Sri Lanka pioneered South Asia’s economic liberalization over three decades ago. The following (see below) transparent investment laws aim to foster foreign direct investments (FDI). Government of Sri Lanka (GOSL) created a strategic roadmap for improving and reforming the investment climate in Sri Lanka.
The election of President Maithripala Sirisena in January 2015, and the establishment of the new national government of consensus led by the United National Party under the charismatic leadership of Prime Minister Ranil Wickremesinghe present a fresh chapter in Sri Lanka’s socioeconomic history and contemporary politics. Such a backdrop provides a welcome opportunity for the country to chart a course rationalized with appropriate economic strategies to ensure Sri Lanka’s future prosperity.
The positive changes are reflected in improved international indices, which in turn will facilitate future economic growth. The expected improvements of Sri Lanka’s position in the Doing Business Index, Global Competitiveness Index, Global Innovation Index, Network Readiness Index as well as Global Economic Report are some of the important areas in this context.
To support foreign investments in Sri Lanka, total foreign ownership is permitted across almost all areas of the economy, No restrictions on repatriation of earnings, fees, capital, and on forex transactions relating to current account payments are there. Safety of foreign investments are guaranteed by the Constitution, existence of a transparent and sophisticated legal and regulatory framework covering all business law enactments, bilateral investment protection agreements with 28 countries and double taxation avoidance agreements with 38 countries are some of those.
Sri Lanka is also a founder member of the Multilateral Investment Guarantee Agency (MIGA), an investment guarantee agency of the World Bank. This provides a safeguard against expropriation and non-commercial risks.
The Board of Investment (BOI) has its origins in the Greater Colombo Economic Commission which was established in 1978. Fourteen years later, in 1992, the Commission was reconstituted as the Board of Investment of Sri Lanka.The BOI is structured to function as a central facilitation point for investors in Sri Lanka. The Agency for Development, by replacing the BOI, will soon be established by the GOSL to facilitate foreign investments in Sri Lanka with more benefits to investors. However, investments could be made in Sri Lanka even without the approval of the BOI subject to the restrictions prescribed by the Exchange Controller in Sri Lanka. Further, it was proposed to introduce a new investment act in Sri Lanka to facilitate investments.
Exchange Control Laws for Foreign Investments
The foreign exchange management function in Sri Lanka is exercised on behalf of the Government by the Central Bank of Sri Lanka, through the Exchange Control Department (ECD) established under the Exchange Control Act No. 24 of 1953.
The exchange control provisions applicable for foreign investments are stipulated. Permission is granted for the issue and transfer of shares in a company up to 100% of the issued capital of such a company, to approved country funds, approved regional funds, corporate bodies incorporated outside Sri Lanka and individuals resident outside Sri Lanka (inclusive of Sri Lankans resident outside Sri Lanka) subject to exclusions, limitations and conditions.
Exchange controls have been a key point of contention in attracting investments and GOSL has proposed to repeal the present archaic and draconian Exchange Control Act and introduce an investor friendly Foreign Exchange Management Act (FEMA) which would help attracts foreign flows from the SAARC and the world at large.
Investors have to open a Securities Investment Account (SIA) through which foreign investors have been requested to channel their investments to Sri Lanka. Through the SIA, profits, sales proceeds, and capital (in the event of exiting), etc, could also be repatriated out from Sri Lanka, ie via the SIA. In addition to the SIA account, investors are also allowed to bring in money to Sri Lanka through any bank account existing in the formal banking system. The Government shall not take any criminal action against any persons making inward remittances of such monies held overseas through the banking channel except in instances where the proceeds are as a result of terrorism, drugs, human trafficking and corruption.
Sri Lanka is one of the safest countries in the world to invest in, due to a number of mechanisms in place to protect investors. Article 157 of the island’s constitution guarantees the safety of investment protection treaties and also of agreements approved by parliament by a two thirds majority. Sri Lanka has signed bilateral investment protection agreements (IPA) with 28 countries. Sri Lanka has an independent judiciary which can redress any concerns of investors.
In order to strengthen the country’s international trade policy framework, GOSL plans to incorporate an International Trade Agency and explore the possibility of entering into free trade agreements (FTA) with countries such as United States, China, South Korea, Singapore, Australia, South Africa and Japan, and also to enhance exports to EU through the regaining of the GSP+ scheme.
Sri Lanka currently has two FTA. Those are with India and Pakistan. Sri Lanka plans to broaden the current FTA with India in to an Economic and Technology Agreement (ECTA), thereby widening the scope of the current FTA which is limited to merchandise goods, to bring in to its wing services and investments as well.
Article 157 of the Constitution of Sri Lanka
Where Parliament by resolution passed by not less than two-thirds of the whole number of members of Parliament, (including those not present), voting in its favour, approves as being essential for the development of the national economy, any treaty or agreement between the Government of Sri Lanka and the government of any foreign state for the promotion and protection of investments in Sri Lanka of such foreign state, its nationals, or of corporations, companies and other associations incorporated or constituted under its laws, such a treaty or agreement shall have the force of law in Sri Lanka and otherwise than in the interests of national security, no written law shall be enacted or made, and no executive or administrative action shall be taken, in contravention of the provisions of such a treaty or agreement.
Regulations of Lands for Foreign Investors
GOSL has imposed a 100% tax on foreigners buying land in Sri Lanka and subsequently prohibited foreigners from purchasing absolute ownership of state and private lands in Sri Lanka. However, the Government allowed leasing of state and private lands on a long term lease basis subject to the payment of 15% land tax on market value of the land.
Currently, GOSL has removed the tax imposed on the leasing of land to foreigners and is also considering the removal of restrictions on ownership on identified investments imposed through the Land (Restrictions on Alienation) Act, which has been an impediment to attract foreign investments in to the country. The Government has provided an opportunity to foreigners to lease lands in Sri Lanka for shorter or long term periods without payment of land tax.
Taxation in Sri Lanka
Under Article 148 of the Constitution of Sri Lanka, the Parliament of Sri Lanka shall have full control over public finance. No tax, rate or any other levy shall be imposed by any local authority or any other public authority, except by or under the authority of a law passed by Parliament or of any existing law.The Department of Inland Revenue, Sri Lanka Customs and Sri Lanka Excise Department are the main tax authorities in Sri Lanka and Income Tax (IT), Value Added Tax (VAT), Nation Building Tax (NBT), Economic Service Charge (ESC) and Customs Duty (CD) are the main taxes collected by the revenue authorities in Sri Lanka.
Income tax exemptions, deductions of expenses and qualifying payments and 50% reduction of income tax liability are provided for investors in Sri Lanka for their investments in different sectors and locations in Sri Lanka. The granting of tax concessions for any investment are strictly under the supervision and monitoring of the Ministry of Finance which would be governed by regulations issued by the Minister. Board of Investment or the Inland Revenue Department cannot grant any new tax holidays other than facilitation and implementation of existing concessions, if there be any.
Income tax rate for the year of assessment 2016/2017 in Sri Lanka is 17.5% and a 30% rate is applicable only for trading activities, liquor, tobacco, betting & gaming and banking.