CONTENT Page No. BUSINESS ORGANIZATIONS - Forms of business organisations Available investment opportunities for non residents 24-29

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1 CHARTEREDACCOUNTANTS

2 CONTENT Page No FOREWORD 02 ABOUT HLB INTERNATIONAL 03 ABOUT NIHAL HETTIARACHCHI AND COMPANY 04 GENERAL INFORMATION - Geography and climate 05 - Language and currency 05 - Population 06 - Constitution and legal system 06 - International relations 07 - Economic overview INVESTMENT FACTORS Country Features - Quality of life 09 - Knowledgeable and flexible labour force 09 - Location and connectivity Access to key markets 10 - Social infrastructure 11 - Fast developing infrastructure Exciting business environment 13 Encouraging government policies and incentives The Financial system Foreign exchange management 19 Local and social security regulations BUSINESS ORGANIZATIONS - Forms of business organisations Available investment opportunities for non residents TAXATION HOW TO CONTACT US 43

3 FOREWORD This booklet has been prepared for the use of clients, partners and staff of HLB International member firms. It is designed to give some general information to those contemplating doing business in Sri Lanka and is not intended to be a comprehensive document. You should consult us, therefore, before taking further action. Nihal Hettiarachchi & Company and HLB International cannot be held liable for any action or business decision taken on the basis of information in this booklet. Nihal Hettiarachchi & Company April A member of HLB International, a worldwide network of independent accounting firms and business advisers. Doing Business in Sri Lanka - 2

4 ABOUT HLB INTERNATIONAL Formed in 1969, HLB International is a world-wide network of independent professional accounting firms and business advisers. The network comprises member firms in 130 countries who, collectively, have 21,000 staff in over 600 offices. Member firms provide clients with a comprehensive and personal service relating to auditing, taxation, accounting and general and financial management advice. Up-to-date information and general assistance on international matters can be obtained from any of the member firm partners of Nihal Hettiarachchi & Company. HLB International Executive Office 21 Ebury Street London SW1W 0LD UK Telephone: +44 (0) Fax: +44 (0) mailbox@hlbi.com Website: HLB International is a world-wide network of independent professional accounting firms and business advisers, each of which is a separate and independent legal entity and as such has no liability for the acts and omissions of any other member. HLB International Limited is an English company limited by guarantee which co-ordinates the international activities of the HLB International network but does not provide, supervise or manage professional services to clients. Accordingly, HLB International Limited has no liability for the acts and omissions of any member of the HLB International network, and vice versa. Doing Business in Sri Lanka - 3

5 ABOUT NIHAL HETTIARACHCHI & COMPANY Nihal Hettiarachchi and Company is a leading firm of Chartered Accountants in Sri Lanka united by a commitment to provide exceptional client service. Established in 1984, we strive to better our performance each day whilst confining ourselves to the scope of our deep rooted principles. In accordance with our philosophies of achieving the right balance in everything we do making us the ideal service providers, we place our emphasis on quality, innovation, timely performance and values whilst maintaining the strong relationship with the clients. The firm provides its professional services, with six partners bringing together a unique combination of multidisciplinary experience and knowledge gathered over the years in public practice. We are renowned for our expertise in Audit and Assurance, Tax Advisory services to national and global businesses. Our specialization further extends to Business process outsourcing and Human Resource Development. We have earned the trust and respect of many impressive clients with a range of services having access to international resources and expertise. Building strong and meaningful client relationships have always been the compass of our business strategy and future development. The Firm's clients range from many industries such as Manufacturing, Construction, Apparels, Banking and Finance, Leisure, Education, Logistics, Information Technology, Consumer business, NGOs etc. We believe that a satisfied client is our best reference. We endeavor to delight them with solutions that put them at an advantage, professionally as well as commercially. Doing Business in Sri Lanka - 4

6 GENERAL INFORMATION Geography and climate Sri Lanka formerly Ceylon, known as the pearl of the Indian Ocean, is an island in the shape of a teardrop off the South East coast of the Indian Ocean. It has a total area of 65,610 km², with 64,740 km² of land and 870 km² of water. The country has year-round warm weather, moderated by ocean winds and considerable moisture. It is a tropical island, but the hill country in the interior with its waterfalls and green tea plantations can be a quick getaway from the heat of the coastal plains. For a small country, Sri Lanka also has amazing natural diversity, where one of the attractions is the Sinharaja Rainforest. The country is a paradise for eco-tourists. Language and currency Sri Lanka is a diverse and multicultural country with many religions, ethnic groups, and languages. In addition to the majority Sinhalese, it is home to large groups of Sri Lankan and Indian Tamils, Moors, Burghers, Malays, and the aboriginal Veddahs. The first language of the Sinhalese is Sinhala, which is an Indo- European language, and for the Tamils, the first language is Tamil. Tamil is also the first language for the majority of Moors as well. Malays speak Malay, and Indo-Portuguese is spoken by many of the Burghers, although its use has declined and the majority now speaks Sinhala. The Veddahs speak Vedda, a Creole language closely based on Sinhala. Doing Business in Sri Lanka - 5

7 English is widely spoken and is the main language used by the business community. The rupee generally written as Rs. (code: lkr) is the currency of Sri Lanka, and is issued by the Central Bank of Sri Lanka. Population The population of Sri Lanka as of 1 January 2016 was estimated to be 20,770,749. This is an increase of 0.50 % (103,748) compared to a population of 20,667,001 the year before. In 2015 the natural increase was positive, as the number of births exceeded the number of deaths by 201,710. Constitution and legal system Sri Lanka is a Democratic Socialist Republic Unitary State governed by a semi-presidential system. The sovereignty is in the People and is inalienable and includes the powers of government, fundamental rights and the franchise. The position of the Executive President is proposed to be abolished in this year. The system of courts is the judiciary of Sri Lanka that interprets and applies the law in the country which is an amalgamation of English Common Law, Roman-Dutch Civil Law and customary law. Doing Business in Sri Lanka - 6

