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Starting of Business in Sri Lanka by a Foreign Company

A Foreign Company can have presence in Sri Lanka through any of the following form:

Off Shore Company:

The Foreign Company may apply to the Registrar to be registered as an “Off Shore Company”. The Registrar may having regard to national interest or in the interest of the national economy issue a Certificate of Registration after the required fee is paid and a Certificate is produced from a bank that a sum of US $ 100,00 has been deposited to meet its expenses in Sri Lanka. Such company is exempted from complying with any other provisions of the Company Act (Companies Act No. 17 of 1982) of Sri Lanka.

Branch Office:

A Company incorporated outside Sri Lank, which establishes a place of business within Sri Lank need to seek registration with the Registrar of Companies within one month of the establishment of the place of business. Generally approval from the relevant ministry would be required before the registration can be completed

Such a company has the same powers to hold lands in Sri Lanka as if it was a company incorporated in Sri Lanka.

Liaison /Representative Office

A Foreign company may have a Liaison office in Sri Lanka for following purpose:-

• Marketing intelligence, planning and coordinating business promotion activities;
• Technical support and quality control;
• Sourcing of raw material and manufactured products;
• Not to engage in any import, export, trade or investment in Sri Lanka.

Application is generally directed to Ministry of Finance.

Holding & Subsidiary Company:

A company is deemed to be a subsidiary of another company if:

• the other company holds more than half of the nominal value of its equity share capital; or
• is a member of it and controls the composition of its board of directors.
A company is a Holding Company of another company if that other company is its subsidiary

Board of Investment

The Principle law applicable to foreign investment is Board of Investment law No. 4 of 1978 (BOI Act). Board of Investment of Sri Lanka is a major body, which approves foreign investments under Board of Investment law. The Board of Investment is structured to function as a central facilitation point for investors.

The BOI Act provides for two types of investment approvals.

Under Section 17 of the Act, the BOI is empowered to grant special concessions to companies satisfying specific eligibility criteria which are designed to meet strategic economic objectives of the government. The mechanism through which such concessions are granted is the Agreement which modifies, exempts and waives identified laws in keeping with the BOI Regulations. These laws include Inland Revenue, Customs, Exchange Control and Import Control.

Approval under Section 16 of the BOI Act permits foreign investment entry to operate only under the 'normal laws' of the country; that is, for such enterprises, the provisions of the Inland Revenue, Customs and Exchange Control Laws shall apply.

For the purpose of granting approvals and incentives, companies incorporated under the Companies Act are treated equally regardless of whether the shareholding is controlled by nationals or non-nationals.

Significantly, when an agreement is signed with the Board of Investment, the specific incentives granted to an eligible company remain valid for the life of the enterprise. The provision and the spirit of the agreement can not be changed by successive governments.

Applicable Taxes for Foreign Companies:

Income Tax:

The existing income tax in Sri Lanka is based on the Inland Revenue Act, No. 38 of 2000. An year of assessment is a period of twelve months from the 1st of April of an year to the 31st of March of the immediately succeeding year.

Company income tax is made up of a tax on corporate income and tax on dividend is 15 % of the gross dividends declared by the company. Generally, companies are liable to income tax on its taxable income at the rate of 35 per centum.

If a resident company pays dividend consisting of a qualifying distribution, it is required to pay advance company tax. A credit is given for this advance company tax paid, against company’s final tax liability.

Goods and Service tax- GST:

Is imposed on the taxable supply of goods and services by a registered person carrying on a taxable activity in Sri Lanka; and on the importation of goods in Sri Lanka by any person

The standard rate of GST is 12.5 per centum which the export of goods and certain services are zero-rated. Supply of goods and services listed under Schedule of the Goods and Service Tax Act, 1996 are exempt from tax.

Turnover Tax –TT

It is charged on the turnover of finance, money lending, pawn broking and banking business.

National Security levy

Every person who carries on the business of manufacture, insurance, banking, finance providing services of any description or imports any article is chargeable with this levy. However for the calculation of levy, certain classes of turnover are excluded.

Prevailing rate for National Security Levy is 7.5 per centum on the turnover other than the turnover from import or manufacture of any plant, machinery and equipment. Levy of 0.5 per centum is charged on the turn over from import or manufacture of any plant, machinery and equipment.

Tax incentives

Tax Incentives for Board of Investment Approved Companies:

Board of Investment has the power under the Board of Investment law to supersede the Inland Revenue Act and grant tax holiday, preferential tax rates, exemption from custom duty and foreign exchange controls in accordance with the investment criteria such as priority sectors, capital inflow, location etc.

