FAQs (Capital Transactions)

Investments in Sri Lanka by persons resident outside Sri Lanka

1.   What is the Regulations issued under the Foreign Exchange Act, No. 12 of 2017 with regard to capital transactions undertaken in Sri Lanka by persons resident outside Sri Lanka (i.e., non-residents)?

  • Regulations No. 2 of 2021 (Gazette Notifications No. 2213/35 dated 03.02.2021)

 

2.   What is the Directions issued under the Foreign Exchange Act, No. 12 of 2017 to Licensed Commercial Banks with regard to capital transactions undertaken in Sri Lanka by persons resident outside Sri Lanka (i.e., non-residents)?

  • Directions No. 15 of 2021 on Inward Investment Account

 

3.   Who is allowed to make investments in Sri Lanka?

  • Any person resident outside Sri Lanka (Non-residents) including country funds, regional funds, investment funds or mutual funds established outside Sri Lanka.

 

4.   What type of bank account a non-resident shall open to invest in Sri Lanka?

  • Inward Investment Account (IIA) to make investments such as:
    • Investment in listed/non listed shares
    • Investments in listed/non listed debt securities
    • Securities issued by the Government of Sri Lanka, Central Bank of Sri Lanka and any State-Owned Enterprises and other statutory bodies
    • Term deposits in licensed financial institutions
    • Immovable properties

5.   Are long-term lease agreements considered capital transactions (e.g. 99-year or 60-year lease)?

  • Yes.
  • Payments made for lease agreements more than 1 year term are considered as capital transactions.
  • Any inward remittances made in respect of 99-year, or 60-year lease agreements shall be routed through an Inward Investment Account.

6.   Is it permitted for a non-resident investor transfer his shareholding in a resident company to another non-resident for no consideration?

  • No.
    • As per Regulation No. 2 of 2021, transfers made between non-resident investors shall be for a consideration, and such funds shall be routed to Sri Lanka through an Inward Investment Account of the new investor.

7.   Is it permitted for a non-resident individual acquire assets (other than loans) by way of gift/inheritance/Court order?

  • Yes.
    • A non-resident individual acquires assets (other than loans) by way of gift from an immediate family member/ inheritance/ settlement under a Court order.

8.   How to remit out the proceeds of the investments inherited/gifted/received under an Order of a Court to a non-resident?

  • In case the initial investment has been made out of inward remittances. Such proceeds may be remitted through an Inward Investment Account, without being subject to any limitations.
  • In case the initial investment has NOT been made out of inward remittances. Such proceeds shall be remitted through a Capital Transaction Rupee Account, subject to an annual allowance of USD 30,000.

9.   What type of investments are permitted to be undertaken by an Emigrant out of the funds held in the Non-Resident Rupee Account?

  • Investment in listed/non listed shares
  • Investments in listed/non listed debt securities
  • Units in Unit Trusts or Mutual Funds;
  • Government Securities (treasury bills, treasury bonds and any other securities issued by the Government of Sri Lanka);
  • Securities issued by the Central Bank of Sri Lanka or any state owned enterprise or any other statutory body;
  • Term deposits in, Sri Lanka Rupee or any designated foreign currency in licensed financial institutions,
  • Immovable properties

10.   How to repatriate proceeds realized from investments made by an Emigrant through a Non-Resident Rupee Account?

  • All income derived from such investments may be repatriated only through respective Capital Transaction Rupee Account or Emigrants’ Remittable Income Account (as applicable), without being subject to the eligible migration allowance.
  • Any capital proceeds of such investments may be repatriated only through respective Capital Transaction Rupee Account subject to the eligible migration allowance.

 

Borrowing from Non-residents

1.   Is it permitted for a non-resident to grant loans to an individual resident in Sri Lanka?

  • No.
    • In terms of the prevailing foreign exchange regulations an individual resident in Sri Lanka cannot obtain loans from a non-resident.

2.   Is it permitted for a non-resident to grant loans to a company incorporated in Sri Lanka?

  • Yes.

3.   Who are permitted to borrow from non-residents?

The following entities resident in Sri Lanka are allowed to borrow from non-residents under Regulations No. 2 of 2021.