8 International relations Sri Lanka by tradition follows a Non-Aligned international policy and since the end of the 3 decade Cold War, the country has better associations with India, Bangladesh, Russia, United States, China, Pakistan, Japan, Malaysia, South Korea and the European Union. Sri Lanka has also ties with the member states of the Association of Southeast Asian Nations (ASEAN), the African Union and the Arab League. Sri Lanka seeks to promote sovereignty, independence, and development in the developing world and so participates in multilateral diplomacy, particularly at the United Nations. Sri Lanka is a founding member of the Non-Aligned Movement (NAM) and is also a member of the Commonwealth of Nations, the South Asian Association for Regional Cooperation (SAARC), the World Bank, the International Monetary Fund (IMF), the Asian Development Bank (ADB) and the Colombo Plan. Sri Lanka has been a World Trade Organization (WTO) member since 1 January 1995 and a member of the General Agreement on Tariffs and Trade (GATT) since 29 July Economic Overview A peaceful environment, encouraging government policies and improved investor confidence have facilitated all the key sectors in the country to exhibit an admirable performance and such improvements has contributed towards the high economic growth (GDP growth of 7.4% in 2014) a substantial boost in the country s per capita income (per capital Gross Domestic Production (GDP) of $3, in 2015) with the strong economic performance has enabled the country to graduate to a middle income country from the list of Poverty Reduction & Growth Trust (PRGT) eligible countries. Doing Business in Sri Lanka - 7

9 Out of the all key sectors, the services sector remains as the leading contributor to the national economy with a contribution 56.8%. Presently, using the benefit of Sri Lanka's strategic location & resources, the government has planned to make the country into a strategically important economic centre. Recently the country has attained some of the highest growth numbers in the region as follows; i. Rent for Grade A commercial space With the rapid increase in demand, real estate and construction have attracted significant investment capital. ii. iii. Colombo's tourism and hotel boom With a new wave of tourism arrivals, a number of international hotels are under construction in Colombo, including Shangri La, Grand Hyatt, ITC Hotels, Movenpick, to name a few. High end residential Some premium residential high rise apartments are under construction in Colombo, but low uptake threatens the long-term viability of this segment. Doing Business in Sri Lanka - 8

10 INVESTMENT FACTORS Country Features Quality of life Sri Lanka offers a range of experiences and places that waits to be discovered, and is a great place to reside and a great place to work. A wide selection of relaxed housing exists in the country including luxury condominium apartments which give a quality living environment, and good quality healthcare facilities, outstanding educational institutions with international standards. Knowledgeable and flexible labour force Sri Lanka possesses the most literate population in South Asia and has one of the highest levels of literacy in the developing world; well educated and energetic, skilled and semi-skilled human resources are also readily available at competitive wage rates in the country. Widespread investment in public education has contributed to create competent and intelligent workforces, who are comfortable with high tech production and services technologies. Also, approximately 50% of the students who complete higher education are trained in technical and business disciplines and English is widely spoken and is the main language used by the business community. Location and connectivity The country is positioned at the traffic circle of major shipping routes linking South Asia, Far East and the Pacific with Europe and America, and is well located next to the fast growing Indian sub-continent with close proximity to Southeast Asia and the Middle East. Sri Lanka has strong air connectivity with over 100 weekly flights to India alone. Doing Business in Sri Lanka - 9

11 The country is also connected to the SEA-ME-WE III and IV (South East Asia Middle East Western Europe) fiber optic communication backbone with over 11 communication satellites orbiting above the southern part of the country. Access to key markets Providing duty free access to over 1.3 billion consumers from the island, Sri Lanka is the only nation to have free trade agreements with both India and Pakistan. In the year 2000, as an outcome of the Indo- Sri Lanka Free Trade Agreement (ISFTA), Sri Lanka got strategic access for over 4,200 products at zero duty to India, which is the world's second most populous market. Also, in 2005, the Pakistan Sri Lanka Free Trade Agreement (PSLFTA), provided strategic access from Sri Lanka for nearly 4,500 products duty free from 2008, to the Pakistan market. Bi-lateral trade between Sri Lanka and India has grown more than 5 times and between Sri Lanka and Pakistan has grown 3 times since the agreements were signed. Moreover, by locating in Sri Lanka, a company can also gain privileged trade access to two large regional blocs under the South Asian Free Trade Area (SAFTA) and the Asia Pacific Trade Agreement (APTA). Doing Business in Sri Lanka - 10

12 Social infrastructure In the South Asian Region, Sri Lanka leads in the human development index with its towering national health indicators where it boasts a life expectation of 70.3 years for males and 77.9 years for females and a child mortality rate of 8.5 per 1,000 live births, which ranked it 92 nd of 186 countries. In terms of international laws and UN rights of labour, children and women, Sri Lanka is a firm supporter and has an edge over its regional competitors as it has a strict devotion to child labour laws and backing of gender equality. Fast developing infrastructure Go-getting infrastructure developments have been initiated by the government to completely upgrade the sea, air, road, power and telecommunication of the country. i. Major Sea Port and Airport development Projects - Colombo South Port Expansion - Hambantota Port Development - Expansion of Bandaranaike International Airport ii. Development of High Mobility Road Network The national Road Master Plan has already been prepared, which focuses on the construction of highways, widening of highways, reduction of traffic congestion, road maintenance & rehabilitation and bridge rehabilitation & reconstruction. There is an urgent necessity for further investment in the road network, as the development of the road network has become a major determinant factor in attracting new investments to the country. Doing Business in Sri Lanka - 11

