Welcome to My Jurisdiction — Sri Lanka

By:  John Wilson
John Wilson Partners
Sri Lanka

Introduction:  According to some commentators, Sri Lanka’s general education system has made important gains in the recent past.

The continued increase in investment in the education system has placed Sri Lanka in a position relatively above the educational system attainments in many countries in the South and South East Asian Region.

The Global Competitiveness Report (2012-2013), which surveyed 144 countries in the world, positioned Sri Lanka at 33 in terms of quality of the education system.[1]

The Government aims at an educational system that will provide the competencies and technological skills required for the rapid economic and social development of the people.

Thus the education policy aims at creating a knowledge-based society, with educational institutions producing a workforce with the required skills to face the emerging challenges in society. It recognizes the necessity of promoting quality and enhancing the quality and relevance of education.

In the field of international higher education, the desire to become a central “hub” for a particular region of the world is a clearly discernible trend having regard to a growing number of countries.

Post conflict Sri Lanka is one such country with aspirations to establish itself as a higher education hub for the South and East Asia region. The Government of Sri Lanka is currently developing strategic action plans and systems to achieve this vision. Thus, the role of higher education as a major drive of economic development is well established.  It is the hope of the Government that the “Knowledge Hub” initiative will help to develop Sri Lanka as a destination for investments in higher education and position the nation as a centre of excellence and regional hub for learning and innovation.

The higher education policy focuses on (a) increasing access by enabling more choices in courses, modes of learning and alternative institutions within a regulatory framework for all prospective students, (b) enhancing quality and upgrading standards with emphasis on employability and ability to cope with national development needs and global competitiveness, (c) fostering a culture of research and innovation, and (d) ensuring accountability, sound performance and financial sustainability. Universities are encouraged to become engines for economic development, agents of innovation and incubators of entrepreneurship.

Sri Lanka has targeted achievement of excellence in higher education by 2020, becoming the most preferred country for higher education in the Asia subcontinent. It aspires to be among the top countries for higher education in Asia. It is envisioned that Sri Lankan Universities will offer internationally recognized courses that are recognized by local and global employers.

Success in transforming Sri Lanka to a Knowledge Hub will greatly depend on the availability of an enabling environment and infrastructure to attract prominent international research and education institutions.

According to the Mahinda Chintana (the President/Government of Sri Lanka’s core policy document), the concept of “Knowledge City” will provide an attractive model for private investors in this field. Government will designate a specific area for the proposed city and provide the supporting infrastructure including necessary buildings and service centres while encouraging international research and education institutions to set up their affiliated institutions in the proposed Knowledge City. This target will be achieved by offering a carefully designed incentive package.

A new tax incentive regime was proposed by the President of Sri Lanka in 2012 in his budget speech to promote private investments, both domestic and foreign.

Under the new regime for investment in education services within the investment range between Rs. 50 million and Rs. 100 million, Rs. 100 million and Rs. 200 million and over Rs 200 million, a full tax holiday period for 4, 5 and 6 years respective will be available.

For an educational service project with an investment of over Rs. 300 Million (large scale projects) – approximately US$ 2,850,000 – being a project which has made investment in fixed assets on or after 1st April 2011 – such project would be eligible to a 12 year tax holiday if the minimum ‘export’ requirement of the output is 70% of turnover in convertible foreign currency as applicable and if the amount of investment is greater that Rs. 2,500 million.

An institution engaging in educational activities in Sri Lanka would also enjoy reduced tax rates of 10% after the expiration of full or partial tax holiday period as applicable.

Many foreign universities in collaboration with Sri Lankan Institutions already offer affiliated or external degrees and transfer programmes from the respective foreign Universities. Some examples are:

