Learn how to set up a business in Sri Lanka, including its registration, taxation, and foreign investment rules under the Sri Lankan Companies Act, Foreign Exchange Act, and the Board of Investment (BOI) framework
Starting a business in Sri Lanka requires an understanding of the available alternative business structures and how such structures can be established. It is important to understand the ongoing obligations imposed under Sri Lanka law, particularly with respect to tax and labor laws. Foreign investors must be aware of foreign ownership restrictions and other laws that govern foreign investment.
This guide outline the key steps and considerations for establishing a business in Sri Lanka.
What are the available alternatives to conduct business in Sri Lanka?
Sole Proprietorship –
This is the most straightforward and common option for anyone starting out in business. It can be set up reasonably expeditiously and doesn’t require complex formalities. It should be noted that in a proprietorship, the owner is personally liable for all debts and obligations of the business. Its profits are taxed under the personal income tax rates set out in the Inland Revenue Act No. 24 of 2017, (as amended), (Inland Revenue Act), which currently range between 6 – 36%.
How to register your business as a sole proprietor?
- Nominate a business name: select a unique and relevant name for your business.
- There is a prescribed application form (Business Name Registration) that can be obtained from the Divisional Secretariat.
- The following documents must be furnished:
- Application form for the Registration of a Business Names of an Individual Business
- A report of the Grama Niladari stating that the business is being carried out (this should be countersigned by the divisional secretary).
- Affidavit confirming initial capital (if required).
- True copy of your National Identity Card (NIC), valid passport or valid driving license of the owner.
- A certified copy of the deed, lease agreement, or rent agreement (certified by a Notary) must be submitted to establish the principle place of business.
- Submit documents and prescribed fee: submit the completed application form, Grama Niladhari certificate, and other relevant documents along with the prescribed registration fee to the Divisional Secretary.
- If approved, the Divisional Secretary will issue a certificate of business name registration.
Timeline for registration – The business name must be registered at the relevant Divisional Secretariat within 14 days of commencing operations or such additional period as may be allowed subject to a ceiling of 30 days. Once the application and required documents are submitted, the Business Registration Certificate is issued within 7 to 14 working days.
Partnership –
A partnership can be formed by two or more individuals under the Partnership Ordinance No. 21 of 1866. The partnership is governed by a partnership agreement entered into by the partners setting out their rights and obligations.
The standard partnership tax rate is 6% for income beyond Rs. 1 million.
Partnership income is thereafter allocated to individual partners in proportion to their ownership share. Individual partners’ income is aggregated with their other sources of income (if any), and thereafter subject to income tax at the prevailing rates – ie 6 – 36%. The partners can deduct the 6% partnership tax paid by the partnership.
How This Works in Practice
- Step 1: The partnership pays the entity-level tax (6%).
- Step 2: Each partner receives their net share of income.
- Step 3: Partners declare this as part of their own total taxable income.
- Step 4: They pay individual income tax based on the progressive personal rates (up to 36%).
How to register your business as a Partnership?
- Nominate a business name: select a name for your partnership business.
- There is a prescribed application form for partnership registration that can be collected from the Divisional Secretariat.
- The partners must submit a partnership agreement that sets out the terms and conditions applicable to the partnership.
- The following documents must be furnished:
- The duly completed prescribed application form (for the Registration of a Business Names of a Partnership Business) together with the prescribed registration fee.
- Copies of each partner’s NIC, valid passport or valid driving license
- A report of the Grama Niladari stating that the business is being carried out (this should be countersigned by the Divisional Secretary).
- A certified copy of the deed, lease agreement, or rent agreement (certified by a Notary) must be submitted to establish the principle place of business.
- Affidavit, a Declaration Statement submitted separately by all the partners to prove the information stated in the application form.
- If approved, the Divisional Secretary will issue a certificate of business name registration.
Timeline for registration – The business name must be registered at the relevant Divisional Secretariat within 14 days of commencing operations or such additional period as may be allowed subject to a ceiling of 30 days. Once the application and required documents are submitted, the Business Registration Certificate is issued within 7 to 14 working days.
Additional Considerations –
- If the business is related to trading, import, export or a manufacture; clearly state the category, type of goods that are being traded, imported, exported or manufactured.
- Online business registration is not available for sole proprietorships and partnerships; registration is done in person at the Divisional Secretariat.