13 Major road development projects; - Colombo - Katunayake Expressway - CKE (25km) - Southern Highway (126km) - Outer Circular Highway - OCH (29.2km) - Colombo - Kandy Highway (99km) iii. Power & Energy Under the government's infrastructure development plans, expansion of the power & energy sector is a key element and long term strategies have been introduced with active contribution of the private sector, as a key part. iv. Telecommunication Infrastructure Development The country is associated with the South East Asia-Middle East-West Europe IV (SEA-ME-WE IV) project, the submarine cable system linking South East Asia to Europe via the Indian Sub-Continent and Middle East. By considerably increasing the bandwidth and global connectivity of users along its route between Singapore and France, the project aims to take these regions to the forefront of global communication. By way of a 25 year assured lifetime for the technology SEA-ME-WE IV, fiber optic cables offer a bandwidth capacity of 1.28 terabits per second. This ground-breaking submarine cable system offers Sri Lanka an enormous bandwidth gain, and paves the way to make the country an internationally competitive business hub. Doing Business in Sri Lanka - 12

14 Exciting business environment In South Asia, Sri Lanka is ranked as the country with the most liberalized economy. The country adapted open market free economic policies in 1978, and consecutive governments have further liberalized the nation, leading to deregulation, greater privatization and opening the economy to global contest and crystal clear investment laws aim to promote foreign direct investments. The country s commercial laws are based on British Laws and have an extremely independent legal structure. The existing dynamic and resilient private sector should enable the foreign investors to invest as joint venture partners. Conversely, foreign investors are permitted to hold 100% ownership of an investment in selected areas. Concessions granted under an agreement with the Board of Investment (BOI) for qualifying investment projects would remain valid over the lifetime of the enterprise. Encouraging government policies and Incentives With the relaxing of government restrictions, usually in areas of social, political and economic policy, today the government has embraced strategies and policies that should encourage more international investments. Several investment laws endeavour to encourage foreign direct investments. Entire foreign ownership is allowed for selected areas of the economy. Protection of foreign investment is assured by the constitution. Existence of a clear and sophisticated legal and regulatory framework, covering all precondition business law enactments. Doing Business in Sri Lanka - 13

15 Sri Lanka is a founder member of the Multilateral Investment Guarantee Agency (MIGA), an investment guarantee agency of the World Bank and it provides a safeguard against expropriation and non-commercial risks. - Sri Lanka was ranked 107 th in the World Bank s Doing Business 2016 Index Sri Lanka ranked as the 107 th country in the World Bank s Doing Business 2016 index, which measures the ease of doing business in 189 different countries. (The report covered only Colombo as a city of Sri Lanka). Sri Lanka ranked 107th out of 189 countries in terms of easiness of carrying out business for 2016, while the country was in the 113th place in The report says that Sri Lanka has also simplified post registration procedures such as tax registration, social security registration and licensing. In addition it also says, that the country has made it simple to deal with construction permits by creating a working group of different agencies involved in issuing building permits, so that applicants no longer need to obtain approvals separately. - "Ease of Doing Business Forums" Initiated by the Ministry of Finance At present, activities carried out by the Ministry of Finance to make the trading and the commercial activities in the country into an investor friendly activity, have accrued benefits to all its stakeholders. An initiative taken by the Ministry of Finance under the direction of the Finance Minister Ravi Karunanayake, the "Ease of Doing Business", has within a short period helped to take away impediments to doing business in Sri Lanka. Doing Business in Sri Lanka - 14

16 Three forums have been held since May 2015 by the Ministry of Finance, where problems have been recognized and positively addressed up to now. This is a joint exercise, chaired by the Finance Minister Ravi Karunanayake with the involvement of the relevant Ministers of the respective ministries and top officials of the government Institutions. Creating another signpost, the Ministry of Finance launched a web portal for "Ease of Doing Business" and this web portal can be accessed through the Ministry of Finance website. In addition, "Ease of Doing Business" has launched a Face Book Page which will act as an extra channel to view the forum and give its input and suggestions on line. As a result of the negotiations held at preceding forums, "Public Relations Offices" have been established by most of the government institutions to provide an efficient service to private sector entities and the general public to accelerate the business process. The results of the negotiations at the Ease of Doing Business Forums of the Ministry of Finance will certainly improve the efficiency of the government by saving time for all stake holders and there is no doubt that this initiative has played an essential role towards this achievement and it would continue to play a major role to transform the state bodies to play the role of a facilitator in promoting the economy of the country. Within the government's strategy, efforts have also been made to attract investments to target sectors in which the country has strong groundwork for development, and as well as in areas where on a national scale it is vital to develop. The government has also proposed to make quite a few amendments to the tax structure of the country so that the overall tax regime for all Doing Business in Sri Lanka - 15

17 sectors will be less complex and will be at a lower rate across the economy. Further, the government is focusing on inspiring the local talent base, increasing the number of women in the workforce, tackling corruption and boosting mutual efforts between the public and private sectors with the view of reaching its goals of sustainable and inclusive growth. Improving education and developing technical skills will also make sure that human capital desires are met as the economy becomes further diversified. The administration of President Maithripala Sirisena has pledged to streamline spending and invite increased private sector contribution and foreign direct investment, while working to improve and increase trade agreements. With a wealth of potential, and reforms already under way, Sri Lanka is poised for continual growth in 2016 and beyond. - Automation of numerous operations of Sri Lanka Customs (SLC) and the Sri Lanka Ports Authority (SLPA) In addition, the foremost operational issues at the SLC and the SLPA have been dealt with by the accessibility of round the clock service on demand. A major breakthrough that should make economic activities easier is the provision of a customs online payment system linking all the major banks in Sri Lanka. The Automation of the CUSDEC import documentation process at the Sri Lanka Customs and the accessibility of Import/Export information in digital form will make it possible for the trading community to let trading partners log on through the internet and make e-payments to SL Customs. Doing Business in Sri Lanka - 16

