Introduction
Sri Lanka continues to position itself as an attractive destination for foreign direct investment (FDI) in the South Asia. Sri Lanka offers investors a strategic geographical location, a tried and tested legal framework, and one that protects foreign investment. There are a range of regulatory and legal requirements that apply to foreign investors, and this article provides an overview of the saliant ones.
Constitutional and Treaty Protection
Sri Lanka is a party to numerous Bilateral Investment Treaties (BITs) and Double Taxation Avoidance Agreements (DTAAs). The BITs and DTAAs form an integral part of the country’s Sri Lankan foreign investment legal framework. They provide, inter alia, reciprocal guarantees of fair treatment, protection from expropriation, etc., Article 157 of the Sri Lankan Constitution recognizes these BITs and DTAAS.
The Principal Laws Governing Investment
Foreign Exchange Act No.12 of 2017 (Foreign Exchange Act) –
The Foreign Exchange Act and regulations and directions issued thereunder govern foreign direct investments in Sri Lanka. The Department of Foreign Exchange (DFE) of the Central Bank of Sri Lanka is the duly appointed regulator.
Under the Foreign Exchange (Classes of Capital Transactions Undertaken in Sri Lanka by a Person Resident Outside Sri Lanka) Regulations No. 2 of 2021 (as amended) issued under the Foreign Exchange Act, foreign investors, including individuals and entities such as country funds, regional funds, investment funds, and mutual funds established outside Sri Lanka, are permitted to engage in certain types of capital transactions. Among the permitted activities are acquiring, holding, or divesting shares in Sri Lankan companies, investing in debt securities and providing loans to companies incorporated in Sri Lanka, subject to specified restrictions and limitations.
Companies Act No.7 of 2007, as amended (Companies Act) –
Foreign investors typically establish limited liability companies in Sri Lanka to carry out projects and business, which are incorporated under and in terms of the Companies Act. The Companies Act governs, inter alia, the procedure for incorporating companies, the form and content of constitutional documents, all matters pertaining to its shareholding, board of directors, including their meetings, procedures and processes appliable to the winding up, restructuring, etc.
The Registrar General of Companies (ROC) is responsible for incorporating companies, maintaining their registrations and ensuring companies comply with the provisions of the Companies Act.
The Companies Act sets out offences including fines and imprisonment of responsible officers, including directors and the company secretary, in the case of non-compliance.
The Companies (Amendment) Act, No. 12 of 2025 was enacted on 4 August 2025 to amend the Companies Act. The substantive provisions of this Amendment shall come into force on a date to be appointed by the Minister by an order published in the Gazette.
Key changes introduced by the Amendment include, inter alia:
- The requirement for companies to notify the Department of the Registrar General of Companies of any transfer or issuance of shares, accompanied by a statement detailing the nature and extent of beneficial ownership; and
- The obligation to maintain a register of beneficial owners.
The term “beneficial owner” is defined to include any individual holding 10% or more of the direct or indirect ownership or exercising effective control over a company. Consequently, where a company’s shareholder is a corporate entity, the particulars of the individual who directly or indirectly exercises control or significant influence must be recorded.
This requirement is particularly relevant in the context of foreign-owned or foreign-controlled companies operating in Sri Lanka.
Board of Investment of Sri Lanka Law (BOI Law) –
The BOI Law established the Board of Investment (BOI), which acts as a single facilitation point for foreign direct investment in Sri Lanka. Foreign investors seeking to benefit from the provisions of the BOI Law, may apply to the BOI for approval under Section 16 and Section 17 of the BOI Law.
Section 16 Approval: While this approval does not confer any specific concessions, it facilitates the issuance of work permits for expatriate employees. The number of work permits granted depends on the value of the investment.
Section 17 Approval: This approval is project-specific and includes a range of incentives, such as exemptions from customs duties, enhanced capital allowances, and relief from certain exchange granted at the BOI’s discretion under an agreement between the project entity and the BOI. Section 17 approval also includes facilitation of work permits for expatriate employees. The specific terms of Section 17 approval—such as the number of work permits and the scope of concessions—depend on factors including the value of the investment, and the nature of the project.
Please note that to obtain BOI approval, the minimum investment threshold prescribed by the BOI must be met.
In addition, the Agreement entered with the BOI provides additional protections, typically including a clause ensuring that the project, its assets, and returns are safeguarded against expropriation or nationalization. It also guarantees that the capital investment and returns of foreign or non-resident shareholders can be transferred in accordance with applicable foreign exchange regulations.
Economic Transformation Act No.45 of 2024 (ETA) –
The ETA was enacted in August 2024 to overhaul the foreign direct investment (FDI) legal regime. It proposes to repeal the BOI Law. The full implementation and amendment process of the ETA is currently ongoing and yet to be completed. It establishes the National Policy on Economic Transformation, setting macroeconomic targets on debt sustainability, fiscal balance, export expansion, and investment growth, with the objective of achieving Advanced Economy status by 2048.
