Tax Incentives

& FDI Policy

in Sri Lanka - 2012

SRI LANKABOI

Board of Investment of Sri LankaPrepared by

Jointly with,Department of Inland RevenueSeptember, 2012

Research & Policy Advocacy Dept. /BOI

Sri Lanka is regarded as a prime location in the Asian Region for

foreign investors to setup and operate their business entities

profitably. The strategic location, economic & political stability,

business friendly investment environment, prudent & pragmatic

investment policies, attractive fiscal incentives, low cost of doing

business, talented and productive human resource pool and fast

developing infrastructure facilities have made the country an

enticing place for investment.

The government of Sri Lanka is geared towards achieving

sustainable economic development throughout the country. In

this context, the Foreign Direct investment is recognized as a vital

element and one of the key drivers of the economy, where

modern technology can be blended into desired sectors to

enhance country's competitiveness.

The Board of Investment of Sri Lanka (BOI) is entrusted with the

task of promoting, attracting and facilitating these investments

into the desired sectors of the economy in a sustainable manner.

BOI provides assistance to the investors at every stage

throughout the project lifespan. In this context, the Inland

Revenue Department (IRD) has introduced a new incentive

scheme applicable to foreign & local investors where a wide array

of fiscal incentives is offered to reduce the upfront cost of the

project, enabling them to develop and flourish their enterprises

in a competitive business environment.

This booklet, jointly prepared by the BOI and the IRD, provides a

snap shot of Sri Lanka's attractive incentive package offered for

prospective investors based on current taxation, investment & stexchange control laws and regulations as of 31 March 2012.

Preface

w w w . i n v e s t s r i l a n k a . c o m

Tax Incentives and FDI Policyin Sri Lanka - 2012

A new incentive regime has been introduced particularly with the budget 2012 to promote

private investments, both domestic and foreign, into desired sectors of the economy. These tax

incentives mainly include exemption on Corporate Income Tax, Customs Duty, Value Added Tax,

and Ports & Airports Development Levy. Details of these incentives applicable for different

categories of investments are described below for easy reference.

The details of the applicable investment threshold and the incentives granted for the enterprises

under each category are described in this brochure.

A) Tax Incentives

Under the Inland Revenue Law, these incentives are offered to an “undertaking” as defined in

the Inland Revenue Act. However, for the purpose of BOI, the word “undertaking” is replaced

by the word “enterprise” since the BOI Law requires an investor to incorporate an enterprise

before entering into an agreement with the BOI.

1 w w w . i n v e s t s r i l a n k a . c o m

Note:

1)

2)

3)

4)

5)

6)

7)

8)

9)

10)

Tax incentives with no minimum investment threshold

Small & Medium Scale Enterprises (based on the Investment Value)

a) Small Scale - New Enterprises

b) Medium Scale - New Enterprises

Large Scale - New Enterprises (based on the Investment Value)

Strategic Import Replacement New Enterprises (based on the

Investment Value & Product)

Expansion of Existing Enterprises

Customs Duty, VAT & PAL Exemption on Imports

Tax on Dividends Exemption

Land Transfer Tax Exemption

Strategic Development Projects

Commencement of Corporate Income Tax Holiday

1) Tax incentives with no minimum investment threshold

2) Small & Medium Scale Enterprises

New enterprises engaged in any of the following activities, provided that the sum invested in fixed assets st stis made between 31 March 2011 to 01 April 2015 and commences commercial operations on or after

st01 April 2011 will be eligible to tax holidays as follows;

a) Small Scale – New Enterprises* (investment between Rs. 25-50 Mn)

Ö1 Amount of Investment means the cost of any land, plant, machinery, equipment and other fixed assets.

* For BOI approved projects, Custom duty will be exempted on imports of; Project related capital goods (plant, machinery and equipment) and, Inputs (raw materials) of export oriented projects.

b) Medium Scale - New Enterprises* (investment Rs. 50 Mn and above)

Ö1 Amount of Investment means the cost of any land, plant, machinery, equipment and other fixed assets. Ö2 Products shall be with a minimum of 35% value addition if more than 50% of the production is to be sold in the domestic market.