  1. American Education Centre Limited (AECL) also known as ANC – offers degree programmes by Northwood University, USA – a world leading American Business University, and  of the Missouri University of Science and Technology (Missouri S&T), USA – a leading American State University, highly specialized in Science, Technology & Engineering.
  2. American College of Higher Education – is affiliated to the Broward College, Fort Lauderdale, Florida, USA, North Dakota State University, USA, Excelsior College, member of the University of the State of New York and Seneca, the largest Technical College in Canada.
  3. Royal Institute – offers degrees from the University of London in the United Kingdom and Deakin University in Australia.
  4. ACBT – ACBT is in association with Edith Cowan University Perth Western Australia and offers professionally focused degree programmes and provides an opportunity for Sri Lankan students to earn an Australian degree from Sri Lanka.
  5. National Institute of Business Management – awards degrees and diplomas by Limkokwing University of Malaysia
  6. Asia Pacific Institution of Information Technology (APIIT) – awards British internal degrees of Staffordshire University, United Kingdom.
  7. British School of Commerce (BSC) – the BSC is a division of the London School of Commerce (UK) which is the associate college of Cardiff Metropolitan University.


  1. When must an entity register to do business in your jurisdiction? Are there alternative forms of registration (i.e. a representative office)?

An entity wishing to do business in Sri Lanka would normally either incorporate a subsidiary in Sri Lanka for this purpose, or, (assuming that the entity is a company incorporated outside Sri Lanka), register itself (branch office type situation) with the Registry of Companies as an overseas company which has established a place of business in Sri Lanka.

The practice at the Registry of Companies is not to allow incorporations of companies with a foreign subscriber of the Articles of Association, unless a letter of approval from the Board of Investment of Sri Lanka (“BOI”) is submitted.

The BOI is the investment promotion agency of the Government of Sri Lanka. Its main priorities are to attract foreign and domestic investment in the economy thereby bringing in capital, creating job opportunities and encouraging the development of new skills.

A foreign company can have presence in Sri Lanka through any of the following forms:

Subsidiary Companies:  Upon incorporation of a subsidiary in Sri Lanka, the subsidiary will enjoy the same benefits and has the same obligations as any other company incorporated in Sri Lanka.

One of the basic advantages of having a subsidiary will be limitation of liability. This means that the parent company is not liable for the debts of the subsidiary company and the liability of the parent company is limited to any amount unpaid in respect of the shares taken by the parent company in the subsidiary.

Branch Office:  Part XVIII of the Sri Lankan Companies Act provides for the registration of companies incorporated abroad, (section 488 of the Companies Act refers to such companies as “overseas companies”), which establish a place of business in Sri Lanka.

The law provides that registration is mandatory where an overseas company establishes a place of business. There is no clear guidance in the law as to what the meaning of “establishing a place of business” is. The formalities which have to be complied with by an overseas company which establishes a place of business in Sri Lanka are that it must  within a month of so establishing a place of business in Sri Lanka submit to the Registrar of Companies certain documents for the purposes of registration.

An “overseas company” is permitted to carry out activities in Sri Lanka as detailed below.

1.  Activities which may be carried on by an overseas company:

An overseas company registered under the Companies Act may carry on in Sri Lanka:

(a) Any commercial, trading, or industrial activity other than those specified in Schedule I of the relevant regulation, provided prior permission has been obtained from the Controller of Exchange for any such activity specified in Schedule II of the relevant regulation.

(b) Any non-commercial, non-trading or non-industrial activity such as the activity undertaken or carried on by a liaison office, representative office, regional office or other similar office, provided such activities do not provide any income directly or indirectly to the company.

In the case of (a) above, a minimum of US$ 200,000 must be brought into Sri Lanka and deposited in a special account.

Certain activities are not permitted for overseas companies – education is not included in this category.

Certain activities require the prior permission of the Controller of Exchange. Education is one such activity.

2.     Are there any treaties that govern foreign entities doing business in your jurisdiction? Are their exemptions for educational activities under those treaties?

Sri Lanka has a strong legal framework for the protection of foreign investments. Article 157 of the Constitution of Democratic Socialist Republic of Sri Lanka guarantees the inviolability  of the protections provided for in investment protection treaties/agreements where such agreements/treaties have been approved by Parliament by a two thirds majority.

Sri Lanka has entered into a number of Investment Protection Agreements with several countries including Belgium, China, Australia, Denmark, Egypt, France, Canada, Finland, Pakistan, Germany, Italy, Indonesia, India, Iran, Japan, Korea,  Qatar, Kuwait, Vietnam, Czech Republic, The Netherlands, Norway, Romania, Singapore, Sweden, Switzerland, Thailand, U.K. and the U.S.A.

