Sri Lanka: A guide to foreign investing in Sri Lanka

Land and Property Ownership by Non Resident

Before 2013 /1/1.

There was no barriers for transferring the ownership of any land to a person who is not a citizen of Sri Lanka. However the Finance Act No 11 of 1963 stated that where of ownership of any land is transferred to a person who is not a citizen of Sri Lanka, a tax of an amount equivalent to the value of the land is charged.

After 2013/1/1.

Circular No.12/2012 of Registrar General Department of Sri Lanka.

"Outright transfer of property to foreigners is prohibited (except transfer of property for the use of foreign Embassies and High Commissions in Sri Lanka as approved and gazette by the Hon. Minister of finance)

However, lease of property to foreigners will be permitted subject to payment of 100% tax on transfer of property on the lease value determined by the Government chief valuer"

The Government decision to ban the sale of land was announced by President Mahinda Rajapaksa, when he presented the 2013 Budget to Parliament in November last year.

Along with the ban in the sale of land, the Government also introduced a 100% tax on the lease of State land to foreigners. The tax imposed will be based on the lease value determined by the Government's Chief Valuer for the entire lease period, that has to be paid upfront, unless the prescribed investment requirement by way of a foreign remittance is exceeded.

However, these prohibitions will not apply to the purchase of lands by Embassies/High Commissions in Sri Lanka.The tax will not apply, however, to renting of property to foreigners.

So, with change of law: foreign individuals can't buy freehold property in their name as private persons any more. 99 years' lease - formerly tax-free - will now cost a tax of 100%.

Incorporating a company in Sri Lanka by Non resident

Both Sri Lankan Citizen and Foreign National are eligible for this service.

If one person is incorporating a company same person cannot act as a secretary and a foreigner cannot act as a company secretary.

If the annual turnover not less than one Million or paidup capital exceeds five hundred thousand a qualified secretary should be appointed.

• If a foreigner is investing in a privet or public company it should be either Board of Investment project or in accordance with the Extraordinary Gazette notification No.1232/14 dated19/04/2002 by the controller of Exchange of Sri Lanka
• Foreign Direct Investments in Sri Lanka

• Share investments

  Issuance of shares by resident companies to foreign investors (non residents) are permitted without prior approval of the ECD( exchange Control Department) in terms of a general permission granted in Gazette Notification No.1232/14 of 19/04/2002 and 1248/19 of 08/08/2002 subject to certain exclusions and limitations. In the areas of investment, movement of funds of such transactions will be through a scheme of account titled, "Securities Investment Account" (SIA). The SIA should be credited by inward remittances received in convertible foreign currencies from the investors and the dividends and sale proceeds realized on this investment are remittable through this account.

  Gazette Notification No.1232/14 of 19/04/2002

"PERMISSION is hereby granted for the purposes of Section 10, 11, 15 and sub-section 5 of Section 30 as applicable of the Exchange Control Act , for the issue and transfer of shares in a company upto 100% of the issued capital of such 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 the exclusions, limitations and conditions hereinafter set out."

When foreign investors (non-residents) do not make their investments in resident companies through a SIA, the resident company should obtain approval from the ECD for the issuance of shares in favour of the foreign investors. To obtain the required approval, the company is required to make an application to ECD along with documentary evidence/bank confirmation with regard to the funds remitted by the foreign investor to the company. Resident companies should also obtain approval from ECD for the issuance of bonus shares to their non-resident shareholders. The areas of exclusions, limitations for non-resident investments are as follows.

Limitations upto permitted share of total share capital

The permission hereby granted shall apply in respect of shares of a company carrying on or proposing to carry on any of the businesses set out below only up to the percentage of the issued capital of the company for which percentage either general or special permission had been granted by the Government of Sri Lanka or any legal or administrative authority set up for the approval of foreign investment in such businesses -

15. Air transportation;
16. Coastal shipping;
17. Industrial undertaking specified in the second schedule of the Industrial Promotion Act, No.46 of 1990 namely-

18. any industry manufacturing arms, ammunition, explosives, military vehicles, equipment aircraft and other military hardware;

    any industry manufacturing poison, narcotics, alcohol, dangerous drugs and toxic, hazardous or carcinogenic materials;

    any industry producing currency, coins or security documents;

18. Large scale mechanized mining of gems;
19. Lotteries.

Board of Investment (BOI)

The Board of Investment is the initial stop for any foreign investor. The BOI provides potential investors with information regarding investment opportunities and incentive packages that are on offer. The BOI also offers special investment incentives for those interested in the Northern and Eastern sections of Sri Lanka. All completed forms are to be submitted to the Appraisal department. Once the completed form reaches the Appraisal Department, a case officer is assigned to assist and guide the investor throughout the approval process. When a Letter of Approval is received, it must be responded to in writing, agreeing to the terms and conditions set out. In order to finalize the agreement, the business must be incorporated as a company with the Registrar of Companies and the following documentation must be submitted to the BOI.