* For BOI approved projects, Custom duty will be exempted on imports of; Project related capital goods (plant, machinery and equipment) and, Inputs (raw materials) of export oriented projects.

1. Enterprise for fishingAny enterprise for fishing carried on in Sri Lanka. (including

cleaning, sizing, sorting, grading, chilling, dehydrating, packaging, cutting or canning of fish)

2. Enterprise for producing of agricultural seeds or planting materials

Any enterprise for producing of agricultural seeds or planting materials or primary processing of such seeds or material.

1. Agriculture Agriculture, Animal Husbandry and Fishing (including processing)

2. Services Creative work including work of an artist, Information Technology

1. Manufacture of any article (including processing) other than liquor or

tobacco products2. Agriculture Agriculture, Animal Husbandry or Fishing

(including processing)3. Services Information Technology, Software Development,

Business/Knowledge Process Outsourcing, Health Care, Educational, Beauty care, Cold room and storage facilities, Tourism, Sports and fitness centers, Creative work including work of an artist, Mini Hydro Power Projects

Exempted from Income Tax for each year of assessment within the period of five years

stcommencing from 1 April 2011.

Exempted from Income Tax for each year of assessment within the period of five years

stcommencing from 1 April 2011.

³25 and <50

³25 and <50

³50 and <100

³100 and <200

³200

4

4

4

5

6

Sector of Investment

Activity

ActivityÖ2

Tax Exemptions

Qualifying CriteriaÖ1Amount of Investment

(Rs. Mn)

Qualifying CriteriaÖ1Amount of Investment

(Rs. Mn)

Tax Exemptions(No. of years)

Tax Exemptions(No. of years)

2w w w . i n v e s t s r i l a n k a . c o m

3) Large Scale – New Enterprises*

Any new enterprise engaged in “specified activities” with an investment of over Rs 300 Mn (large stscale projects) and made investment on fixed assets by such company on or after 1 April 2011 will

be eligible for the following tax holiday periods.

1. Agriculture or Forestry Cultivation of food crops or industrial crops,

Horticulture, Forestry, Animal Husbandry (Dairy, poultry, Swine,

Goat etc.)

2. Manufacturing 2.1 Manufacture, Production or processing of

non-traditional goods for export, including deemed exports;

2.2 Manufacturing for domestic and/or export market

Boats, Pharmaceuticals, Tyres and Tubes, Motor Spare Parts, Furniture, Ceramics, Glassware or other mineral based products, Rubber based products, Cosmetic products, Edible products manufactured out of locally cultivated agricultural products, Construction materials, Electrical/Electronic items

3.Services- Provided to a person or partnership outside Sri Lanka

- Tourism or Tourism Related Projects, - Providing Hotel Services, Guest Houses or

similar services, - Infrastructure Projects including Construction

of Commercial Buildings, - Development of any warehousing or storage

facility, - Power Generation using Renewable

Resources - Establishment of Industrial Estates, Special

Economic Zones or Knowledge Cities, - Urban Housing or Town Centre Development,- Provision of Any Sanitation Facility or Waste

Management Systems, - Development of Water Services, - Development of internal water ways or

related transport (goods or passengers)- Construction of Hospitals and provision of

Health Care Services, - Repair of aircrafts or maritime vessels or ship

breaking - Sporting Services (eg. Motor Racing or Golf

Course) - Information Technology- Software Development- Business/Knowledge Process Outsourcing- Any Project in Light or Heavy Engineering

Industry, - Artificial insemination for cattle (Dairy

development)- Educational services

ActivityÖ1Amount of Investment

(Rs. Mn)

Tax Exemptions(No. of years)

None

90%(75% for

Apparel & Textile)

None

Min. Export Req.(% of Output)

6

7

8

9

10

12

>300 and £500

>500 and £700

>700 and £1,000

>1,000 and £1,500

>1,500 and £2,500

>2,500

70% of turnover should be in

convertible foreigncurrency as applicable.