- For both sole proprietorships and partnerships, it is important to display the registration certificate at the business location.
- In case of a Partnership Business, all the partners should sign separately. The information stated in the Application Form should be corroborated by the partners in separate affidavits/declarations of oaths.
- When enrolling new partners, details such as their full name with names denoted by initials, address etc. should be provided. All the Partners including new Partners should sign the application.
Can foreigners establish sole proprietorships and partnerships in Sri Lanka?
No.
Private Limited Liability Company (LLCs)
A LLC is established in terms of the Companies Act No. 07 of 2007 (as amended) (Companies Act) and requires at least one shareholder, one director, a registered office in Sri Lanka, a company secretary, and a statutory external auditor. There is no minimum share capital requirement, and the share capital can be as little as LKR 1.
Foreigners can establish LLCs and can own up to 100% in certain businesses. However, there are restrictions on certain sectors which are discussed in detail under the Foreign Investment Rules.
How to set up an LLC?
- Reserve the business name online via the Registrar of Companies (ROC), (e-ROC system).
- Fill in Forms No.1, 18, & 19 on the e-ROC system.
Form 1: Application for Registration of a Company
Form 18: Consent and Certificate of Director (must be completed by each Director)
Form 19: Consent and Certificate of the Secretary/SecretariesIt is also a requirement that the ultimate beneficial ownership of the company be disclosed. If the shareholder of the company is to be a foreign entity, it is a requirement that the ultimate beneficial ownership of the foreign entity be disclosed. - In addition to completing the listed forms, Articles of Association of the LLC must be prepared as per the Model Articles in the Companies Act.
- The aforementioned documents must be scanned and uploaded to the e-ROC system. The fee to register is LKR 11,000 inclusive of VAT and processing charges (approx. USD 37), (Form 1 – LKR 4,000/= (approx. USD 13), Form 18 – LKR 2,000/= (approx. USD 7), Form 19 – LKR 2,000/= (approx. USD 7), Articles of Association – LKR 2,000/= (approx. USD 7)).
These fees apply to single director companies, as the total fee amount varies depending on the number of directors.
- The LLC must issue a public notice via Government Gazette and a daily newspaper in Sinhala, Tamil, and English, within 30 days of its incorporation. The notice will set out the LLC’s name, number and registered address.
Timeline for incorporation/registration
- Name reservation can take up to 3 days. It is always recommended to provide several options in case the suggested names are rejected. The word ‘Sri’ cannot be used in the name of a company.
- A company can be incorporated within a period 3 – 10 days if all required documents are furnished. The timeline is shorter for companies that are incorporated with Sri Lankan shareholders. Need to factor in potential delays if the e-ROC system is down.
What are the laws applicable to foreign Investment?
The Foreign Exchange Act No. 12 of 2017 (as amended) and the regulations issued thereunder (FEA) is one of the principle enactments governing foreign investment in Sri Lanka. It deals with inter alia, inward and outward remittance of capital and profits well as foreign ownership restrictions in certain types of businesses and activities in Sri Lanka.
Non-resident investors (including foreign individuals, companies, and funds) can generally own up to 100% of a Sri Lankan company subject to restrictions in certain sectors.
Sectors in which foreign investment is not permitted?
- Pawn-broking
- Retail trade with capital under USD 5 million
- Coastal fishing
Sectors in which foreign ownership is permitted up to 40% of a company’s shareholding?
- Production of quota-restricted exports
- Growing/processing tea, rubber, coconut, cocoa, rice, sugar, spices
- Mining and processing non-renewable resources
- Timber-based industries using local timber
- Deep sea fishing
- Mass communication, education, freight forwarding, travel/shipping agencies
Foreign ownership is permitted with special approval in the following sectors –
- Air transportation, coastal shipping
- Manufacture of arms, explosives, hazardous substances, currency, and security documents
- Large-scale mechanized gem mining
- Lotteries
What is an Inward Investment Account (IIA)?
AN IIA is a special purpose bank account that facilitates free inward and outward movement of capital (and profits in the case of outward remittance). As per the FEA and regulations issued thereunder, (FE Laws), the investment of the nonresident shareholder in the shares of LLC must be routed through an IIA, established by the shareholder with a local commercial bank.
All returns on such investment (such as dividends, sale and liquidation proceeds) must be repatriated via the same IIA.