The ETA establishes new institutions, including the Economic Commission of Sri Lanka (EC) and Investment Zones Sri Lanka (Zones SL). Once the ETA is fully implemented and the amendment process completed, the EC will serve as the apex body for promoting and facilitating FDI in Sri Lanka. It will take over the function of the BOI, as the ETA proposes to repeal the BOI Law. Zones SL, established under the ETA will establish and manage ‘to be’ designated investment zones.
Financial Transactions Reporting Act No.6 of 2006 (FTRA) –
The (FTRA) governs the detection and prevention of money laundering and terrorist financing in Sri Lanka. It imposes obligations on licensed commercial banks (Banks) in Sri Lanka to conduct Know Your Customer (KYC) procedures, maintain detailed record keeping, and report suspicious transactions to the Financial Intelligence Unit (FIU) of the Central Bank of Sri Lanka.
Banks are required to report cash or electronic transactions above prescribed thresholds and disclose any property suspected to be linked to terrorist activity. The FIU is empowered to suspend suspicious transactions, refer matters to law enforcement authorities, and impose administrative penalties for non-compliance.
Foreign investors must ensure they (and their local subsidiaries, joint ventures, and financial intermediaries) comply strictly with FTRA.
Prevention of Money Laundering Act No. 5 of 2006, as amended (PMLA) –
The PMLA governs the framework pertaining to illicit monies moving through the financial system. The PMLA set out the offences of money laundering and the applicable fines, including imprisonment of those found guilty of such offences. The PMLA empowers authorities to freeze and confiscate assets.
Foreign investors should be cognisant of the provisions of PMLA, to ensure that source of funds can be clearly identified. Additionally, foreign investors should exercise due diligence, and consider having in place anti-corruption safeguards in compliance with the PMLA framework.
Land (Restrictions on Alienation) Act No.38 of 2014, as amended (LRA) –
The LRA Limits direct foreign ownership of land while permitting long-term leases and condominium ownership under specific conditions. The restriction on land ownership extends to companies incorporated in Sri Lanka with foreign shareholding in excess of 50%. Foreign investors seeking to acquire interest in immovable property should be aware of the provisions of the LRA as the consequence of violating its provisions are severe – i.e., an acquisition of immovable property contrary to the provisions of the LRA is deemed void.
Inland Revenue Act No. 24 of 2017, as amended (IRA) –
IRA governs taxes in Sri Lanka. It deals with the charge, levy and collection of taxes on gains and profits generated in Sri Lanka. It covers, income tax (personal and corporate), withholding tax, capital gains tax, etc. applicable to resident and non-resident investors.
Colombo Port City Economic Commission Act No.11 of 2021 (CPCEC) –
Provides a distinct regime for investment within the Colombo Port City area, with its own regulatory authority and fiscal incentives. Foreign investors seeking to engage in business within the Port City and avail themselves of the benefits and concessions provided under the CPCEC Act will be subject to the provisions of the CPCEC Act and regulations issued thereunder.
Personal Data Protection Act (PDPA) –
PDPA regulates the processing of personal data when such processing takes place in Sri Lanka, is carried out by a resident or a company incorporated in Sri Lanka, or involves offshore entities that offer goods or services to individuals in Sri Lanka or monitor the behaviour of data subjects in Sri Lanka, including profiling. It also governs matters related to cross border data transfers.
Legal Due Diligence and Legal Awareness for Foreign Investors
Foreign investors entering Sri Lanka must approach each stage of their investment with informed awareness and thorough due diligence. From understanding foreign exchange regulations to navigating sector-specific laws and reviewing contractual and regulatory obligations, every stage of the investment process requires informed and strategic attention. Engaging experienced counsel for legal advice in Sri Lanka and assistance with obtaining approval of the BOI ensures that the transaction structure, funding source, and ownership arrangements comply with legal and regulatory requirements
In addition, when a foreign investor plans to acquire an existing company in Sri Lanka, it’s crucial to conduct thorough legal, tax, and financial due diligence before completing the transaction. This process helps identify potential risks and ensures full compliance with local laws.
From a legal perspective, due diligence should cover the verification of share ownership, review of legal and regulatory compliance, assessment of ongoing litigation, employee-related matters, covenants under financial or contractual arrangements that could affect the transaction etc. Foreign investors should also pay close attention to restrictions on foreign ownership of land and sector-specific limitations on foreign shareholding, which may apply to certain industries in Sri Lanka.