Ö1 Amount of Investment means the cost of any land, plant, machinery, equipment and other fixed assets* For BOI approved projects, Custom duty will be exempted on imports of; Project related capital goods (plant, machinery and equipment) and, Inputs (raw materials) of export oriented projects. In addition, please refer category No. 6 below for exemptions during the project implementation period.

Qualifying Criteria

3 w w w . i n v e s t s r i l a n k a . c o m

4) Strategic Import Replacement - New Enterprisesst Any new enterprise established on or after 01 April 2012 and engaged in the manufacture of any of

the products referred to in the table below will be eligible for the following tax incentives.

Note: For exemptions on importation of plant, machinery or equipment, please refer category No. 6 below (i.e. Customs Duty, VAT and PAL – Exemptions

on imports of capital goods)

Ö1 Amount of Investment means the cost of any land, plant, machinery, equipment and other fixed assets

5) Expansion of Existing Enterprises

a) Expansions by Small, Medium and Large Scale Enterprises

Existing enterprises falling within small, medium and large scale categories described above which have st stmade investment on fixed assets on or after 01 April 2011 but before 01 April 2015 in the expansion of

any enterprise will be eligible for following tax incentives.

Ö1 Amount of Investment means the cost of any land, plant, machinery, equipment and other fixed assets

SectorÖ1Minimum Investment

(US$ Mn)Tax Incentives

I.

ii.

iii.

iv.

Fabric

Pharmaceutical

Milk Powder

Cement

5

10

30

50

5 years Tax holiday followed by a

concessionary tax rate of 12% thereafter

Any Existing enterprise;

- Should qualify for exemptions under small/medium or large scale category

- Investment to be made in fixed assets between 01.04.2011 to 01.04.2015

Activity Amount of Ö1Investment

(Rs. Mn)

Tax Exemptions(No. of years)

As applicable to the original enterprise

Min. Export Req.(% of Output)

50 A qualifying payment relief of the investment made, subject to ;

- Not exceeding 25% of such investment in that year of assessment and balance 75% be apportioned in equal amount over 3 year period immediately succeeding that year of assessment

- If investment is made in more than one year of assessment, the year of assessment on or after 01.04.2011, in which, the aggregate of the minimum investment of Rs 50 Mn is reached, shall be deemed to be the year of assessment to qualify for this deduction.

Qualifying Criteria

4w w w . i n v e s t s r i l a n k a . c o m

b) Expansions by Strategic Import Replacement Enterprises

A special incentive scheme has been introduced for existing enterprises falling within the investment

criteria stipulated for Strategic Import Replacement Enterprises described under category 4 above, st which have made investment on fixed assets on or after 01 April 2012 in the expansion of any such

enterprise. The enterprise will be eligible for following tax incentives, depending on the sector and

the relevant investment requirement.

Ö1 Amount of Investment means the cost of any land, plant, machinery, equipment and other fixed assets

Being an investment which would have qualified such enterprise understrategic import replacement category engaged in the manufacturing of any product referred herein.

Investment to be made in fixed assets on or after 01.04.2012

Activity Amount of Ö1Investment

(US$ Mn)

Tax Exemptions(No. of years)

Fabric

Pharmaceutical

Milk Powder

Cement

Min. Export Req.(% of Output)

5

10

30

50

a) Concessionary tax rate (12%) for 5 years

Reckoned from the commencement of assessment year in which the minimum investment criteria is fulfilled; coupled with,

b) Qualifying payment relief of the investment made subject

to ;- Not exceeding 25% of such

investment in that year of assessment and balance 75% be apportioned in equal amount over 3 year period immediately succeeding that year of assessment

- If investment is made in more than one year of assessment, the year of assessment on or after 01.04.2012, in which, the aggregate of the minimum investment is reached shall be deemed to be the year of assessment to qualify for this deduction.

Qualifying Criteria

5 w w w . i n v e s t s r i l a n k a . c o m

6) Customs Duty, VAT and PAL - Exemptions on imports

of capital goods

(Only for new large scale and Strategic Import Replacement enterprises)

To reduce the upfront cost incurred on account of importation of project related plant, machinery

or equipment, the applicable Customs Duty, VAT and PAL will be deferred/exempted during the

project implementation period as applicable and the said deferment will be treated as an exemption

on the fulfillment of the conditions as specified in the agreement entered into with the Board of

Investment of Sri Lanka.

