Tax Incentives

& FDI Policy

in Sri Lanka - 2012

BOI
SRI LANKA

Board of Investment of Sri Lanka

Prepared by
Research & Policy Advocacy Dept. /BOI
Jointly with,
Department of Inland Revenue
September, 2012

Preface
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 &
exchange control laws and regulations as of 31st March 2012.

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Tax Incentives and FDI Policy

in Sri Lanka - 2012
A) Tax Incentives
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.
1) Tax incentives with no minimum investment threshold
2) Small & Medium Scale Enterprises (based on the Investment Value)
a) Small Scale - New Enterprises
b) Medium Scale - New Enterprises
3) Large Scale - New Enterprises (based on the Investment Value)
4) Strategic Import Replacement New Enterprises (based on the
Investment Value & Product)
5) Expansion of Existing Enterprises
6) Customs Duty, VAT & PAL Exemption on Imports
7) Tax on Dividends Exemption
8) Land Transfer Tax Exemption
9) Strategic Development Projects
10) Commencement of Corporate Income Tax Holiday
The details of the applicable investment threshold and the incentives granted for the enterprises
under each category are described in this brochure.
Note:
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.

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1) Tax incentives with no minimum investment threshold

Tax Exemptions

Sector of Investment

1. Enterprise for fishing

Any enterprise for fishing carried on in Sri Lanka. (including
cleaning, sizing, sorting, grading, chilling, dehydrating,
packaging, cutting or canning of fish)

Exempted from Income Tax for each year of

assessment within the period of five years
commencing from 1st April 2011.

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.

Exempted from Income Tax for each year of

assessment within the period of five years
commencing from 1st April 2011.

2) Small & Medium Scale Enterprises

New enterprises engaged in any of the following activities, provided that the sum invested in fixed assets
is made between 31st March 2011 to 01st April 2015 and commences commercial operations on or after
01st April 2011 will be eligible to tax holidays as follows;
a) Small Scale New Enterprises* (investment between Rs. 25-50 Mn)
Qualifying Criteria
Amount of Investment1
(Rs. Mn)

Tax Exemptions
(No. of years)

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

25 and <50

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

25 and <50

Activity

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)

Activity2

1. Manufacture of any article

(including processing) other than liquor or
tobacco products
2. 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

Qualifying Criteria
Amount of Investment1
(Rs. Mn)

Tax Exemptions
(No. of years)

50 and <100

100 and <200

200

Amount of Investment means the cost of any land, plant, machinery, equipment and other fixed assets.
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.
2

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3) Large Scale New Enterprises*

Any new enterprise engaged in specified activities with an investment of over Rs 300 Mn (large
scale projects) and made investment on fixed assets by such company on or after 1st April 2011 will
be eligible for the following tax holiday periods.
Qualifying Criteria

Activity

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

Tax Exemptions
(No. of years)

Min. Export Req.

(% of Output)

Amount of Investment1
(Rs. Mn)

None

>300 and 500

>500 and 700

>700 and 1,000

>1,000 and 1,500

>1,500 and 2,500

10

>2,500

12

90%
(75% for
Apparel &
Textile)

None

70% of turnover
should be in
convertible foreign
currency as
applicable.

- 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
1
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.

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4) Strategic Import Replacement - New Enterprises

Any new enterprise established on or after 01st 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.
Sector

I.
ii.
iii.
iv.

Minimum Investment1
(US$ Mn)

Tax Incentives

5
10
30
50

5 years Tax holiday

followed by a
concessionary tax
rate of 12%
thereafter

Fabric
Pharmaceutical
Milk Powder
Cement

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)
1

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
made investment on fixed assets on or after 01st April 2011 but before 01st April 2015 in the expansion of
any enterprise will be eligible for following tax incentives.
Qualifying Criteria
Activity

Any Existing enterprise;

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

Min. Export Req.

(% of Output)

Amount of
Investment1
(Rs. Mn)

Tax Exemptions
(No. of years)

As applicable to
the original
enterprise

50

A qualifying payment relief of the

investment made, subject to ;

- Investment to be made in fixed assets

between 01.04.2011 to 01.04.2015

- 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.

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

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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,
which have made investment on fixed assets on or after 01st 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.
Qualifying Criteria
Activity

Being an investment which would have

qualified such enterprise under
strategic import replacement category
engaged in the manufacturing of any
product referred herein.

Amount of
Investment1
(US$ Mn)

Tax Exemptions
(No. of years)

Fabric

Pharmaceutical

10

Milk Powder

30

Cement

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,

Min. Export Req.

(% of Output)

Investment to be made in fixed assets

on or after 01.04.2012

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

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

- 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.

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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.
Relevant
Act/Gazette

Duty Type

Eligible
Enterprises

Remarks

Customs Duty

Customs
Ordinance

For large scale

enterprises and
Strategic Import
Replacement
enterprises

Payment of Customs Duty on importation of plant,

machinery or equipment will be exempted during the
project implementation period.

VAT

VAT Act No.14

of 2002

For large scale

enterprises and
Strategic Import
Replacement
enterprises

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

PAL

PAL Act No. 18

of 2011

For large scale

enterprises and
Strategic Import
Replacement
enterprises

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.

For large scale

enterprises engaged
in construction
activities

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.

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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.

Sector

1.

Hospitals or Hotels Construction & Operation

2.

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.

Investment
Requirement
(USD Mn.)
10

None

3.

Transfer of Condominium Units (situated on or above 4th 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)

4.

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.

50

5.

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.

01

6.

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.

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None

02

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.
(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

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.

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B) FDI Policy
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:
(I)
(ii)
(iii)
(iv)

Money lending,
Pawn broking,
Retail trade with a capital of less than One Million US Dollars,
Coastal fishing.

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.
(I) Production of goods where Sri Lanka's exports are subject to internationally
determined quota restrictions;
(ii) Growing and primary processing of tea, rubber, coconut, cocoa, rice, sugar and spices;
(iii) Mining and primary processing of non renewable national resources;
(iv) Timber based industries using local timber;
(v) Fishing (deep sea fishing);
(vi) Mass communications;
(vii) Education;
(viii) Freight forwarding:
(ix) Travel agencies;
(x) Shipping agencies.

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(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) Air transportation;
(ii) Coastal shipping;
(iii) 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;
(iv) Large scale mechanized mining of gems;
(v) Lotteries.

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10

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September 2012
Printed by Karunaratne & Sons Pvt (Ltd)
Designed by Chanaka Kumanayaka (BOI Media Dept.)

BOI
SRI LANKA

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