• Memorandum or articles of association
• Name of the Company secretary
• Location of the Registered office
• Particulars of Directors
• Lists of all machinery and equipment required The formal agreement is then signed within the period stipulated in the Letter of Approval.

Organizations intending to employ expatriate personnel must obtain a letter of Recommendation from the Appraisal Department. This letter is then to be submitted to the Department of Immigration and Emigration to obtain the necessary visa and work permits.

How to incorporate a private Company.

Registrar of Companies (ROC)

In order to be able to register a company with the Registrar of Companies there are several steps that need to be taken and they are as follows:-

1. Name Search Application
2. 1. A name search application must be submitted with a payment of the prescribed fee to the ROC
   2. A search will then be run to verify the name
   3. The Registrar/ officers have sole discretion to either approve or disapprove the name. The name may be approved or there will be a request for further information made to the applicant. Once approved, the approval number can be collected the following day.
   4. The reservation of the name will be valid for a period of 3 months from the date of Application only.

2. Registering a Private Company

3. After name approval is obtained, the following forms must be prepared along with two copies of the Articles of Association.

   • Form 1 - Registration of a Company
   • Form 18 - Consent and certificate of director
   • Form 19 - Consent and certificate of Secretary/ s

Can a company enter into a contract or other enforceable obligation?

COMPANIES ACT, No. 07 OF 2007

19. (1) A contract or other enforceable obligation may be entered into by a company as follows :-

1. an obligation which, if entered into by a natural person is required by law to be in writing signed by that person and be notarially attested, may be entered into on behalf of the company in writing signed under the name of the company by -
2. 1. two directors of the company; Right of shareholders to a Copy of the articles.
   2. if there be only one director, by that director ;
   3. if the articles of the company so provide, by any other person or class of persons; or
   4. one or more attorneys appointed by the company, and be notarially executed;

2. an obligation which, if entered into by a natural person is required by law to be in writing and signed by that person, may be entered into on behalf of the company in writing signed by a person acting under the company's express or implied authority;
3. an obligation which if entered into by a natural person is not required by law to be in writing, may be entered into on behalf of the company in writing or orally, by a person acting under the company's express or implied authority.

2. The provisions of subsection (1) shall apply to a contract or other obligation
3. 1. whether or not that contract or obligation is entered into in Sri Lanka; and
   3. whether or not the law governing the contract or obligation is the law of Sri Lanka.

3. For the purpose of this section, a company may use a generally recognized abbreviation of any word in the name, unless it is misleading to do so.

EXCHANGE CONTROL

Issue and Transfer of Shares to Non-residents in Companies -

In terms of the Exchange Control Act, no shares can be issued or transferred to a non-resident without the permission of the Controller of Exchange. General permission has now been granted by the Controller of Exchange for the issue or transfer of shares in a Company upto 100% of the issued capital of such company to non-residents, subject to certain exclusions and limitations aboverefrred. The payment for shares in any issue or transaction so permitted should be made out of or into a Securities Investment Account (SIA) opened in a Commercial Bank in accordance with the directions given by the Controller of Exchange. All transfers, remittances of dividends and sale proceeds of securities should be through the SIA accounts and could be permitted by an Authorized Dealer subject to the production of the following -

1. A certificate of balance in the SIA account at the date of application.
2. Contract notes in proof of sale price and number of shares sold.
3. Income tax clearance covering the amount to be repatriated.

Taxation

TURNOVER TAX

Turnover tax is payable on business which is defined to include professions and services as well. With the devolution of powers to the Provincial Councils (under the 13th Amendment to the Constitution) the Provincial Councils in all the provinces except the North East Province have enacted Financial Statutes imposing a tax on turnover on sale by wholesale or retail of any article or commodity other than the sale by a manufacturer. There is no exemption limit under these statutes. All businesses engaged in the wholesale or retail sale of articles and commodities irrespective of their turnover are liable to turnover tax. The manufacturers and the others are liable to continue to pay the turnover tax to the Central Government.

There is a duty of 0.5 per cent on the issue of shares. Receipts for payments of Rs 25,000.00 and over carry a stamp duty.

Business Turnover Tax

The multi-stage tax is based on the turnover of business carried on in Sri Lanka. The rates depend on the kind of business and are subject to change from time to time.