18 Electronic funds transfer or online payments could be made to pay Customs duties and levies connected with the clearance formalities of goods declared for import or export of cargo. The Customs Single Window System, which is another footstep that has been earmarked to be implemented, would enable economic operators and trading partners to submit all import, export and transit information required by regulatory agencies via a single electronic gateway. This will eliminate the system of overlapping that entails the submitting and processing the same information on several occasions to different entities. - Investment protection and double taxation Since a number of mechanisms are in place to protect investors, Sri Lanka is one of the safest countries in the world to invest in. Article 157 of the country's constitution guarantees the safety of investment protection treaties and agreements approved by parliament by a two thirds majority. Sri Lanka has signed bilateral investment protection agreements with 28 countries and double taxation avoidance agreements with 38 countries. - Visa through BOI The BOI function in obtaining Visa process is to provide visa services for all the investors and their employees who are engaged in BOI approved enterprises. BOI may facilitate the issuance of residential visas to investors and qualifying employees once an agreement is signed with the BOI. The company should submit the required information and documentation along with the visa application when applying for expatriates. Doing Business in Sri Lanka - 17

19 The Financial System Financial intermediaries and financial markets in the country channel funds from those who have savings to those who have more productive uses for them. The country s banking and financial services industry is sound, vibrant and market driven and thus, customers benefit from this. The financial system of the country comprises the major financial institutions, namely the Central Bank of Sri Lanka (CBSL), Licensed Commercial Banks (LCBs), Licensed Specialised Banks (LSBs), Licensed Finance Companies (LFCs), Specialised Leasing Companies (SLCs), Primary Dealers (PDs), pension and provident funds, insurance companies, rural banks, stock brokers, securities market intermediaries, unit trusts and thrift and credit co-operative societies. The major financial markets are the foreign exchange market, money market, capital market and the informal financial market; and the financial infrastructure which is the legal framework related to the financial system and the payment and settlement. The banking sector in Sri Lanka, which comprises LCBs and LSBs, dominates the financial system and accounted for 58 per cent of the total assets of the financial system. Commercial banks include both local and foreign banks, and local banks are well established island wide and foreign banks are generally on hand in the main cities. Banks play a critical role within the Sri Lankan Financial System, as they are engaged in the provision of liquidity to the entire economy, while transforming the risk characteristics of assets. Banks are also engaged in providing payment services, thereby facilitating all entities to carry out their financial transactions. Internet banking is offered by most of the banks so that the customers are able Doing Business in Sri Lanka - 18

20 to access their accounts and carry out transactions from home. The banks are also very committed in terms of physical presence as well, and are located in every town and city as the level of competition is high. Foreign exchange management The Central Bank of Sri Lanka exercises the foreign exchange management function of the country on behalf of the government, through the Exchange Control Department (ECD) established under the exchange control act no. 24 of With the liberalization of all current account transactions, the relaxation of exchange controls on current account transactions commenced, permitting commercial banks (i.e. Authorized dealers in foreign exchange) to release foreign exchange on such transactions free of any exchange restrictions. The Exchange Control Department now concentrates mainly on the monitoring of foreign exchange flows into and out of the country on current transactions and already liberalized capital transactions and advising the dealers in foreign exchange on good practice. Labour and social security regulations Sri Lanka is a cherished member of the International Legal Organization (ILO) since the country s standards of industrial law are far above the norm when compared to other countries in our region. In fact it is said that Sri Lanka leans in favour of the safety and wellbeing of her workers even at the expense of productivity. Doing Business in Sri Lanka - 19

21 Employment regulations Wages Board Ordinance and Shop and Office Employees Act are covered under laws relating to terms and conditions of employment. Wages Boards are bodies set up to ensure minimum wages and a few other conditions such as holidays, leave and overtime rates in respect of specified trades. The Shop and Office Employees Act applies to all employees within the definition of a shop or office and deals with five areas regulation of hours of employment in shops and offices: health and comfort of employees, payment of remuneration, regulation of remuneration, closing order for shops and general matters. Employee welfare and well-being The employment of women young persons and children Act, maternity benefits ordinance and employment of females in mines Act are amongst laws on welfare and the well-being of employees. Occupational health is regulated by the factories ordinance of 1942 and all persons operating factories are conversant with the comprehensive provisions of this legislation. Explicitly health, safety and welfare are covered under this area. Social security Laws on social security of employees are addressed by three main mechanisms: employees provident fund, employees trust fund and the gratuity fund. Such mechanisms enable employees to get financial benefits upon completion of a statutory period of service, change of employment or reaching the retirement age.

