FDI In Sri Lanka
Foreign Direct Investment (“FDI”) in Sri Lanka since the fourth quarter of 2017 has increased by approximately USD 965 Million which was the highest recorded influx of FDI for the financial year. Sri Lanka anticipates to increase its investments by attracting up to USD 2.5 Billion in FDI in 2018. The key locations which Sri Lanka hopes to obtain such FDI in to the country would be from China, India, Singapore, and South Korea among others. New laws which have been introduced in the legal arena facilitate the furtherance of attracting major FDI in to the country. The key laws set in place since the fourth quarter of 2017 onwards are as follows:
- Land (Restrictions on Alienation) Amendment Act No. 03 of 2017 (“LRA”);
- Foreign Exchange Act No. 12 of 2017;
- Inland Revenue Act No. 24 of 2017 (“IRA”);
- Anti-Dumping and Countervailing Act No. 02 of 2018 (“ADCA”);
- Safeguard Measures Act No. 03 of 2018 (“SMA”);
- New Procurement Guidelines via Extraordinary Gazette No. 2070/15 of 9th May 2018 (“PG”)
Synopsis of the foreign exchange regulations
The regulations set out in the Extraordinary Gazette No. 2045/56 (the “Gazette”) provide guidelines as to how FDI ought to be utilized in Sri Lanka and the types of investment which are deemed permissible or subjected to restrictions. Schedule II of the Gazette refers to capital transactions undertaken in Sri Lanka by persons resident outside Sri Lanka. In terms of the Gazette any person, country funds, investment funds, mutual funds established outside Sri Lanka are entitled to engage in capital transactions in Sri Lanka which requires foreign exchange to be remitted inwards. In order to do so, it is mandatory for a Non-Resident Investor (“NRI”) to set up an Inward Investment Account (IIA) in the name of such NRI with a licensed commercial bank in Sri Lanka. All capital remitted in to Sri Lanka shall be via an IIA and all income, proceeds, liquidation, maturity of the investments shall be credited to the IIA.
NRIs are entitled to invest, acquire or hold all classes of shares in a company incorporated in Sri Lanka and listed in the Colombo Stock Exchange. Additionally, NRIs are entitled to invest in debt securities, grant loans, unit trusts or mutual funds, government securities, securities issued by the Central Bank of Sri Lanka (“CBSL”), deposits in licensed financial institutions, immovable properties or any other investment categories approved by the Monetary Board in accordance with the directions issued by the Minister.
NRIs are restricted from investing in business of pawn brokering, coastal fishing and retail trade where the capital contributed by the NRI is less than USD 5 million. In addition thereto, NRIs are permitted to invest only up to 40% of the stated capital of a company involved in the following:
More FDI In-Depth Features
- production of goods where Sri Lanka’s exports 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;
- mass communication;
- freight forwarding;
- travel agencies; and
- shipping agencies.
Permission shall apply in respect of shares in a company carrying on air transportation, coastal shipping, industrial undertakings (manufacture of arms, ammunition, explosives, military vehicles and equipment, aircraft and other military hardware, poisons, narcotics, alcohol, dangerous drugs and toxic, hazardous or carcinogenic materials and any industry producing currency, coins, or security documents and etc.), large scale mechanized mining of gems, and lotteries. The above mentioned industries shall be subjected to the same limitations in terms of setting up an overseas company registered under the Companies Act No. 07 of 2007.
Incentives granted to NRIs
In terms of the IRA, governments of foreign countries or foreign territories are exempt from taxes as specified under a diplomatic immunities law or a similar law. An international organization too shall be exempt from taxes under diplomatic immunities law or a similar law or an agreement between the Government of Sri Lanka (“GOSL”). Double Tax Avoidance Treaties have been entered in to between Sri Lanka and many other states such as Australia, Belgium, Canada, China, Denmark, France, Germany, Italy, Japan, Korea, Russia and Singapore among many others.
If a NRI intends to establish a company with approval from the Board of Investment (“BOI”) under the BOI Law No. 4 of 1978 and its amendments thereof, Section 17 empowers the BOI to grant special concessions to companies which are established in furtherance of strategic economic objectives of the GOSL. The GOSL places its emphasis on setting up investment projects in Sri Lanka which relate to the advancement of utilities and infrastructure. BOI approved companies are entitled in terms of Section 17 to import capital goods which are to be utilized in projects of such company, free of customs duty during the implementation period of the project provided that such company is a non- export oriented company.
Precautionary measures taken by the GOSL
Albeit having an investment-centric policy, the GOSL has also taken up precautionary measures to protect domestic resources and ensure the growth of its export trade. In terms of the LRA, NRIs are restricted from owning freehold land any time after the 1st of January 2013. As per Section 2 of the LRA, transfer of title of any land situated in Sri Lanka is prohibited if such transfer is purported to be to a foreigner, a company incorporated in Sri Lanka under the Companies Act where any foreign shareholding in such company (direct or indirect) is 50% or above or to a foreign company. However, NRIs are permitted to invest up to 49% of the stated capital of companies which possess freehold property.
