Foreign Investment in Sri Lanka: FAQs and Key Legal Considerations for International Investors

Sri Lanka has evolved from a historically restrictive exchange control regime to a more liberalized foreign exchange framework, reflecting ongoing efforts to improve the business environment for foreign investors. This article outlines the key legal and regulatory considerations that foreign investors should be aware of when investing in or  establishing a business presence in Sri Lanka.

What types of foreign exchange transactions are permitted in Sri Lanka?

Under Sri Lanka’s Foreign Exchange Act, No. 12 of 2017 (“FEA”) and regulations thereunder, foreign transactions are primarily categorised into “current transactions” and “capital transactions”.

What are current transactions?

Current transactions are transactions which are not for the purpose of transferring capital assets and encompasses:

• all payments due in connection with foreign trade, other current business, including services, and normal short term banking and credit facilities;
• payments due as interest on loans and as net income from other investments;
• payments of moderate amount for amortization of loans or for depreciation of direct investments; and
• moderate remittances for family living expenses.

These transactions can be carried out through an authorized dealer in the manner specified in the FEA.

What are the capital transactions that foreign investors can engage in within Sri Lanka?

A capital transaction is any transaction that is not classified as a current transaction. Permitted capital transactions for foreign investors in Sri Lanka are set out in the regulations issued under the FEA.

Investing in shares or debt securities of a company incorporated in Sri Lanka, or granting loans to such a company, constitute capital transactions. These capital transactions are subject to certain exclusions, limitations (including tenure requirements for foreign loans) and other restrictions. 

What are the legal structures available to a foreign investor to carry out business in Sri Lanka?

A foreign investor may carry out business in Sri Lanka through one of the following legal structures:

• Incorporation of a limited liability company in Sri Lanka; or
• Registration of the foreign company as an overseas company in Sri Lanka. This option is suitable where a foreign company intends to establish either a branch office, project office, liaison office or representative office in Sri Lanka.

Do foreign investors need a special bank account to invest in Sri Lanka?

Yes, foreign investors are required to open an Inward Investment Account (“IIA”) with a licensed commercial bank in Sri Lanka to conduct capital transactions. This account facilitates the seamless repatriation of returns from the investment, ensuring compliance with local foreign exchange regulations.

Which industries in Sri Lanka are closed to foreign investment?

Foreign investors cannot invest in the shares of a company incorporated in Sri Lanka engaged in:

• pawn broking;
• coastal fishing (as defined by the Minister to whom the subject of fisheries is assigned); and
• retail trade where capital contributed by persons resident outside Sri Lanka will be less than USD 5 million.

Are there any industries in Sri Lanka where foreign investment is restricted or limited?

Yes, foreign investment in fully paid voting shares of a company incorporated in Sri Lanka is limited to 40% in certain industries. These restrictions apply to companies engaged in activities such as:

• production of goods where Sri Lanka’s exports are subject to internationally determined quota restrictions;
• growing and primary processing of tea, rubber, coconut, cocoa, rice, sugar and spices;
• mining and primary processing of non-renewable national resources;
• timber based industries using local timber;
• deep sea fishing (as defined by the Minister to whom the subject of fisheries is assigned);
• mass communication;
• education;
• freight forwarding;
• travel agencies; and
• shipping agencies.

The Board of Investment of Sri Lanka (“BOI”) may, at its discretion, approve a higher percentage of foreign shareholding in the above-listed industries. This requires the target company to register with the BOI and submit an application for approval of a higher percentage of foreign shareholding.

Are there specific business activities in Sri Lanka that require special approvals for foreign investments?

Yes, foreign investors require either the general or special approval of the relevant legal or administrative authority designated by the Government of Sri Lanka to invest in the voting shares of companies engaged in businesses such as:

• air transportation;
• coastal shipping (as defined by the Minister to whom the subject of shipping is assigned);
• industrial undertaking as specified in the Second Schedule to the Industrial Promotion Act, No.46 of 1990, namely-
  • any industry manufacturing arms, ammunitions, explosives, military vehicles and equipment, aircrafts and other military hardware;
  • any industry manufacturing poisons, narcotics, alcohol, dangerous drugs and toxic, hazardous or carcinogenic materials;
  • any industry producing currency, coins, or security documents;
• large scale mechanized mining of gems;
• lotteries.