Resident Guest Scheme

Non-citizens in Sri Lanka who come under this are deemed to be non-resident and excluded from liability of tax on profits and income arising outside Sri Lanka and income accruing from any account opened by such person in a commercial bank.

Taxations on Investment Income

Non-residents are not subject to tax on non Sri Lankan investment income.


Interests, annuity, ground rent and royalty received by a non – resident person from a person outside Sri Lanka are exempt from income tax.

Dividend from a non- resident company is exempt in the hands of a non-resident person. Service rendered by a non-resident is exempted from income tax, if it doesn’t exceed Rs. 144,000.

Reduced Rates

Certain interest income, royalties and employment income are taxed at reduced rates.

Exchange control

The law that deals with foreign exchange in Sri Lank is the Exchange Control Act No 24 of 1953 and its subsequent amendments. The Central Bank is responsible for carrying out the provisions of this Act.

The Exchange Control Act applies to a variety of exchange transactions involving importation of capital, repatriation of capital, exports, imports, etc. Since March 1994, in Sri Lanka a rupee (LKR) has been made fully convertible on the current account. Commercial banks have complete freedom in transactions related to imports, exports and services.

The Department of Exchange control is the administrative agency for foreign investments, which fall under the Board of Investment.

The Board of Investment 1978 has stipulated that investments made under agreements with the BOI may be exempted from the provisions of the Exchange Control Act.

The following outward remittances may be made by a foreign investor under the prevailing liberal exchange control regulations:

• Profits (interim and final) of branches in Sri Lanka to their parent companies and to non-resident partners of partnership operating in Sri Lanka.

• Dividends (interim or final) accruing to non-resident shareholders of companies incorporated in Sri Lanka.

• Interest, royalties and technical service fees by enterprises established in the BOI area in accordance with the agreements entered into with the Greater Colombo Economic Commission.

• Life insurance premiums by foreign nationals temporarily residing in Sri Lanka.

• Remittance of Shares in a company incorporated in Sri Lanka (for the purpose of investing in the Economic Commission area) to a resident in Sri Lanka or to a non-resident outside Sri Lanka.

• Any unutilized balance in excess of the minimum requirement of the investor.

• Capital gains and income from investment.

• Sale proceeds of investment.

• Capital, including liquidation proceeds.

• Pensions, salaries and commission paid to non-residents.


The Sri Lankan government has established Export Processing Zones (EPZs) at various places in Sri Lanka to provide investment opportunities and promote exports.

Under the Board of Investment Law, incentives in the form of tax, import duty and exchange control exemptions are available to foreign investors who wish to engage in the following Export Oriented Enterprises in the Export Processing Zones.

• Thrust Industries
• General Export Oriented Projects
• Projects Locating in designated industries zone
• Exports of Textiles, Software, Gems, Jewellery and Agricultural Products
• Export Trading, Regional Operating head quarters ship repairing and breaking
• New Enterprises outside Colombo District
• Non-export Oriented Projects –Tourism, Housing, Hospital and small scale infrastructure
• Large scale investment
• Agriculture and Training Institutions.

Protection to Investors

Bilateral investment agreements, which are supported by a constitutional guarantee, provide strong protection to foreign investment in Sri Lanka. The safety of foreign investment is guaranteed through the acceptance by a two – third majority of Parliament of the constitutional guarantees of Investment Protection Agreements. Under Article 157 of the Country’s Constitution the agreement enjoys the force of law and no legislative executive nor administrative action can be taken to contravene it.

Bilateral Investment Agreements are valid for 10 years. They are extended automatically unless terminated by either party. If the agreements are terminated, investments already made are protected for another 10 years. The constitution ensures the sanctity of the agreements. The bilateral agreements provides for the following:-

• Protection against nationalization
• Prompt and adequate compensation if required
• Free remittances of earning, capital and business fees.
• Settlement of dispute under the International Convention for the Settlement of Investment Dispute (ICSID)

Double Tax treaty:

With a view to avoiding double taxation, Sri Lanka has entered into Treaties with most of the countries. Sri Lanka’s tax treaties have generally followed the UN Model convention. Sri Lanka has also entered into Double Taxation Agreement with India on 27.01.1982.

Clearance of Personnel

Foreign companies that wish to employ expatriate personnel must obtain a letter of recommendation from the Appraisal Department. This letter must then be submitted to the Department of Immigration and Emigration to obtain necessary visas and work permits.

Duties on Export and import of materials

Custom duties on the equipments & material for the export and import in Sri Lanka vary. India and Sri Lanka has entered into a Free Trade Agreement under which listed goods are under Zero Duty. India has also been accorded the status of Most Favoured Nation (MFN) by Sri Lanka under which the duties vary from 15 % to 35 % depending on materials / goods.




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