Dividends, Interest and Royalties

Dividends, interest and royalties arising in Sri Lanka and received by a non-resident are liable to Sri Lanka income tax. The rate of tax on such income will be that applicable to non-resident individuals and non-resident companies. However, concessionary rates varying from 10 to 15 per cent have been extended to residents from countries with which Sri Lanka has entered into Double Tax Relief Conventions.

LABOUR LAWS

Principal Laws - which regulate the various aspects of employer-employee relationship include:

1. Shop and Office Employees (Regulation of Employment and Remuneration) Act.25
2. Wages Boards Ordinance.
3. The Employees' Provident Fund Act (EPF).
4. The Employees' Trust Fund Act (EPF)
5. Payment of Gratuity Act.
6. Workmen's Compensation Ordinance.
7. Factories Ordinance.
8. Industrial Disputes Act.
9. Termination of Employment of Workmen (Special Provisions) Act.
10. Minimum Wages (Indian Labour) Act.
11. Maternity Benefits Ordinance

Salient Features of some of these Principal Labour Laws are:

1. AGE LIMIT
2. WORKING HOURS

On any one day - not to exceed 9 hours (including one hour for meals and rest). In any week - not to exceed 45 hours.

Note:

1. If working time includes the period between 11 a.m. and 2 p.m. the rest and lunch interval should be one hour.If it includes the time 7 p.m. and 10 p. m. the rest and dinner interval too should be one hour duration. Any work period, which includes 4 p. m. and 6 p. m., and at any time after duration of four hours such rest and meal interval could be for 30 minutes.
2. The provision regarding nine hour day and forty five hour week applicable to all persons employed in shops and offices does not apply with the same vigour to public corporation managerial executives. Administratively, the application of overtime rules are relaxed In the case of other persons holding similar posts in the private sector. Travelling inspectors, travelling agents, travelling salesmen, canvassers, and those in similar positions do not get coverage for the limitation of working hours. Similarly, reporters and press photographers of publishing houses and editorial establishments of newspapers also fall into this category.
3. Working beyond nine hours (with a break for rest and meals and overtime) each day is restricted to all females and to males below 18 years' of age. This prohibition is relaxed in the case of residential hotels, clubs, theatres,and air-line shops or offices. Females above the 18th year of age could be employed before 6 a. m. and after 6 p. m. in offices maintained by airlines, and those who work as ground hostesses, as receptionists In residential hotels, as ladies cloak-room attendants, as ladies linen-room attendants, or as ladies lavatory attendants.
4. A person who has not attained the age of fourteen years cannot be employed in or about the business of a shop or an office. A male between fourteen and eighteen years of age may not be employed in a shop or an office before 6 a. m. or after 6 p. m. on any day; any male between fourteen and sixteen years may however be employed in a hotel, restaurant or place of entertainment during the period between 6 p. m. and 10 p.m.Females below fourteen years are forbidden from employment before 6 a.m. and after 6 p. m. There are however relaxations extended to females who are eighteen years of age employed in hotels etc.

3. OVERTIME

Rate of payment - 1½ times the ordinary remuneration (including C. 0. L allowances)
26
Period of overtime - not to exceed 12 hours in any week
Note:

1. An employee becomes entitled to overtime payments If he works for more than 8 hours a day or for more than 45 hours in a week. However, in some establishments the daily, and therefore, the weekly, hours are less than what the law allows. For instance, in some establishments the daily working hours are 7 or 7½ hours. In such cases an employee should nevertheless be paid at overtime rates for work beyond his normal working hours even though such normal working hours are less than 8 hours permitted by the Act.
2. The necessity of paying overtime rates for working in excess of 45 hours a week, as distinct from work in excess of 8 hours a day, would arise only In a situation where an employee does not receive his weekly holidays in a particular week but only in the succeeding week and, thereby, exceeds the weekly hours of work. For example, In a particular establishment the working hours are 8 hours on week days and 5 hours on Saturday, making a total of 45 hours in the week. If he works overtime during the period Monday to Friday he will receive overtime payments for work in excess of his normal working hours during the week, and not on the basis that he has exceeded the 45 hours in the week. If, in the same example, an employee worked 8 hours each day between Monday and Friday, works the whole of the Saturday and Sunday and receives his weekly holidays only in the next week then, by working on the Saturday afternoon and on Sunday he has exceeded the weekly hours of work and will receive overtime for that reason.
3. The period of any leave or holidays during the week will be deemed to be time worked for the purpose of ascertaining the number of hours he has worked In that week.
4. As the Act does not prescribe particular days in the week as the weekly holidays, the question of any special rates of overtime for 'work on 'weekly holidays does not arise. As stated earlier, if an employee does not enjoy hisweekly holidays in a particular week then he receives overtime payment for having exceeded his normal weekly hours.
5. For any overtime work an employee is entitled to be paid at 1½ times the normal hourly rate.
6. For the purpose of computing overtime remuneration, the hourly rate of remuneration is worked out as follows:
7. 1. where remuneration is payable at a daily rate, be 1/8th of the daily rate;
   2. where the remuneration is payable on a monthly rate, be 1/8th of the monthly rate divided by 30;
   3. where remuneration is payable at a fortnightly rate, be 1/8th of the fortnightly rate divided by 14;
   4. where remuneration is payable at a weekly rate, be 1/8th of the weekly rate divided by 7.