Bilateral investment protection agreements/treaties are generally operative for 10 years. They generally contain provision for automatic extension unless terminated by either party.

If a bilateral protection agreement/treaty is terminated, investments already made are protected for another 10 years. Such treaties/agreements generally provide for:

a)    protection against nationalization;
b)    payment of prompt and adequate compensation in the case of expropriation;
c)     free remittance out of Sri Lanka of earnings, capital and business fees;
d)    settlement of disputes under ICSID

There are no specific provisions in those bilateral investment promotion and protection agreements regarding companies carrying out educational activities.

As for taxation treaties, Sri Lanka has entered into and ratified  38 treaties for the avoidance of double taxation and 8 more are reported to be in the process of negotiation and finalization. The 38 countries include Australia, Italy, Qatar, Bangladesh, Japan, Romania, Belgium, Canada, China, Denmark, Finland, Korea, Russia, Kuwait, Saudi Arabia (this is a limited scope treaty),  Malaysia, Singapore, Mauritius, Nepal, Sweden, Switzerland, Thailand, Netherlands, France, Germany, Hong Kong (this is a limited scope treaty), Norway, Oman (this is a limited scope treatyt), UAE, United Kingdom, USA, Pakistan, India, Indonesia, Philippines, Vietnam, Poland and Iran.

3.     What is the test for when a foreign entity is subject to local taxes?

The general rule is that any person who/which is not resident in Sri Lanka for the purposes of the Inland Revenue Act is only liable to pay tax in respect of profits and income arising in or derived from Sri Lanka.

A person who/which is resident in Sri Lanka for the purposes of the Inland Revenue Act is liable to pay tax in respect of profits and income wherever arising.

The test of residence in the case of a company is set out in section 79(1) of the Inland Revenue Act, No 10 of 2006 (as amended) which provides that “Where a company or a body of persons has its registered or principal office in Sri Lanka, or where the control and management of its business are exercised in Sri Lanka, such company or body of persons shall be deemed to be resident in Sri Lanka for the purposes of this Act.”

The taxation of foreign entities

Three scenarios are considered below.

1.  A foreign company conducts business in Sri Lanka through a fully owned subsidiary company which is resident in Sri Lanka for the purposes of the Inland Revenue Act.

Such a subsidiary would operate as a stand alone entity for income tax purposes and would not be treated as a permanent establishment for the purposes of a double taxation treaty.

A resident company would have to pay the following taxes (inter alia):

–        tax at the appropriate rate on the taxable income of the company
–        remittance tax in respect of any remittances made by such a subsidiary
–        a tax of 10% of the gross dividends distributed out of profits to any shareholder;
–        a deemed dividend tax under certain circumstances.

It should be noted that the rules generally change with the implementation of budget proposals contained in the President’s budget speech each year and so up to date advice should always be sought.

Sri Lankan law also imposes obligations to pay Value Added Tax, Nation Building Tax, Social Responsibility Levy and, where the turnover exceeds Sri Lanka Rupees 30,000,000 per quarter, Economic Service Charge, irrespective of the type of operation conducted in Sri Lanka. Any Economic Service Charge paid can be set off against income tax liability.

2.  A non-resident  company

The income tax which a company which is not resident in Sri Lanka in any year of assessment, would be obliged to pay for that year of assessment would consist of (i) a tax on the taxable income as specified in the Second Schedule of the Inland Revenue Act; (ii) where there are remittances by such company in that year of assessment, a sum equal to ten per centum of the aggregate amount of such remittances by such company; (section 62 of the Inland Revenue Act No. 10 of 2006 (as amended)).

Section 83 of the Inland Revenue Act, No.10 of 2006 (as amended), makes provision for the profits of a non-resident person to be computed on a deemed profit basis as a percentage of the sum receivable by such a person from its business. Such a deemed profit must not be less than six percent but the actual rate specified by the Department of Inland Revenue is often higher than this.