Customs Duty

VAT

PAL

Customs Ordinance

VAT Act No.14 of 2002

PAL Act No. 18 of 2011

For large scale enterprises and Strategic Import Replacement enterprises

For large scale enterprises and Strategic Import Replacement enterprises

For large scale enterprises and Strategic Import Replacement enterprises

For large scale enterprises engaged in construction activities

Duty Type Eligible Enterprises

RemarksRelevant Act/Gazette

Payment of Customs Duty on importation of plant, machinery or equipment will be exempted during the project implementation period.

Payment of VAT on importation of plant, machinery or equipment on or after 01.01.2012, will be deferred during the project implementation period and treated as an exemption, subject to fulfillment of conditions as specified in the agreement with BOI a) Payment of PAL on importation of plant, machinery or

equipment by any enterprise qualified for tax holiday under large scale or strategic import replacement category on or after 09.05.2012, will be deferred during the project implementation period subject to furnishing of Bank Guarantee on the amount of the tax due on the articles imported and will be treated as an exemption, subject to fulfillment of conditions as specified in the agreement with BOI.

b) Payment of PAL on importation of project related articles on or after 09.05.2012 (not being plant, machinery or equipment other than the articles in the negative list published by the secretary to the Treasury), by any enterprise qualified for a tax holiday under large scale category engaged in construction activities which has entered into agreement with BOI, for the use by such enterprise for construction purposes of the project, will be exempted during the project implementation period.

However, this provision is subject to the condition that such articles are not obtainable in Sri Lanka and recommended by the DG/ BOI on the request made to in that regard by such enterprise.

6w w w . i n v e s t s r i l a n k a . c o m

7) Tax on Dividends Exemption

Any dividend paid to a shareholder of a small, medium or large scale company, is exempted from Dividend

Tax during the tax holiday period. However, a resident construction project will be eligible for additional

01 year exemption from the Dividend Tax.

8) Land Transfer Tax Exemption for BOI Companies

Transfer of ownership of any property within Sri Lanka to a company owned by persons who are not

citizens of Sri Lanka shall be charged a tax of an amount equivalent to the value of that property (100%

Transfer Tax) if more than 25% of the issued shares in such company are owned by the said non citizens.

However, the above provision shall not apply to transfer of property to BOI companies approved under

Section 17 of BOI Law, provided the land has been obtained for the following purposes, the applicable

investment threshold is fulfilled and the total value of the land, is met by inward remittance of foreign

currency.

Hospitals or Hotels – Construction & Operation

Housing /Condominium – Construction A project for the construction of not less than hundred residential housing units, each constructed on individual allotments of land not exceeding ten perches or a condominium property within the meaning of the Apartment Ownership Law No.11 of 1973 comprising not less than hundred units for residential or non-residential accommodation.

thTransfer of Condominium Units (situated on or above 4 floor) Any condominium unit of a condominium property situated on or above the fourth floor of such condominium property, the ownership of which is transferred to a person who is not a citizen of Sri Lanka and value of such unit is met by inward remittances of foreign currency (this applies to any condominium property BOI or otherwise)

Infrastructure / other development - Infrastructure development or any other development determined by the Minister of Finance as being essential for the economic progress of Sri Lanka.

Manufacture of non-traditional goods for exports - A project solely for the manufacture of non-traditional goods for export for the establishment of its manufacturing plant, office, storage facilities, dormitories for workers.

Services Sector - A project relating to service sector including BPO industry, IT related training institution, educational institution, determined by the Minister as being essential for the economic progress of Sri Lanka and employing not less than 50 local persons.

SectorInvestment

Requirement(USD Mn.)

10

None

None

50

01

02

1.

2.

3.

4.

5.

6.