22 Employees Provident Fund (EPF) The Employees Provident Fund was established by Act No. 15 of 1958, and an amount equivalent to 20% of the employee s total earnings has to be remitted every month to the Central Bank by Employers. The employer has to contribute an amount equivalent to 12% of the employee s total earnings and employee s contribution is 8%. Earnings include wages, cost of living allowances and similar allowances, payment in respect of holidays and leave, cash value of food provided by the employer and meal allowance. Overtime payments are excluded from the earnings. Payments for work done during normal working hours on weekly holidays, poya days or public holidays should also be considered as earnings for the computation of EPF contributions. Failure to remit EPF results in surcharges ranging from 5% to 50%. Employees Trust Fund (ETF) The Employees Trust Fund Act No. 46 of 1980 (as amended) obliges the employer to contribute monthly 3% of the employee s total wages to the Trust Fund created under it. Gratuity Gratuity to an employee is governed by the Payment of Gratuity Act No. 12 of 1983 and is a lump sum payment made in recognition for services at the end of a period of employment. Under the Act any employer who has employed more than 15 employees in any industry during the twelve months preceding the termination of the employee in question, is required to pay a gratuity to that employee if he has completed five years of service. The Doing Business in Sri Lanka - 21

23 amount for monthly paid employee is calculated at the rate of half a month s salary for each completed year of service. Gratuity is also payable to employees who are paid weekly or daily, at the rate of 14 days salary for each completed year of service. Gratuity is payable whether termination was by the employer or employee, except if the termination was for reasons of fraud, misappropriation of the employer s money or willful damage to the employer s property, the amount of the loss or damage may be deducted from the amount of gratuity due under the Act. If the employee dies while employed, any gratuity due to him must be paid to his legal heirs Doing Business in Sri Lanka - 22

24 BUSINESS ORGANISATIONS Forms of Business Organisation Sole trader A sole trader is a business owned by a person/an individual and controlled/managed by himself/herself. Partnership A partnership is an association of two or more persons or entities that carry on business as partners with the common motive of earning profit. A partnership may be formed verbally, or in writing. Most of the partnerships carry on business in line with the provisions made in the partnership agreement. Company Companies established in Sri Lanka are governed by the Companies Act No. 07of 2007 (formerly by No.17 of 1982) and the registering authority is the Registrar of Companies. On incorporation of the company, the Registrar of Companies will issue the Certificate of incorporation and a specified number will be given as a registration number of the company. The Articles of Association embody the rules and regulations governing the operation of the company and these rules and regulations have to be formulated or set up within the framework of the Companies Act. The privilege of limited liability for business debts is one of the principal advantages of doing business as a company. A company s existence continues irrespective of the change in the composition of its members.

25 A company should have a common seal and this common seal acts as the official signature of the company. The financial statements of a company should be audited by a chartered accountant who should state an opinion as to whether the financial statements give a true and fair view. Non-profit organisations An organisation established with the main objective of maintaining healthy education, social, cultural level in the society as a whole. Since there is no profit motive, operations will be carried out with the assistance of various individuals and entities. Trust A trust is a collection of individual investors. A trustee is an entity/person act as an administrator for the pool of money & other assets of investors who invested together (outside) and distribute benefits among all such investors. Available Investment Opportunities for Non-Residents Investments in shares in Companies incorporated in Sri Lanka Non-residents can acquire up to 100% of the share of a Company in Sri Lanka. However, they are not allowed to invest in shares of Companies in the following business areas: - Money lending. - Pawnbroking. - Retail trade with a capital of less than USD 1 million. - Coastal fishing. - Provision of security services. Doing Business in Sri Lanka - 24

26 Moreover, Non-residents are allowed to invest up to 40% of the capital of the Companies engaged in the below areas of businesses if the Board of Investment of Sri Lanka has approved. - Production of goods where Sri Lanka s exports are subject to 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. - Fishing (deep sea fishing) - Mass communications. - Education - Freight forwarding. - Travel agencies. - Shipping agencies. Non - residents need to obtain permission from the relevant government authority to invest in the following areas of businesses. - Air transportation. - Coastal shipping. - Industries which are involved in the following activities. - Manufacturing, arms, ammunition, explosives, military vehicles and equipment, aircraft and other military hardware. - Manufacturing poisons, narcotics, alcohols, dangerous drugs and toxic, hazardous or carcinogenic materials. - Producing currency, coins or security documents. - Large scale mechanized mining of gems. - Lotteries Doing Business in Sri Lanka - 25

27 Investments in a Unit Trust Non-residents can invest in units in a unit trust in Sri Lanka which operates on a license issued by the Securities and Exchange Commission of Sri Lanka (SEC). Investments in Treasury bonds and Treasury bills Investments are allowed up to 12.5% of the total outstanding stock of T- bonds and T-bills at a given time. Investments in Sri Lanka Development Bonds (SLDBs) The following investors can invest in SLDBs: - Primary dealers appointed by the Central Bank of Sri Lanka. - Citizens of foreign states whether living in Sri Lanka or outside Sri Lanka. - Citizens of Sri Lanka who are living outside Sri Lanka, permanently. - Citizens of Sri Lanka who have proceeded outside Sri Lanka to take up employment or to set up a business or engage in a profession. - Companies or firms established outside Sri Lanka. - Companies registered to carry on insurance business in Sri Lanka. Investments in listed debentures Investments up to 100% of the issue of listed debentures are permitted. Doing Business in Sri Lanka - 26

28 Investments in special foreign investment deposit Accounts (SFIDA) If people wish to maintain deposits in Sri Lanka, they can open a SFIDA with any bank. SFIDAs can be opened as time or saving deposits in designated foreign currencies or in Sri Lanka rupees and can be held jointly, subject to maintaining of a minimum balance of USD 10,000. How to open places of business in Sri Lanka (a) Non-residents can establish branch, liaison, project, and representative, regional or other similar offices (Overseas Companies) in Sri Lanka. (b) An overseas company engaged in permitted commercial, trading, or industrial activity needs to invest a minimum of USD 200,000. (c) Overseas companies are not permitted to carry out operations in the following business arrears: - Money lending - Pawn broking - Retail trade with a capital of less than USD 2 million. - Coastal fishing. - Growing and primary processing of tea, rubber, coconut and rice. - Mining and primary processing of non-renewable national resources. - Freight forwarding - Shipping agency business. - Mechanized mining of gems - Lotteries - Security services Doing Business in Sri Lanka - 27