Are there any other laws or regulations foreign investors should consider when assessing restrictions on investment in Sri Lanka?

Yes. While the primary restrictions on foreign investment are set out under the Foreign Exchange Act, No. 12 of 2017 (“FEA”), foreign investors should also be mindful of industry-specific legislation and regulatory frameworks that may impose additional prohibitions, limitations or restrictions.

*The prohibitions, limitations, and restrictions outlined in this article relate specifically to those under the FEA, and do not address sector-specific regulatory requirements that may apply depending on the nature of the investment and the industry.

Can foreigners legally purchase land in Sri Lanka?

Subject to certain exemptions, the Land (Restrictions on Alienation) Act, No. 38 of 2014 as amended, prohibits the transfer of title of a land situated in Sri Lanka to:

• foreigners;
• foreign companies; and
• companies incorporated in Sri Lanka with more than 49% foreign shareholding (either direct or indirect).

Can foreigners lease land in Sri Lanka?

Yes, foreigners can lease land in Sri Lanka.

Are there any investment promotion agencies or special economic zones in Sri Lanka?

Board of Investment of Sri Lanka (“BOI”)

The BOI is the primary investment promotion agency in Sri Lanka, responsible for facilitating foreign investments. The BOI has the authority to approve higher percentages of foreign shareholding in industries where foreign shareholding is generally limited to 40% under the foreign exchange laws and regulations. Additionally, the BOI offers various incentives, such as visa facilitation for expatriate employees and consultants, and duty-free concessions for the importation of specific items, based on the investment threshold and the type of BOI registration.

Colombo Port City (“Port City”)

Port City is a Special Economic Zone (“SEZ”) designed to attract foreign investment, particularly to diversify Sri Lanka’s service economy, promote foreign exchange inflows, and create employment opportunities. Businesses registered within the Port City are governed by the Port City Economic Commission Act, No. 11 of 2021.

The Colombo Port City Economic Commission is the key body responsible for granting registrations, licenses, and approvals for businesses operating within the Port City. It serves as a single-window investment facilitator to ease the process of doing business within Port City. Additionally, legislative and tax exemptions are available to certain businesses within the Port City, based on the industry and investment threshold.

Are there any tax incentives and concessions available in Sri Lanka?

Tax incentives in Sri Lanka are governed by the Inland Revenue Act, No. 24 of 2017 as amended (“IRA”). At present, tax incentives are available in Sri Lanka in the form of enhanced capital allowances based on the investment amount. The minimum investment amount to qualify for these enhanced capital allowances is USD 3 million.

Other concessions available under the IRA are a dividend tax exemption for commercial hub operations and a concessionary income tax rate of 15% for the service export sector.

Tax incentives are also available for businesses classified as being of strategic importance within the Colombo Port City, subject to the regulatory framework governing this Special Economic Zone. Eligibility for such incentives is subject to a minimum investment threshold and requires registration as a business of strategic importance within the prescribed statutory timeframe.

Does Sri Lank have any double tax treaties?

Yes, Sri Lanka has double tax avoidance agreements with 46 countries.

What forms of investor protection are available in Sri Lanka?

Under the Sri Lankan Constitution, foreign investments are protected where Sri Lanka has entered into a treaty or agreement with a foreign state for the promotion and protection of investments. These treaties or agreements must be adopted through Parliamentary resolutions, with at least a two-thirds majority vote. Such treaties apply to investments made by nationals, corporations, or entities incorporated under the laws of the respective foreign state.

Furthermore, no domestic laws can be enacted, nor can any executive or administrative actions be taken that contravene the provisions of these treaties or agreements, except in cases where national security is involved.