7 w w w . i n v e s t s r i l a n k a . c o m

9) Strategic Development Projects

Tax exemptions are considered under the provisions of the Strategic Development Projects Act No 14 of

2008 and its amendments for special projects which are in the national interest, likely to bring economic

and social benefit to the country and to change the landscape of the country.

Strategic Development Projects Act covers full or partial exemptions from following taxes based on the

nature of the investment on a case by case basis.

A special process has to be followed to declare a project as a Strategic Development Project by the

Parliament.

10) Commencement of Corporate Income Tax Holiday

The Corporate Tax exemption period shall be reckoned, from the commencement of the year of

assessment in which the enterprise commences to make profit or any year of assessment not later than 2

years from the commencement of commercial operation, whichever is earlier.

(I)

(ii)

(iii)

(iv)

(v)

(vi)

(vii)

(viii)

Inland Revenue Act No.10 of 2006

Value Added Tax Act No.14 of 2002

Finance Act No.5 of 2005

Excise (Special Provision) No.13 of 1989

Economic Service Charge Act No.13 of 2006

Customs Ordinance Chapter 235

Nation Building Tax Act No.9 of 2009

Ports and Airports Development Levy Act No.18 of 2011

8w w w . i n v e s t s r i l a n k a . c o m

1) The Board of Investment Law

The Board of Investment Law No. 4 of 1978 and its amendments is the principal law applicable to

investments in Sri Lanka. It is structured to function as the Central Facilitation point for investors

and empowered to enter into agreements with investors providing tax holidays, tax concessions

and exemption from custom duty & exchange control laws.

Total foreign ownership is permitted for investment for almost all the areas of the economy and

there is no restriction on foreign exchange transaction relating to current account payments.

The safety of foreign investment is guaranteed by the constitution and there are 27 Bilateral

Investment Promotion and Protection Agreements and 38 Avoidance of Double taxation

Agreements existing at present.

2) Exchange Control Laws Applicable for foreign Investments

The Exchange Control Provisions applicable for foreign investments are stipulated in the

Regulation No. 1232/14 dated 19-04-2002 as amended by No. 1248/19 dated 08-08-2002 which

read as follows;

“Permission is granted 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.

Exclusions:- The permission hereby granted shall not apply in respect of shares of a company

proposing to carry on any of the following businesses:

Limitations:-

(a) Foreign investments in the areas listed below will be approved only upto 40% of the issued

capital of such company or a higher percentage of foreign investment when approval has been

granted by the Board of Investment of Sri Lanka only upto such higher percentage.

B) FDI Policy

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;

Fishing (deep sea fishing);

Mass communications;

Education;

Freight forwarding:

Travel agencies;

Shipping agencies.

(I)

(ii)

(iii)

(iv)

(v)

(vi)

(vii)

(viii)

(ix)

(x)

(I)

(ii)

(iii)

(iv)

Money lending,

Pawn broking,

Retail trade with a capital of less than One Million US Dollars,

Coastal fishing.

9 w w w . i n v e s t s r i l a n k a . c o m

10w w w . i n v e s t s r i l a n k a . c o m

(b) The permission hereby granted shall apply in respect of the shares of a company carrying on

or proposing to carry on any of the businesses set out below only upto the percentage of the

issued capital of the company for which percentage either general or special approval has been

granted by the Government of Sri Lanka or any legal or administrative authority set up for the

approval of foreign investment in such businesses.

(i)

(ii)

(iii)

(iv)

(v)

Air transportation;

Coastal shipping;

Industrial enterprise in the Second Schedule of the Industrial Promotion Act, No. 46

of 1990, namely – any industry manufacturing arms, ammunitions, explosives, military

vehicles and equipment aircraft and other military hardware; any industry

manufacturing poisons, narcotics, alcohols, dangerous drugs and toxic, hazardous or

carcinogenic materials; any industry producing currency, coins or security documents;

Large scale mechanized mining of gems;

Lotteries.

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Note :

SRI LANKABOI

Research and Policy Advocacy Department Board of Investment of Sri Lanka

Level 19, West Tower, World Trade Center, Colombo 01, Sri Lanka.Tel: 2437137, 2427376, Fax: 2543406

Website: www.investsrilanka.com

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