3.  A foreign company which has a permanent establishment in Sri Lanka

The concept of a permanent establishment is found in all the comprehensive double taxation treaties which Sri Lanka has entered into. If there is a permanent establishment in Sri Lanka, it is generally the business profits of the foreign company attributable to the permanent establishment which  would be liable to income tax in Sri Lanka. As per the provisions contained in certain double taxation treaties which Sri Lankan has entered into,  income arising from all sources where the foreign company has permanent establishment would be subject to tax in that State thereby including sales of goods or merchandise or other business activities of the same or similar kind sold through the permanent establishment.

A non-resident company would be liable to pay all other taxes such as Value Added Tax, Nation Building Tax, Social Responsibility Levy, and Economic Service Charge where applicable in terms of the relevant Statutes.

4.  Any tax treaties that provide exemptions? In general, what types of exemptions are available?

A tax holiday is offered by the BOI to enterprises, (has to be a company incorporated in Sri Lanka), which enter into agreements with the BOI. The nature of the concession would depend on the number of students who would be trained per annum and the number of institutes which are set up in locations outside Colombo and the adjacent Gampaha administrative districts as shown in the Table below:

No. of Students to   be trained per annum


No. of units   outside Colombo and Gampaha Districts

Tax Holiday


5 years



6 years



7 years



8 years



9 years



10 years



11 years

A new tax incentive regime was proposed by the President of Sri Lanka in 2012 the budget speech to promote private investments, both domestic and foreign.

These new incentives are applicable to the following categories of investments.

1). Medium Scale – New Enterprises* (investments of Rs. 50 Mn and above)


Qualifying Criteria   Amount of Investment* (Rs. Mn)

Tax Exemptions (No.   of years)

3. Services

50 – 100

100 – 200

Over 200




 2). Large Scale – New Enterprises

Any new enterprise engaged in “specified activities” with an investment of over Rs. 300 Million (large scale projects) – approximately US$ 2,850,000 and which has made investment in fixed assets on or after 1st  April 2011 would be eligible for the following tax holidays.


Qualifying Criteria

Tax Incentives

Min. Export Req. (% of Output)

Amount of Investment (Rs. Mn)

Full Tax Holiday (years)

3. Educational Services 70%   of turnover should be in convertible foreign currency as applicable. >2,500 12

Enterprises falling within small, medium, large scale, strategic import replacement and strategic development project categories which are engaged in the following business activities would enjoy reduced tax rates (as stipulated in the table below) after the expiry of full or partial tax holiday period as applicable.




Reduction Rate   After Tax Holiday



5.    Are there special rules for foreign institutions of higher education?

Foreign Institutions of higher education

The Tertiary and Vocational Education Act No. 20 of 1990 as amended by Act No, 50 of 1999 contains the governing legislative framework.

Tertiary education is defined by the said Act as post-secondary education and/or training imparted to persons to prepare and fit them for an occupation/profession or for the purpose of further study in a university of similar institution.

Vocational education is defined by the said Act as education and or training imparted to persons for the acquisition of knowledge, operative skill, technical or craft skill or of experience needed for the pursuit of an occupation or trade.

According to section 14 of the said Act no person shall establish, manage, run or control any institute for the provision of tertiary education and vocational education or tertiary education or vocational education without being registered under the Act. The procedure for such registration is provided for in a regulation under the Act which prescribes a Development Plan for Registration of Institutes.

The prescribed criteria to be considered for registration must be satisfied.

The Commission must approve such an application and upon such approval, the Director General is required to register the Institute under such name and style specified by the Commission.

The said Act prohibits any person from conducting a tertiary education course or vocational educational course, being a specified course, without being registered under the Act.

Section 16 of the Act provides that no person or establishment shall conduct any examination for conferring or granting any tertiary education award or vocational education award without being registered with the Director General under the said Act. Certain exceptions are applicable.

6.  What is the test for an independent contractor vs. an employee in your jurisdiction?

The distinction generally drawn between an independent contractor and an employee is that an employee is governed by a contract of service whereas an independent contractor is governed by a contract for the provision of services.

The criteria applied to determine what the real nature of a contract is and identify whether a person is a workman under a contract of service or an independent contractor under a contract for the provision of services are complicated and difficult to apply given the evolution of employment methods, flexibility in employments and arrangements resorted to by employers to circumvent their obligations.

The Courts have developed many tests to apply to the facts for the purpose of deciding whether a person who provides his or her services is an employee or an independent contractor. The tests developed by the Courts include the control test, the integration test, the economic reality test and the multiple test.