Establishment of an IIA will take approximately up to 14 working days depending on the information and documentation requirements of the relevant bank. In the case of individual investors, the process is more straightforward and the IIA can be established within 1 – 3 days subject the bank’s KYC requirements. The timeline for establishing an IIA should be factored in when investing in Sri Lanka, as it is often the case that the establishment of the IIA delays the inward movement funds, resulting in potential delays to closure of transactions.
What is the Board of Investment of Sri Lanka (BOI) and what role does it play in foreign investment?
The BOI is the central facilitation point for foreign investment in Sri Lanka. Investors may opt to set up companies with the approval of the BOI in accordance with the Board of Investment Law No. 4 of 1978, as amended (BOI Law).
What types of approval does the BOI grant?
There are two types of approvals granted by the BOI.
An approval granted under Section 16 of the BOI law does not provide for any concessions, however, such an approval may enable investors to a limited number of Resident work visas for expatriate employees, depending on the value of the investment.
Section 16 approval makes it relatively straightforward to obtain a work visa for an expatriate. At present the minimum investment requirement for an entity to qualify for approval under Section 16 is USD 250,000.
Alternatively, under Section 17 of the BOI Law, the minimum investment required for approval depends on the business category. Companies approved under this scheme may receive import duty exemptions on raw materials, construction materials, and capital goods necessary for manufacturing and export, subject to the BOI Negative List. Similar to Section 16 approval, Section 17 approval will also enable investors to obtain work visas for expatriate staff. The number of work visas will depend on the value of the investment. The BOI does not grant tax concessions.
What are overseas companies registered under the Companies Act?
A company incorporated outside Sri Lanka can register and maintain a place of business in Sri Lanka, as an ‘Overseas Company’ under the Companies Act and FEA.
The following structures are available for registration as an overseas company:
- If the overseas company is to undertake commercial, trading or industrial activities in Sri Lanka, it must be registered as a Branch Office or Project Office; and
- If there are no commercial and trading or industrial activities to be carried out in Sri Lanka, the overseas company should be registered as a Liaison Office, Representative Office or Regional office. No income can be generated either directly or indirectly in Sri Lanka.
Timeline for registration – It can take up to 4 weeks.
What are the requirements and procedure for establishing an overseas company in Sri Lanka (ie – a branch, project office, liaison office)?
Requirement –
- The foreign parent company must invest at least USD 200,000 through an IIA (for income-generating operations).
- Provide proof of remittance of the USD200,000 must be provided to the ROC within 90 days of registration.
- For non-income-generating offices (liaison/regional offices), the investment can be limited to operational costs. All ongoing expenses of the liaison/regional offices must be borne by inward remittance from the parent company.
Procedure –
- The overseas company’s name must exactly match the Principal Company’s name.
- After the name approval, the following has to be submitted to the ROC:
- Certified copy of the Principal Company’s constitutional documents (with an English translation if needed).
- Certified recent copy of the Certificate of Incorporation or equivalent proof of establishment.
- List of Directors (Form 45).
- Details of one or more Sri Lanka-based authorized persons for service of documents (Form 46).
- Statement of the company’s registered/principal office and business address in Sri Lanka (Form 44).
- Valid Power of Attorney authorizing the Sri Lankan representative(s).
- Board and shareholder resolution approving the opening of the branch in Sri Lanka.
Additional documents may be required depending on the entity type.
Do proprietorships, partnerships and companies require licenses and permits to operate their businesses?
Certain businesses need specific licenses such as those in tourism, food and beverages, or manufacturing depending on their industry sector.
Is it a requirement for companies to register for Tax?
All companies must obtain a tax identification number (TIN).
The TIN registration can be done online through the RAMIS system or in person at the Inland Revenue Department (IRD).
The following documents must be submitted to obtain a TIN:
- Incorporation Certificate
- Forms 1 and 18
- Articles of Association
- Proof of Identity (passport or Sri Lankan identity card)
It will take between 1-5 days to obtain tax registration.