Ongoing Compliance Checklist –
Ongoing corporate compliance and practical considerations for foreign investors seeking legal advice in Sri Lanka.
| Compliance Area | Key Requirements / Risks | Recommended Practice |
|---|---|---|
| Corporate | Compliance with incorporation procedures and adherence to shareholding or local director requirements, depending on the specific sector. | Assess applicable shareholding and director requirements prior to incorporating a company or acquiring shares in an existing company. |
| Beneficial Ownership | Compliance with the reporting requirements related to beneficial ownership under the Companies Act (once in effect). | Verify that all required information can be accurately disclosed and maintain up-to-date records. |
| Remittance of Funds | All investment funds, returns (e.g., dividends), or capital proceeds must be remitted through permitted channels in accordance with the Foreign Exchange Act and regulations issued thereunder. | Familiarize yourself with permitted remittance channels, set up required accounts, and avoid transferring funds through unauthorized routes. |
| Legal and Regulatory Compliance | Compliance with all applicable laws and regulations for the proposed business in Sri Lanka, including licensing, approvals, and registration requirements. If acquiring an existing business, ensure the company is compliant. | Familiarize yourself with these requirements before commencing business and assess the relevant obligations to ensure compliance. |
| Taxation | Profits, dividends, and capital gains are taxable under the Inland Revenue Act, subject to DTAA relief. | Engage tax advisors to ensure treaty benefits, timely filing, and compliance with source rules. |
| Sub-division and Amalgamation | mains economically viable and isn’t fragmented into plots too small for productive use. This helps promote sustainable and practical land management, especially in rural or agricultural zones. (Section 70) | Sub-division or amalgamation of land parcels is typically treated as a straightforward administrative procedure without a specific statutory framework. |
| Condominium Registration | An owner of a land parcel registered under this system, on which a multi-storey building has been constructed, may apply to register its horizontal subdivision (condominium parcels) under the Act, in accordance with the Apartment Ownership Law, No. 11 of 1973 (as amended). (Sections 50, 51 & 52) (Form No.21 – Instrument to register a Condominium Property) This process is not automatic and requires submission of a certified condominium plan and compliance with prescribed procedures. Once approved, each unit receives a separate title backed by cadastral mapping and the legal certainty under this system, ensuring clarity and security in property dealings. | Under this system, a condominium is created and governed primarily under the Apartment Ownership Law, No. 11 of 1973 (as amended). Once a Condominium Deed of Declaration and Condominium Plan are registered under this law, individual ownership of units and common property is recognized. |
| Legal Certainty | The system involves a thorough investigation process to verify ownership claims and possession conducted by the Commissioner of Title Settlement prior to issuing ownership declarations based on verified claims and possession. (Sections 12, 13 & 14) It simplifies the ownership structure by replacing the need to trace historical deeds.
| Registering an instrument under this Ordinance does not remedy any inherent legal defects nor confer validity upon an instrument that is otherwise invalid at the time of its execution. It only gives the document priority over unregistered or later-registered instruments. Therefore, ownership depends on the validity and legal history of all prior deeds, as registration alone does not guarantee absolute title. (Section 7 (4)) Certified copies or endorsed duplicates by the Registrar serve as prima facie evidence of the registration and its contents in all proceedings. (Section 43) |
| Legal Risk Exposure | The likelihood of ownership disputes is substantially mitigated due to the government’s assurance of title accuracy. In the event of an error or loss, compensation is provided in accordance with a court order, from the Title Insurance Fund established under the Act, administered by the Registrar General of Title under the supervision of the Central Bank of Sri Lanka. (Sections 58, 60 & 62) | Ownership is not guaranteed by the government, and the risk of land disputes is higher compared to the Title Registration system. There is potential for disputes, fraud, and unresolved claims to arise from errors or gaps in the chain of deeds. Ensuring security of ownership depends heavily on maintaining a clear title history and conducting thorough legal due diligence. |
FAQ
Foreign investment in Sri Lanka is governed mainly by the Foreign Exchange Act No. 12 of 2017 and the BOI Law. Foreign ownership restrictions are also contained in certain sectorwise laws such as the Land (Restrictions on Alienation) Act.
Yes. Non-residents, may acquire, hold, or divest shares in Sri Lankan companies. But there are certain foreign ownership restrictions that apply to certain types of business. Additionally, the inward and outward movement of funds in the purchase and sale of shares must be routed through bank accounts that are called inward investment accounts IIAs).
Yes, there are certain ownership restrictions that apply depending on the business proposed to be conducted in Sri Lanka. For instance, the Land (Restrictions on Alienation) Act prohibits direct foreign ownership of land, permitting only long-term leases and condominium ownership under conditions.
Foreign investors may apply for:
- Section 16 Approval – mainly for obtaining work permits for expatriates.
- Section 17 Approval – provides project-specific incentives such as customs duty exemptions, enhanced capital allowances, and exchange control concessions, along with facilitated expatriate work permits.
BOI companies are not entitled to any tax concessions.
There are certain minimum investment thresholds for certain types of businesses. For example, a company engaged in retail trade (ie sale of goods to end users), must have a minimum share capital of US$5,000,000, if it has any foreign shareholding. The majority of businesses do not require minimum investment. The BOI prescribes certain minimum investments for BOI approved companies.