In addition thereto, the ADCA regulates and restricts imported products which are determined to be a product investigated on being dumped, or there is injury caused to the Sri Lankan industry as a result of such importation or there exists a causal link between dumping and the injury caused. Imports of similar products from more than one country shall be thoroughly investigated by the Director General for the purpose of determining whether an injury exists.
The SMA sets in place measures to be used as safeguards on products which are imported in to Sri Lanka and to conduct investigations on such imports when necessary. The SMA was enacted in line with the General Agreement on Tariffs and Trade of 1947 (“GATT”) to which Sri Lanka became a signatory in 1994. The SMA provides guidance on determining whether increased imports of investigated products have caused a threat of serious injury or serious injury to a domestic industry. This shall be determined based on an evaluation of all relevant factors which shall be objective and quantifiable in nature, taking into account its effect on domestic industries.
Recent trends and imminent legal developments
The GOSL is currently focused on developing infrastructure facilities by means of improving and channeling investment in to the local construction industry. The main trend resorted to in furtherance of this objective is by way of establishing Public Private Partnership (“PPP”) projects between the GOSL and project companies whose main investor is a NRI. The most significant ongoing PPP projects are the Colombo Port City Project, Hambantota Port Project, Western Region Light Rail Transit project in Colombo, among many others. In order to facilitate the ease of conducting PPP projects the GOSL has introduced new PGs and in addition thereto, the Ministry of Finance of Sri Lanka is currently setting up an e-Procurement process to fully digitize the process of public procurement.
The Department of the Registrar of Companies (“ROC”) recently made the process of incorporation to be completely digitized. Submission of incorporation documents shall be done online and details of companies which have been registered at the ROC can be accessed online by obtaining a free online membership. Such efforts have been taken up to speed up the incorporation process and to foster the likelihood of NRIs setting up companies in Sri Lanka.
The Securities and Exchange Commission of Sri Lanka collectively with the Colombo Stock Exchange of Sri Lanka is reported to have established a new platform to instigate public listing for Small and Medium Enterprises (“SME”). The new listing platform named “Empower” is said to launch a series of new capital market development initiatives proposed by the SEC Chairman. This new listing platform is encouraged to be invested in by NRIs and is one of the key markets of Sri Lanka which has never before been open to public listing and is yet another effort of the GOSL to open its doors to new avenues of FDI.
About D.L.&F De Saram
No.47, C.W.W. Kannangara Mw. (Alexandra Place),
Colombo 7, Sri Lanka
D.L. & F. De Saram is one of the oldest and carried on in partnership by his sons, Douglas and Fred De Saram. This tradition has endured without , founded in 1898 by Richard Francis De Saram, interruption well into the 20th century when Fred De Saram’s four sons, Colonel F.C. De Saram, F.J. Coo De Saram, Robert De Saram and Maurice De Saram, and a nephew, Clifford Trevor De Saram, guided the fortunes of the firm. Interestingly, the tradition is kept alive by the present partners, Michael Sproule and Dijen De Saram, grandsons of Fred De Saram, and Savantha De Saram and Prabash De Saram, his great grandsons. De Saram’s is one of the largest full service law firms in Sri Lanka , which, while taking great pride in its rich heritage is, in these rapidly changing times, not anchored by its traditions.
The firm provides legal counsel in a wide array of practice areas such as Foreign Direct Investment, Banking and Finance, Capital Markets and Securities, Mergers and Acquisitions, Competition and Anti-trust, Infrastructure Development, Construction, Real Estate, Labour, Employment and Immigration matters, Restructuring and Insolvency, Intellectual Property, Information Technology, Admiralty and Shipping, Litigation and Dispute Resolution, Taxation, Family Law and Testamentary matters. The Firm provides cross border legal services to major international firms in, inter-alia the United Kingdom, the United States, China, Europe and Australia. It consists of a team of approximately 40Sri Lankan Lawyers specialising in infrastructure project development (including ports, power and energy, and highways) with special emphasis on PPPs and cross border financing. The Mergers & Acquisitions team has been involved in some of the largest projects undertaken in Sri Lanka. Our compliance and employment team advises several leading multinational companies on various aspects of Sri Lankan labour law.
The firms subsidiary corporate arm, Corporate Advisory Services (Private) Limited (CAS), provides incorporation, secretarial and ancillary services to corporate clients and is currently in excess of 500 corporate clients. CAS provides for all services connected with the establishment and operation of a domestic or foreign company in Sri Lanka.