What are the taxes that a company is required to pay in Sri Lanka?
| Tax Type | Description |
|---|---|
| Income Tax | LLC taxable income is taxed at 30%. Gains arising from the disposal of assets or liabilities are subject to income tax in Sri Lanka based on the type of asset. Currently, the disposal of investment assets is subject to a capital gains tax at the rate of 30%. |
| Withholding Tax (WHT) | Dividends paid by the LLC to its shareholders are subject to WHT at the rate of 15%. In relation to a non-resident shareholder, the concessionary rate(s) provided under the Double Taxation Avoidance Treaty between Sri Lanka and the country of tax residency of such shareholder (“DTA”) would be applicable, provided that such shareholder is permitted to claim benefits under the relevant DTA. DTA benefits: Available only if the non-resident is a tax resident of the foreign country and is majority-owned/controlled by residents of that country, unless the shareholder is a listed company there. Other income: Interest, royalties, rent, service fees, insurance premiums, and employee remuneration sourced in Sri Lanka are taxable at varying rates, subject to local exclusions and exemptions. |
| Value Added Tax (“VAT”) | VAT is payable on import of goods to Sri Lanka and is also imposed on taxable supplies of goods and services in Sri Lanka, by a company, unless such supply is classified as zero-rated or exempt under the Value Added Tax Act No. 14 of 2002, as amended (“VAT Act”). • The standard VAT rate is 18%. If a supply is zero rated, it is 0%. |
| Social Security Contribution Levy (“SSCL”) | The company must pay SSCL at 2.5% of its liable turnover, calculated quarterly. For services, the taxable value follows the same rules as VAT, meaning SSCL applies on the total amount receivable for services in Sri Lanka, excluding exempt services. |
| Import Related Taxes and Levies | Any product imported into Sri Lanka may attract taxes (e.g., Customs Duty, Excise, Cess, VAT, SSCL, PAL), with rates depending on its HS code, including for machinery and equipment. |
Employers should be mindful of their obligations to deduct income tax at source when paying salaries to their employees who are liable to pay income tax on their earnings. Employers must deduct Advance Personal Income Tax (APIT) from employees who are liable to pay income tax and remit it monthly to the IRD.
Any registration a company is required to make when employing workers?
Employers must complete statutory registrations when hiring employees in Sri Lanka.
Registration with the Employees’ Provident Fund (EPF) must be done within 14 days of hiring the first employee. This creates the employer’s EPF number and allows monthly EPF contributions to be made.
No separate registration is needed to register with the Employees Trust Fund (ETF) as the same EPF number is used by the ETF for their monthly contributions.
EPF/ETF employer registration can take between 1 – 5 days.
How to establish a bank account?
All businesses regardless of structure must open a bank account with a licensed commercial bank in Sri Lanka.
The following minimum documents are required to set up a bank account:
- Business registration certificate
- TIN
- Articles of Association (for companies)
- Details of directors and shareholders
It should be noted that banks have stringent KYC requirements, that may require additional information and documents to be provided, including information and documents pertaining to its shareholders and directors. A bank account can be established within 1 – 4 days provided all required documents are submitted together with the duly completed and signed bank account opening form.
By following these steps and understanding the applicable regulations, you can set up and operate a compliant, well-structured business in Sri Lanka whether you are a local entrepreneur or an overseas investor.
Quick Reference Glossary
Articles of Association (Articles)
The Articles of Association (also known as Articles) is the governing document of a company under the Companies Act. It sets out provisions pertaining to internal management, including the rights and duties of shareholders, directors, and officers, procedures for meetings, share transfers, and other operational matters. In Sri Lanka, a company may adopt the Model Articles provided in the Act or file its own customized Articles at the time of incorporation with the ROC.
Divisional Secretary / Divisional Secretariat – Local administrative office that registers business names for proprietorships and partnerships.
Grama Niladhari – Local level government officer who issues confirmation reports for business registration.
Registrar of Companies (ROC) – Government authority under the Companies Act responsible for company incorporation and maintenance via the eROC online system.
Inland Revenue Department (IRD) – Sri Lankan tax authority that issues TINs and administers income tax, VAT, WHT, and SSCL.
Board of Investment (BOI) – The statutory body facilitating foreign investment.
Inward Investment Account (IIA) – Special-purpose bank account for routing foreign capital into Sri Lankan companies under the Foreign Exchange Act.
Employees’ Provident Fund (EPF) – A superannuation fund for employees to which both the employer and employee contribute. Employers must register within 14 days of hiring their first worker.
Employees’ Trust Fund (ETF) – A superannuation that requires additional contributions from employers. It employs the same registration as the EPF.
RAMIS System – Is the online platform established by the IRD for electronic tax registration and filing.
Notary Public – Licensed lawyer authorized to certify deeds, leases, and other legal instruments under Sri Lankan law.