However these tests can only constitute guidelines for any given case and the absence of one or more of the indicia which could be relied upon to decide the nature of the contract is not conclusive.

Briefly, the most common indicia relied upon are:

i.          Performance of work by the employee him/herself is a key feature of a contract of service, while in a contract for the provision of services the contractor only agrees to produce a given result. This rule is difficult to apply in the case of a consultant who legitimately renders personal services without being an employee.

ii.          Whether the employer has the right to the exclusive service of a person is material in deciding whether or not a person is an employee or an independent contractor, the latter being under no obligation to exclusively render service to the person who engages him/her.

iii.          The place where the services are to be rendered is a relevant factor. Where the services are to be performed in the employer’s premises, this may sometimes be relied upon as an indication that the person concerned is an employee.

iv.           The label used by the parties to describe their relationship would be relevant only in the event of a doubt, but does not bind a Court in regard to the determination of the true character of the relationship as the question is essentially one of the law.

v.          The payment of remuneration, as distinct from payment by the job, may be an indication of a contract of service.

vi.          An independent contractor carries on an independent business, while under a contract of service a person sells his/her labour and services to another. The question whether the person is in business on his/her own account or not is called the ‘Economic Reality Test’.

vii.          The question whether the work done is an integral part or a core activity of the business is relevant.

viii.          Who owns the tools or equipments used to produce goods or services is another test which is sometimes applied.

ix.          The right to supervise and give orders is an old test which continues to be applied. This also includes the right to dismiss and disciplinary control. [2]

In many cases, employers who have power to include clauses favourable to them due to unequal bargaining power between the parties have included designations such as self-employed persons, agents, consultants, free-lancers and subcontractors to label the workmen as independent contractors with the belief that they could circumvent their statutory obligations. However the Courts have creatively applied the tests to the facts and decided that they were workman. However, the decisions made by the Appellate Courts in the cases with complex and ambiguous facts show that the tests developed by the courts are relevant even today, and the tests could be creatively applied to make decisions as to the true nature of contract and achieve objectives of labour legislations.

7.     When is a work permit required?

Sri Lankan law prohibits non citizens from engaging in trade profession or business without a visa/visa with permission to engage in employment.

The  rules and administrative practices regulating the grant of visas to foreign nationals with an endorsement thereon permitting employment are stringent and only certain types of employment will be permitted in practice and only certain types of companies will be permitted to employ foreign nationals.

8.     Is there anything else you think a potential client should know about doing business in your jurisdiction?

The principal laws applicable to foreign investment in Sri Lanka are the Exchange Control Act and the BOI Law No. 4 of 1978 as amended read with Regulations made thereunder.

The following outward remittances may be made by in terms of prevailing liberalised exchange control regulations:

  • Profits of branches in Sri Lanka to their parent companies and to nonresident partners of partnership operating in Sri Lanka.
  • Dividends accruing to nonresident shareholders of companies incorporated in Sri Lanka.
  • Interest, royalties and technical service fees by enterprises established in the BOI area in accordance with the agreements entered into with the Greater Colombo Economic Commission.
  • Life insurance premiums by foreign nationals temporarily residing in Sri Lanka.
  •  Remittance of sales proceeds of shares in a company incorporated in Sri Lanka
  • Capital gains and income from investment.
  • Sale proceeds of investment.
  • Capital, including liquidation proceeds.
  • Pensions, salaries and commission paid to non-residents.

As mentioned in the answer to Question 1, the BOI is responsible for authorizing all foreign investments.

There are two regimes under the BOI:  section 17 approval and section 16 of the said Act.

Section 17 approval is generally applicable to investments in nontraditional export oriented manufacturing, advanced technology, electronic and information technology as well as direct or indirect exports and such approval entitles the enterprise to certain tax and other concessions.

Companies that do not qualify under the section 17 regime can apply under section 16. These companies will be governed by the ‘normal laws’ of the country; that is to say,  the provisions of the Inland Revenue, Customs and Exchange Control Laws will apply to such companies.

A minimum investment of USD$ 250,000 is currently required to qualify for approval under section 16.

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