29 (d) To engage in the following businesses, the permission of the Controller of exchange need to obtained: - Production of goods where Sri Lanka s exports are subject to internationally determined quota restrictions. - Growing and primary processing of sugar, cocoa and spices. - Timber based industries using local timber. - Deep sea fishing. - Mass communications. - Education - Outbound travel agency business - Local air transportation. - Coastal shipping. - Any industry manufacturing or producing: Arms, ammunitions, explosives, military vehicles and equipment, aircraft and other military hardware. - Poisons, narcotics, alcohols, dangerous drugs and toxic, hazardous or carcinogenic materials. - Currency, coins or security documents. Funding investments in Sri Lanka Required to open securities investment account (SIA) with any bank to channel the funds for the above investments. SIA can be opened in the name of the investor and can be held jointly. It can be maintained in Sri Lanka rupees or on any designated foreign currency. Can use the same SIA for remitting back sale proceeds / dividends/ profits or other similar receipts related to the investments freely, without coming to the Central Bank. Doing Business in Sri Lanka - 28

30 Making remittances to an Overseas Company. (Branch, liaison. Project, representative, regional or other similar offices): Investments have to be made through an SIA. Once the proposed Overseas Company is registered with the Registrar General of Companies, the required funds may be transferred from the SIA to the rupee account of the Overseas Company in Sri Lanka. The Overseas Company can transfer profit, royalty, franchise or other similar payments or surplus funds (net of taxes) into the SIA of the investor without coming to the Central Bank. Doing Business in Sri Lanka - 29

31 TAXATION 1. Fiscal Year Income tax is to be computed for each year of assessment. Year of assessment is the period of twelve months commencing on the first day of April of any year and ending on the thirty first day of March in the immediately succeeding year. A person who carries on any trade, business, profession or vocation is required to make up accounts of that trade, business, profession or vocation for each successive period of 12 months ending on 31st March. Any person who is unable to make up the accounts as at 31st March is required to give a notice in writing to the Commissioner General of Inland Revenue (CGIR) stating the reasons for his inability to do so. The CGIR may direct that person to make up the accounts for such other period reserving the power to revoke the direction at any time. 2. General structure Income tax in Sri Lanka is governed mainly under the Inland Revenue Act No. 10 of 2006 (the Act) as amended subsequently. It is a direct tax levied on the profits and income of every person. The administration authority is the Department of Inland Revenue of Sri Lanka. Section 2 of the Act imposes the tax liability of every person. This Section serves as the main charging section of the Act and is considered as being a summarized form of discussion on income tax. In addition to this, Section 78 (Partnership) and Section 102 (Non- Governmental Organizations) act as charging sections for specific entities. Doing Business in Sri Lanka - 30

32 Section 2 of the Act states as follows: Income tax subject to the provisions of the Act, be charged at the appropriate rates specified in the schedules to the Act for every year of assessment, in respect of the profits and income of every person for that year of assessment. i. Who is liable to pay income tax? Every person is liable to pay income tax. Under the Act, the word person is defined as follows: Person includes a company, body of persons or any government. For this purpose, Company means any company incorporated or registered under any law in force in Sri Lanka or elsewhere and includes a public corporation. Body of persons includes any local or public authority, anybody corporate or collegiate, any fraternity, fellowship, association or society of persons, whether corporate or unincorporated, and any Hindu undivided family, but does not include a company or a partnership. It should be noted that the definition of person is an inclusive definition and all the categories have not been defined. Therefore, it is obvious that an individual falls within the meaning of the word person. ii. On what is the tax liability computed? Income tax is computed on profits and income Profits or income means the net profits or income from any source for any period calculated in accordance with the provisions of the Act. Profits or income listed below are referred to as sources of income. i. Profits from trade, business, profession or vocation ii. Profits from employment Doing Business in Sri Lanka - 31

33 iii. Net annual value Where the owner occupies the property solely as his residence or someone else occupies on behalf of the owner, the net annual value is treated as owner s income. However, the net annual value of one place of residence is exempt from income tax. iv. Dividends, Interest and Discounts income v. Charges or Annuities vi. Rent, Royalty and Premium income vii. Winnings from a lottery, betting or gambling viii. Reward and share of fines from Government ix. Grants, donations and contributions received by nongovernmental organizations x. Income from any other source, not including profits of a casual and non-recurring nature. iii. Residence For income tax purpose, a person could be categorized as either a resident person or as a non-resident person. A resident person is liable for income tax in Sri Lanka on profits and income wherever it arises. This means he is liable for income tax on the sources of income referred to above, whether they arise inside Sri Lanka or outside Sri Lanka. A non-resident person is liable for income tax in Sri Lanka on profits and income arising only in Sri Lanka. However, there are systems in place to avoid double taxation by providing relief for taxes paid outside Sri Lanka. Therefore, it is important to decide whether a person is a resident or non-resident for the purposes of income tax in Sri Lanka, pertaining to a year of assessment. Section 79 specifies the following rules in deciding the residency of a person. Doing Business in Sri Lanka - 32

