Exchange Control Restrictions On Non-Residents Establishing A Business In Sri Lanka

Non-Residents cannot invest in a company in Sri Lanka, carrying on any one or more of the following businesses:

• Money lending
• Pawn Broking
• Retail Trade with a capital investment of less than US$ 1 million
• Coastal fishing

In certain other areas, investment by foreigners up to 40% of the share capital of the company concerned and in most of the other cases up to 100% of the share capital is allowed.
 
Share Investment Account
 
Investment in shares of a local company in Sri Lanka by a non-resident (individual or company) in areas of businesses permitted under the Exchange Control Law, can invest by bringing the investment in foreign currency (e.g. US Dollars) and opening Share Investment Rupee Account (SIA) at a licensed commercial bank in Sri Lanka
 
Thereafter the shareholder can transfer in Sri Lanka Rupees from SIA the amount of his investment to the Sri Lankan Company and shares will subject to corporate procedure be issued to the shareholder by the company.
 
When the shareholder receives dividends from the Sri Lankan Company, he/it can take the amount of the dividends out of Sri Lanka in foreign currency through the SIA subject to payment of tax, if any, and obtaining tax clearance.
 
If the shareholder decides on a future date to sell his/its shares, he/it can sell the same and take the sale proceeds out of Sri Lanka in foreign currency subject to tax clearance if required.
 
Eligible investors in SIA are: non-resident Sri Lankans, citizens of foreign states whether resident in Sri Lanka or outside Sri Lanka, corporate bodies incorporated outside Sri Lanka, foreign institutional investors.  An SIA facilitates investments in Government Securities (Treasury Bills and Treasury Bonds), debentures, shares of companies incorporated in Sri Lanka and units of Unit Trusts in Sri Lanka.  All benefits earned out of the said investments could be credited into the same SIA and remitted outside Sri Lanka.

Restrictions on Land Alienations
 
New Law
 
It was announced by the last Government of Sri Lanka in 2014 that in furtherance of the development policies promoted by the Government of Sri Lanka in the backdrop of a globally integrated environment, it considered deemed expedient and necessary to ensure the prudent use of land which is a limited resource, in a manner that preserves the national interest.
 
Stating that the National Policy is to regulate the use of lands, in a sustainable manner, the last Government in 2014 enacted the Land (Restrictions on Alienation) Act No. 38 of 2014 imposing restrictions on the alienation of lands to foreigners, foreign companies and certain institutions with foreign shareholding, as specified in that Act.  The provisions of this Act are deemed to have come into operation with effect from 1 January 2013.  Now a new Government has taken over but it has not announced whether the said Act No. 38 of 2014 will be repealed or amended.
 
Exemptions from Restrictions on Alienation of Lands
 
However outright transfers of the immovable properties to the following persons are exempted by Section 3 of the new Law from the operation of the New Law:
 

• Foreign Diplomatic Missions or an International Multilateral or Bilateral organisations recognised in terms of that Act
• Foreign investor who acquired a land as per a Cabinet Decision before 1 January 2013
• ‘Next of kin’ in accordance with the applicable law of succession of Sri Lanka by way of gift or succession by intestacy or testamentary disposition
• Dual citizens of Sri Lanka
• Licensed Commercial banks in which foreign shareholding is 50% or more at an auction for debt recovery/due to a court decree
• Finance leasing institutions in which foreign shareholding is 50% or more in the process of recovery of a loan
• Foreign companies, which acquired the land between 1 January 2013 and 29 October 2014 if it had been in active operations in Sri Lanka for not less than 10 years
• Foreign entities engaged in banking, financial, insurance, maritime, aviation, advanced technology or infrastructure development projects identified and approved as Strategic Development Projects in terms of Strategic Development Projects Act No. 14 of 2008 and exempted as provided for in Sec 3 (2) of the Law No. 38 of 2014.
• Foreign companies engaged in international commercial operations to locate or relocate their global or regional operations, or to set up branch offices if exempted in terms of Sec.  3 (3) of the Law No. 38 of 2014 with the prior approval of the Cabinet

The Act also exempts the transfer of lands and property to foreigners, if the properties are condominium units on or above the fourth floor, provided the entire value of the property is paid up front through an inward foreign remittance prior to the execution of the relevant Deed of Transfer.  To decide whether the floor is fourth or above the ground level floor and floors which accommodates only the Common Elements will be excluded.
 
Land Lease Tax
 
The leasing of a land-

• to a foreigner; or
• to a company incorporated in Sri Lanka under the Companies Act, where any foreign shareholding in such company, either direct or indirect, is fifty percent or above; or
• to a foreign company.
• can be effected only subject to the payment of the Land Lease Tax imposed under the new law unless it is exempted under Section 7 of the Law.  Those exemptions are similar to those applicable to outright transfers and specified above but the maximum tenure of any such lease shall not exceed ninety nine years.

The rate of the said Land Lease Tax is 15% of the total rental payable for the entire duration of the lease but the said tax is payable only at 7.5% of in certain categories specified in Section 6 (3) of the Law.
 
Mr. Kandiah Neelakandan, Precedent Partner of the Law Firm of Neelakandan & Neelakandan (formerly Murugesu & Neelakandan) Attorneys-at-Law, is well known as one of the leading corporate lawyers in Sri Lanak with specialisation in laws relating to banking, corporate and property matters and is in active practice as an Attorney-at-Law for more than 45 years in Sri Lanka. 

• He has advised banks companies and foreign investors. 
• Mr.  Neelakandan has served as member of a number of institutions including the Law Commission of Sri Lanka the Finance Commission of Sri Lanka and the Council of Legal Education.  He authored the first book published on the new Companies Act. 
• He was editing the Bar Association of Sri Lanka Law Journal from 1988 to 2013. 

Kandiah can be contacted on + 94 11 2371133 or by email at neela@mnlaw.lk