7. Where an employee is employed on a statutory holiday he is entitled to one extra day's salary or to a paid holiday in lieu before 31st December of that year.
8. The Commissioner of Labour may at his discretion permit a worker to be employed on such holiday.
9. All Full Moon Poya days operate as 'dies non' for employees in shops and offices. Unlike in the case of Public Holidays, employment on Poya Holidays, does not require the sanction of the Commissioner of Labour; remuneration for work on Poya Holidays is one and a half times the normal pay for such day. Monthly remunerated workers would receive only one half day's pay.

LEAVE AND OTHER BENEFITS

ANNUAL LEAVE

For those

1. who join between 1st January and 31st March 14 days In the year succeeding
2. who join between 1st April and 30th June 10 days in the year succeeding
3. who join between 1st July and 30th September 7 days in the year succeeding
4. who join on or after 1st October 4 days in the year succeeding

Note: On cessation of employment an employee is entitled to leave earned in the previous year and also in the current year of cessation. If an employee is unable to avail himself of his leave entitlement before the cessation he should be remunerated in respect of his unavailed leave on the basis of one day for each complete month if the final period of employment is less than ten months; for 14 days If the period is over ten months.

CASUAL LEAVE
Leave on account of private business, ill-health or other reasonable cause could be obtained upto a maximum of 7 days each year. New employees can obtain such casual leave on a pro-rata basis of one day for each complete period of two months.

MATERNITY BENEFITS
Women in shop and office are entitled to 84 working days leave in respect of their first two live birth.

Female employees are entitled to -

1. 14 days leave prior to confinement and to 70 days leave subsequent to such confinement (upto a maximum of two confinements)
2. 42 days (of which 14 days leave prior to confinement and the balance 28 days) subsequent to such confinement (for the third and subsequent confinements) Maternity leave 84 working day will be in addition to the any holidays falling within this period together with the weekly holidays. The Maternity Benefits Ordinance, but not Shop and Office Employees Act requires an employer of a female employee who is nursing a child under one year of age to allowed a two nursing intervals within the normal working day at such time as she may require.

WAGES BOARDS have been established for a number of trades. These boards have the power to determine minimum rates of wages and overtime and fix working hours, days of leave and holidays etc.

EPF: All employees (other than government servants, local Govt. service employees, domestic servants, employees in charitable institutions or any institutions maintained solely for the purpose of religious worship or social service and employees in industrial undertakings which are carried mainly for the purpose of giving industrial training to juvenile offenders, orphans or to persons who are destitute dumb or blind) are covered by the EPF Act. Now even employment in the service of any charitable Institution or Institution maintained for the purpose of religious worship or social service employing 10 or more employees is also a covered employment.
Contributions: Employer - 12% of the employee's earnings
Employees - 8% of the employee's earnings
Employees electing to pay higher contribution can do so but the decision, once taken, is irrevocable.

Contributions:
ETF: Employers have to contribute 3% of the employees earnings. This contribution brings for members a life insurance cover and certain medical benefits.

Industrial Disputes Act - The Industrial Dispute (Amendment) Act No. 56 of 1999 prohibits certain unfair labour practices by employers.

This law contains provisions for prevention, investigation and settlement of industrial disputes and matters connected therewith. Salient features of The Industrial Dispute Act are those providing for arbitration, establishments of Industrial Courts Labour Tribunals and Collective Agreements etc. An applicant seeking relief from a Labour Tribunal should make the application within 3 months of the date of termination.

TERMINATION OF EMPLOYMENT OF WORKMEN (Special Provisions) Act No.45 of 1971 (as amended by the Law No.44 of 1976 and the Act No.51 of 1988)
Any employer employing 15 or more workmen on an average in a scheduled employment shall not terminate (for any reason whatsoever other than by reason of a punishment imposed by way of disciplinary action) the services of a workman who has one year or more service under the employer without the workman's prior written consent or the prior written approval of the Commissioner of Labour. Termination effected in contravention of this Act is illegal and null and void. Any complaint to the Commissioner of Labour in respect of a termination in violation of this Act should be lodged within 6 months of such termination.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.