34 a) Residency rules applicable to individuals An individual s residency depends on the physical presence in Sri Lanka as follows: An individual, who is physically present in Sri Lanka for 183 days or more during any year of assessment, shall be deemed to be resident in Sri Lanka throughout that year of assessment. Otherwise, he becomes a non-resident throughout that year of assessment. b) Residency rules applicable to companies A company is deemed to be a resident company if; - Its registered or principal office is in Sri Lanka, or - The control and management of its business is exercised in Sri Lanka. 3. Individual taxation Every individual being a person liable for income tax, is required to pay income tax on his taxable income for each year of assessment. Ascertainment of taxable income includes ascertainment of total statutory income, assessable income and finally taxable income. 3.1 Total Statutory Income The total statutory income of a person for any year of assessment shall be the aggregate of his statutory income for that year of assessment from every source of his profits or income in respect of which tax is charged. 3.2 Assessable Income The assessable income of an individual for any year of assessment shall be his total statutory income for that year after deducting therefrom income which does not form part of assessable income and deductions specified in Section 32 of the Act. Doing Business in Sri Lanka - 33

35 i. Income which do not form part of the assessable income The Act specifies certain income which should be deducted in arriving at the assessable income. Most of the income that is deducted under this category includes income on which withholding tax has been deducted at source. The taxes so deducted are treated as final taxes and such income will not be liable for further taxation. ii. Deductions under section 32 There are three types of deductions available under this section in arriving at the assessable income of any person of the Act. a) Payment of annuity and interest b) Loss incurred by such person in any trade, business, profession or vocation c) Any business commencement expenses other than the capital expenses 3.3 Taxable income The taxable income of an individual for any year of assessment is the assessable income after making the following deductions: i. Tax free allowance Any individual being a citizen of Sri Lanka irrespective of whether such individual is resident in Sri Lanka or not, shall be entitled to deduct a tax free allowance for each year of assessment. ii. Qualifying payments Qualifying payments specified in Section 34 of the Act are deductible in ascertaining the taxable income subject to the restrictions given therein. Doing Business in Sri Lanka - 34

36 3.4 Rates of income tax The tax rates applicable to an individual differ from that of a company. Individuals enjoy progressive tax rates when compared with the flat rates applicable to companies. When applying the specially reduced rates, individuals could enjoy an additional benefit by applying the progressive tax rates. The following tax rates are applicable for an individual. i. Normal tax rates ii. Reduced / concessionary tax rates iii. Higher tax rates 4. Corporate taxation Company is defined in the act to mean any company incorporated or registered under any law in force in Sri Lanka or elsewhere, and includes a public corporation. 4.1 Composition of Income tax liabilities on Resident Company The tax liability of a resident company is comprised of the following. i. Tax on Taxable income This component is the main part of the tax liability of a company. It is the tax on taxable income which comprises profits and income chargeable with tax. ii. Tax on dividend distribution Apart from the tax on taxable income, when resident company distributes dividend to its shareholders, it is liable to pay tax on the distribution of dividend at the rate of 10%. However, a company is not liable to tax on the following dividend distribution, Doing Business in Sri Lanka - 35

37 a) Dividend distributed out of any dividend received from another resident company. b) Dividend distributed to the following shareholders, - Persons referred to in section 7(a) whose profits are exempt from tax. - Government institution or local authority in section 7(c). - Unit trusts and mutual funds. - Any shareholder who claim exemption of dividend under section Any registered society referred to in Section7(h) - Api Wenuwen Api fund iii. Tax on distributable profit If the dividends distributed (within 18 months from the commencement of the relevant year of assessment) by the company are less than 10% of the Distributable profits of the preceding year; then, a tax equivalent to 15% of the excess of 33 1/3% of the distributable profit of the year of assessment immediately preceding that year of assessment over the aggregate of the gross dividends distributed by such company in such preceding year, is to be paid as a tax on under distributed profit. 4.2 Composition of Income Tax Liabilities on Non Resident Companies A non- resident company is chargeable with the following components of income tax liabilities. i. Tax on Taxable Income The steps of computation of taxable income of a non-resident company are similar to that of a resident company. In computing the Doing Business in Sri Lanka - 36

38 total statutory income, the profit and income are the profits and income arising in or derived from Sri Lanka. Profit as a percentage of turnover Where the Commissioner-General is of the opinion that the correct amount of the profits of a non-resident person arising in or derived from Sri Lanka from any trade or business cannot be readily ascertained, the taxable profit may be ascertained as a percentage of sum receivable by such person from such trade or business. For this purpose a non-resident Company must make a declaration to the Commissioner-General of Inland Revenue. Then the Commissioner- General determines the profit percentage within the range of 6% - 10%. ii. Tax on remittances There is no payment of dividends in Sri Lanka for a non-resident company. As such in Lieu of tax on dividends for a resident company, a non-resident company is liable for income tax on the amount of remittances made during the year of assessment. 5. Other taxes 5.1 Withholding taxes When a person makes a payment to any other person and of such receipt is generally liable for income tax in the hands of the recipient, instructions have been given to the payer to deduct a certain amount of taxes out of the amount payable and remit such deducted tax to the Revenue Authority. There are number of withholding tax systems prevailing in Sri Lanka. The main withholding tax provisions in relation to income tax are: i. PAYE on remuneration. ii. On interest payments. Doing Business in Sri Lanka - 37

