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 InvestmentÖ1 (Rs. Mn)

Tax Exemptions (No. of years)

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

³25 and 1,000 and £1,500

9

>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 Ö1 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 InvestmentÖ1 (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) Ö1

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 InvestmentÖ1 (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.

Ö1

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 InvestmentÖ1 (US$ Mn)

Tax Exemptions (No. of years)

Fabric

5

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

Ö1

5

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

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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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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