Investment Policy

Sri Lanka’s Investment policy is geared towards the realization of national sustainable development goals and grounded in 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:

– Investment in specific economic activities, e.g. as an integral part of an industrial development strategy.

– Areas for mutual reinforcement of public and private investment (including a framework for public-private partnerships).

– Investment that makes a significant development contribution by creating decent work opportunities, enhancing sustainability, and/or by expanding and qualitatively improving productive capacity and international competitiveness.

In this context, the key legislations facilitating investments in Sri Lanka are;

  1. Board of Investment Law No. 4 of 1978
  2. Finance Act No. 12 of 2012 (Hub Operations)
  3. Inland Revenue Act No.24 of 2017
  4. Foreign Exchange Act No.12 of 2017

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 empowered to enter into agreements with investors providing incentives to attract investments.

Finance ACT No.12 of 2012 (Hub operations) as amended in 2013

This legislation was 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 freedom to carry out transactions in convertible foreign currency.

Inland Revenue Act No.24 of 2017

This legislation has simplified the taxation law in Sri Lanka while introducing new incentive regime for investors. While maintaining the standard corporate income tax rate at 28%, this law provides for a reduced rate of 14% for specific sectors such as SMEs, Exports of Goods and Services, IT, Education, Tourism and Agriculture. Enhanced investment allowance has been offered to investors for their fixed capital investment over and above the normal depreciation.

Summary of the investment incentives

Location Expenses incurred on Depreciable Assets* Enhanced Capital Allowance Extended Period for Deducting Unrelieved Losses
Northern Province  > US$ 3 Mn 200% 10
Other than Northern Province  > US$ 3 Mn and < = US$ 100 Mn 100% 10
 > US$ 100 Mn 150% 10

* Other than intangible assets (Class 5)

Classification of Depreciable Assets

Class  1  : computers and data handling equipment together with peripheral devices

Class  2 :  buses and minibuses, goods vehicles; construction and earthmoving equipment, heavy general purpose or specialised trucks, trailers and trailer-mounted containers; plant and machinery used in manufacturing.

Class  3 : railroad cars, locomotives, and equipment; vessels, barges, tugs, and similar water transportation equipment; aircraft; specialised public utility plant, equipment, and machinery; office furniture, fixtures, and equipment; any depreciable asset not included in another class.

Class  4 : buildings, structures and similar works of a permanent nature

Class  5 :  intangible assets, excluding goodwill – applicable only for normal depreciation

Category Expenses incurred on Assets or Shares Enhanced Capital Allowance Extended Period for Deducting Unrelieved Losses Exemption from Dividends tax & Exemption of employment income from WHT
State owned company > US$ 250 Mn 150% 10 x
> US$ 1,000 Mn 150% 25 P

Special incentives

“state owned company” means any company, where fifty per centum or more of the shares are held by the Government and includes a company of which forty per centum or more of the shares held by the Government are acquired by a person for an amount not less than USD 250 million

Temporary Concessions

Location Expenses incurred on Depreciable Assets* Enhanced Capital Allowance Extended Period for Deducting Unrelieved Losses
Northern Province  Up to US$ 3 Mn 200%  10
Other than Northern Province   Up to US$ 3 Mn 100% 10

* (a)        Class 1 : computers and data handling equipment together with peripheral devices and

Class 4 : buildings, structures and similar works of a permanent nature and

(b)       Depreciable assets (other than intangible assets) comprising plant or machinery that are used to improve business processes or productivity and fixed to the business premises.

 

Sector Incentives Period

(after commencement of the Act)

Business of Life Insurance Reduced CIT rate of  14% 3 years
Information Technology

–       conducts a business which predominately consists of providing information technology services

–       has at least 50 employees during the whole of the year

–       report those employees in the statement that the company, as a withholding agent, is required to file under section 86

Additional deduction equal to 35%

(of the total amount deducted for the year under the IR Act that represents payments made by the company which are to be included in calculating the taxable income of its employees)

* Not entitled for enhanced capital allowance

ceiling of

5 years

Headquarters Relocation

(established on or after October 1, 2017)

CIT Rate  at 0% 3 years
Renewable Energy

(Which entered into a Standardized Power Purchase Agreement on or before November 10, 2016 with the Ceylon Electricity Board )

Reduced CIT rate of  14% 3 years
Research and Development Additional deduction equal to

100% of the total amount of research and development expenses

3 years

 

  1. Foreign Exchange Act No.12 of 2017

The above Foreign Exchange Act repeals the Exchange Control Act (Chapter 423) while 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 through Outward Investment Accounts.

Exchange Control Laws Applicable for foreign Investments

In accordance with the Foreign Exchange Act No 12 of 2017, the Minister in charge has gazetted 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 as follows;

Exclusions:

The permission hereby granted shall not apply in respect of shares of a company proposing to carry on any of the following businesses:

  1. Pawn broking
  2. Retail trade with a capital of less than Five Million US Dollars

Limitations:

(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.

  1. Production of goods where Sri Lanka’s exports are subject to internationally determined quota restrictions
  2. Growing and primary processing of tea, rubber, coconut, cocoa, rice, sugar and spices
  1. Timber based industries using local timber
  2. Deep Sea Fishing (as defined by the Ministry assigned the subject of Fisheries)
  3. Mass Communication
  1. Travel Agencies
  2. Shipping Agencies

(b) The permission shall apply in respect of shares in 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

  1. Air transportation;
  2. Coastal shipping (as defined by the Ministry assigned the subject of Shipping);
  3. Industrial enterprise in the Second Schedule of the Industrial Promotion Act, No. 46 of 1990, namely –
  4. any industry manufacturing arms, ammunitions, explosives, military vehicles and equipment aircraft and other military hardware;
  5. any industry manufacturing poisons, narcotics, alcohols, dangerous drugs and toxic, hazardous or carcinogenic materials; any industry producing currency, coins or security documents;
  6. Large scale mechanized mining of gems;
  7. Lotteries

General Conditions for Permitted Investments