39 iii. On dividend income. iv. On lottery prizes, gambling or betting, winning and on rewards and share of fines paid by the government institutions. v. On annuity, royalty, management fee or similar receipts. vi. On interest, rent, royalty or annuity to persons outside Sri Lanka. vii. Gem sold at an auction conducted by the National Gem and Jewellery Authority. 5.2 Indirect taxes There are two types of main indirect taxes in Sri Lanka. i. Value Added Tax (VAT) VAT is the main indirect tax in Sri Lanka and is imposed on domestic consumption. VAT was introduced with effect from August 01, 2002 through the Value Added Tax Act No. 14 of The main provisions with regard to VAT in Sri Lanka are given below: a) VAT on non-financial services VAT shall be charged on the value of supply at the time of supply on: - Every taxable supply of goods or services made by a registered person, in a taxable period, in the course of carrying on or carrying out taxable activity in Sri Lanka; and - The importation of goods into Sri Lanka by any person. Certain supplies are exempted from VAT whereas some supplies have been excluded from VAT where no tax is charged. Direct export of goods and some specified services are liable for VAT at zero rate and other liable supplies are taxable at the standard tax rate. The input tax paid or payable by a registered person on the purchase of goods and Doing Business in Sri Lanka - 38

40 on the services used by him and VAT paid on importation may be setoff against the output VAT. If the input tax paid is more than the output tax, a refund is due to the tax payer. VAT on financial services The provisions relating to VAT on financial services were introduced through the insertion of a new chapter to the Act in This chapter applies to persons who supply financial services as specified in the Act. Supply of financial services by a unit trust or mutual fund has been exempted from VAT. ii. Nation Building Tax (NBT) This particular tax was introduced by the Nation Building Tax Act No. 09 of Every person engaged in import of any article or manufacturing of any article or provision of any service or whole sale and retail sale is chargeable with NBT. Some articles and services are excepted. iii. Capital Gains Tax Tax on capital gains from sale of shares quoted in the Colombo Stock Exchange was abolished in 1987 and tax on capital gains arising on other assets was abolished in However, the government has proposed to reintroduce tax on capital gains. The methodology of taxation of capital gains and the rates of tax under such proposal are yet to be announced. iv. Mansion Tax Mansion tax was introduced in 2015 and will be levied for every year on the owner of a mansion constructed on or after April 01, Amount of mansion tax payable per annum is Rupees one million. A Doing Business in Sri Lanka - 39

41 mansion is defined to include any building constructed on or after April 01, 2000 for residential purpose, of which the floor area is not less than ten thousand Sq.ft or the value of such building is not less than Rupees one hundred and fifty million as determined the Government chief valuer. v. Stamp Duty Stamp Duty was reintroduced by the Government under the Stamp Duty (Special Provisions) Act No. 12 of Stamp Duty shall be charged on every Specified Instrument - executed, drawn or presented in Sri Lanka; or - executed outside Sri Lanka being an instrument which relates to property situated in Sri Lanka, at the time such instrument is presented in Sri Lanka Different rates may be determined in respect of different classes or categories of instruments. Specified Instrument means; - An affidavit. - A policy of insurance. - A warrant to act as a Notary Public. - A license issued for a specified period under any written law for the time being in force, being a license which authorizes the holder thereof to carry on any trade, business, profession or vocation. - A bond or mortgage for any definite and certain sum of money and affecting any property. - A promissory note. - A lease or hire of any property. - A receipt or discharge given for any money or other property. Doing Business in Sri Lanka - 40

42 - Any other instrument which the Minister may in the interest of the economic progress of Sri Lanka, specified by Order published in the Gazette. 6. Transfer Pricing Regulation in Sri Lanka The Sri Lanka s Minister of Finance by way of an extraordinary gazette proclaimed in August 2013 the initial Transfer Pricing regulation in Sri Lanka. All transactions between associated parties are required to be made on an arm s length basis after the issuance of this gazette. At the same time, the Inland Revenue Department established a separate unit called Transfer Pricing Regulations Unit (TPRU) in order to achieve the collaborative purposes, implementing and administrating transfer pricing regulations, providing a framework to confirm whether transactions with associated parties comply with the arm s length principle. Doing Business in Sri Lanka - 41

43 7. Double Taxation Treaties Sri Lanka has concluded tax treaties, for the avoidance of double taxation with respect to taxes on income and wealth, with the following countries: Australia Italy Poland Bangladesh Japan Qatar Belarus Korea Romania Belgium Kuwait Russia Canada Luxembourg Saudi Arabia China Malaysia Seychelles Denmark Mauritius Singapore Finland Nepal Sweden France Netherlands Switzerland Germany Norway Thailand Hong Kong Oman U.A.E. India Pakistan U.K. Indonesia Palestine U.S.A. Iran Philippines Vietnam NOTE : Please refer to the attached leaflet for updated tax rates and other information. Doing Business in Sri Lanka - 42

44 HOW TO CONTACT US HLB in SRI LANKA Please feel free to contact the below officers regarding our services. Mr. Dinuk Hettiarachchi. FCA, FCMA(UK), CPA(AUS) Managing Partner M: E: dinuk@rnhgroup.lk Ms. Erandi Weerasuriya. ACA, Bsc (Pub.Mgt)Sp(Hons) Audit Partner M: E: erandi@nh-co.lk Mr. Nadeeka Suranjana. ACA, Bsc(Acct)Sp(Hons) Tax Partner M: E: nadeeka@nh-co.lk Ms. Yadeeshani Perera. ACA, Bsc (Bus.Admin)Sp(Hons) Accounting Services / Audit Partner M: E: yadeeshanip@rnhgroup.lk Ms. Dilini Silva. ACA Audit Partner M: E: dilini@nh-co.lk Ms. Harshila Withanage. Director, Company Secretarial Division M: E: harshila@rnhgroup.lk Ms. Chathurika Jayampathi. CBA Manager, Galle Branch M: E: mgr.galle@nh-co.lk Doing Business in Sri Lanka - 43

45 CHARTEREDACCOUNTANTS "RNHHouse" No:622-B,KoteRoad,Kote, SriLanka