export of goods and services with the freedom to carry out transactions in a convertible foreign currency.
3.Inland Revenue Act No. 24 of 2017
This legislation simplified the taxation law in Sri Lanka while introducing a new incentive regime for investors. While maintaining the standard corporate income tax rate at 24%, this Act provides for a reduced rate of 14% for specific sectors such as SMEs, Exports of Goods, Education, Tourism, Construction services, Healthcare services and Agro processing, with zero corporate income tax rate applicable for Agro framing, IT and Export of services. Further, Enhanced investment allowance is offered to investors for their fixed capital investment over and above the normal depreciation.
2.Strategic Development Projects Act No 14 of 2008
Projects which are of national interest and are likely to bring economic and social benefit to the country, which are likely to change the landscape of the country, primarily through— (a) the strategic importance attached to the proposed provision of goods and services, which will be of benefit to the public ; (b) the substantial inflow of foreign exchange to the country ; (c) the substantial employment which will be generated and the enhancement of the income earning opportunities ; and (d) the envisaged transformation in terms of technology, will be granted specific tax reliefs on a case by case basis.
5.Foreign Exchange Act No. 12 of 2017
The Foreign Exchange Act repealed the Exchange Control Act (Chapter 423) introducing a liberal exchange regime for Sri Lanka. Foreign exchange controls have been greatly liberalized and investors are allowed to directly deal with the banks for their transactions unless Central Bank approval is specifically needed. Free flow of transfers are allowed through Inward Investment Accounts and Outward Investment Accounts.
6.Land Policy (Land Act**)
Foreign investors are permitted to acquire land on lease-hold basis, subject to a maximum tenure of 99 years, with no lease taxes charged. Outright transfer of ownership is permitted when the foreign shareholding of a company is less than 50%. Condominium properties however may be purchased outright with no restrictions on nationality.
Exchange Control Laws Applicable for foreign Investments*
Under the Foreign Exchange Act No 12 of 2017, the Minister in charge has gazettes relevant regulations in the Extraordinary Gazette No 2045/56 dated 17-11-2017 with the Exchange Control Provisions applicable for foreign investments which read as follows;
A person resident outside Sri Lanka is permitted to Invest, acquire or hold all classes of shares or an entitlement of shares issued by companies incorporated in Sri Lanka, subject to the exclusions & limitations given below;
The permission hereby granted shall not apply in respect of shares of a company proposing to carry on any of the following businesses;
ii) Retail trade with a capital of less than Five Million US Dollars
iii) Coastal Fishing
(a) Foreign investments in the areas listed below will be approved only up to 40% of the stated capital of such company or if a special approval has been granted by the Board of Investment of Sri Lanka for a higher percentage of foreign investment in any company, only up to such higher percentage.
i) Production of goods where Sri Lanka’s exports are subject to internationally determined quota restrictions
ii) Growing and primary processing of tea, rubber, coconut, cocoa, rice, sugar and spices
iii) Mining and primary processing of non-renewable national resources
iv) Timber based industries using local timber
v) Deep Sea Fishing (as defined by the Ministry assigned the subject of Fisheries)
vi) Mass Communication
viii) Freight Forwarding
ix) Travel Agencies
x) Shipping Agencies
(b) Investment in shares of a company carrying on or proposing to carry on any of the businesses specified below only up to the percentage of the stated capital of the company, for which percentage either general or special approval has been granted by the Government of Sri Lanka or any legal or administrative authority set up for the approval of foreign investments in such businesses
i) Air transportation;
ii) Coastal shipping (as defined by the Ministry assigned the subject of Shipping);
iii) Industrial enterprise in the Second Schedule of the Industrial Promotion Act, No. 46 of 1990, namely –
iv) Any industry manufacturing arms, ammunitions, explosives, military vehicles and equipment aircraft and other military hardware;
v) Any industry manufacturing poisons, narcotics, alcohols, dangerous drugs and toxic, hazardous or carcinogenic materials; any industry producing currency, coins or security documents;
vi) Large scale mechanized mining of gems;
General Conditions for Permitted Investments
- Capital Investments shall be made through an “Inward Investment Account (IIA)”.
- Income from such investments and proceeds of disposal shall be credited to IIA.
- All income, proceeds on sale of the above investments transferred from a person who is non-national by way of inheritance may be repatriated through an IIA opened by the beneficiary.
- Resident entities involved with the capital transactions, including Investee Company, company secretaries and all intermediaries including stockbrokers, unit trusts, mutual funds and financial institutions shall be responsible to ensure that capital transactions are carried out in compliance with all legal requirements.
- The commercial bank and the person engaged in capital transactions shall retain all information and documentary evidence in proof of the permitted capital transactions engaged in, for a period of six years from each such transaction
- The documentary evidence on inflows or outflows of funds, disposal or acquisition of assets, receipts of income or returns on capital transactions and any other documentary evidence should prove the legality of such transactions substantially
- The commercial bank and the person engaged in capital transactions shall facilitate compliance with the provisions of the Regulations by providing necessary documents at the time of such transactions
Acquisition of Land in Sri Lanka by Foreigners
Law applicable for instruments executed after 1st of April 2018
The foreign investors are eligible to lease lands in Sri Lanka to establish their projects. A new land law was promulgated in 2014 (as amended in 2017 and 2018) which permitted lease of land for foreign investments and outright transfers will only be permitted when the foreign shareholding is less than 50%. The land lease period is subject to a maximum tenure of 99 years. Foreign investors are not liable pay any lease tax when leasing a land. However, condominium properties can be purchased outright with no restrictions on nationality.
Acquisition of land by foreigners, foreign companies or Sri Lankan companies with more than 50% foreign shareholding is prohibited subject to a few exemptions.
The following table provides the restrictions (Section 2), exemptions to the law (Section 3) and some conditions that needs to be fulfilled in this regard
Leasing of Lands to Foreigners
Section 5 (1)
The Leasing of Land shall be effected to;
(a) a foreigner
(b) Sri Lankan company with 50% or above foreign shareholding
(c) a foreign company
Subject to a maximum tenure of 99 years.
The above three transactions are not subject to land lease tax. (The land lease tax which was introduced in the Land (Restriction on Alienation) Act 2014 was withdrawn with effect from 1st January 2016.)
This section provides general rules applicable to lands transferred or leased under the new law and the interpretations.
Restriction on Mortgaging (Section 11)
Any land transferred or leased to a person or a company referred to in Section 2 (1) and 5 (1) of Land (Restrictions on Alienation) Act, after the date on which the certificate of the speaker is endorsed in respect of this Act (October 29, 2014) shall not be mortgaged or pledged to any licensed bank, for a period of 5 years from the date of execution of the transfer or lease.
Lease / transfers prior to certification of Land (Restrictions on Alienation) Act
(a) Any transfer deed to a person or a company referred in section 2(1), executed prior to January 1, 2013 and pending registration it shall be registered subject to the provisions of repealed Part VI of Finance Act, No. 11 of 1963, notwithstanding the fact that it was repealed.
(b) Any Lease / transfer executed to a person or a company under section 2(1) or 5(1) of Land (Restrictions on Alienation) Act, from January 1, 2013 to October 29, 2014 shall be subject to the provisions of the said Act.