  • Companies incorporated in Sri Lanka under the Companies Act, No. 7 of 2007
  • Branch office or project office registered in Sri Lanka as an overseas company under the Companies Act, No. 7 of 2007
  • Government of Sri Lanka or State-Owned Enterprises subject to obtaining any approval required from the relevant line Ministry and any other relevant authority
  • Licensed Commercial Banks, Licensed Specialised Banks, Licensed Finance Companies and Specialised Leasing Companies, subject to the approval of the relevant regulatory authorities

4.   What bank account is required to open to receive loans from overseas?

  • External Commercial Borrowing Account – Any eligible borrower (mentioned under item 3 above), other than licensed commercial banks, licensed specialised banks, the Government of Sri Lanka and State owned enterprises
  • Inward Investment Account is not mandatory for the non-resident (i.e., lender) to route the proceeds of the loan.

5.   Is it permitted for a non-resident to grant loans to a company incorporated in Sri Lanka?

  • Yes.
    • Tenure of such loan shall be 3 or more years.
    • Loan may be repaid by the borrower in full at the end of the tenure or shall be amortized over the tenure.
    • Borrower shall open an External Commercial Borrowing Account with any Licensed Commercial Bank to credit proceeds of the loan and repayments shall be made through the same account.

6.   Is it permitted to convert loans obtained by resident companies from overseas into ordinary shares?

  • Yes.
  • As per Regulations No. 1 of 2021 issued under the Foreign Exchange Act, No. 12 of 2017, loans obtained by companies incorporated in Sri Lanka may be converted into ordinary shares. after expiry of 18 months from the date of the borrowing.

7.   Is there a tenure requirement for any loan obtained under Regulations No. 2 of 2021?

  • Tenure requirement of 3 or more is only applicable for the loans obtained by companies incorporated in Sri Lanka from overseas.
  • However, such requirement is not applicable for loans granted by the overseas parent company to its overseas offices registered in Sri Lanka, loans obtained by Government of Sri Lanka/State Owned Enterprises/Licensed Commercial Banks/Licensed Finances Companies/Specialized Leasing Companies.

 

Investments in voting shares of a company incorporated in Sri Lanka by Non-residents 

1.   What is the maximum time period allowed for issuing shares to a non-resident in respect of an investment made?

  • A resident company shall issue shares within 3 months (90 days) from the date the receives the investment proceeds to the company.                                                                                                                                                                                                                                                                                                                                                        

2.   Is a non-resident allowed to fully own (100%) the voting shares of a Sri Lankan company?

  • Other than the business activities listed as exclusions, limitations, and conditions in paragraphs 7 and 8 of part I of the Schedule of Regulation No. 02 of 2021 issued under the Foreign Exchange Act, No. 12 of 2017, a non-resident investor may invest in up to 100% of the voting shares of a company incorporated in Sri Lanka.

(Please note that these restrictions are based on the specific business activities the company currently performs or proposes to undertake.)

3.   In which business activities are non-residents not permitted to invest in ordinary shares?

  • Pawn broking;
  • Coastal fishing (as defined by the Minister to whom the subject of fisheries is assigned);
  • Retail trade where capital contributed by persons resident outside Sri Lanka will be less than USD 5 Million

4.   In which business activities are non-residents restricted to a maximum investment of 40% in ordinary shares?

Non-residents may invest only up to 40% of the voting shares in companies that are engaged in, or propose to undertake, the following business activities:

  • production of goods where Sri Lanka’s exports subject to internationally determined quota restrictions;
  • growing and primary processing of tea, rubber, coconut, cocoa, rice, sugar and spices;
  • mining and primary processing of non-renewable national resources;
  • timber based industries using local timber;
  • deep sea fishing (as defined by the Minister to whom the subject of fisheries is assigned);
  • mass communication;
  • education;
  • freight forwarding;
  • travel agencies;
  • shipping agencies.

However, if the Board of Investment of Sri Lanka has granted permission for a higher limit, such a limit shall apply.

Setting up a branch office in Sri Lanka by non-resident entities

1.   Is it permitted to establish a branch office in Sri Lanka by non-resident entities?

  • Yes.
  •  Such branch offices shall be operated by registering as an overseas company under the Companies Act, No. 7 of 2007, subject to exclusions and conditions specified in paragraphs B. 3 and 4 of part I of the Schedule of the Regulation No. 02 of 2021.
  • Accordingly, such an overseas company registered under the Companies Act, No. 7 of 2007 is permitted to carry out any commercial, trading or industrial activities or non-commercial, non-trading and non-industrial activities (as specified in Regulations No. 2 of 2021).

2.   Is there a minimum investment requirement for a non-resident entity to establish an overseas office in Sri Lanka?

  • Yes.
    • Overseas companies which engage in activities generating income, directly or indirectly, is required to remit a minimum investment of USD 200,000 to establish a branch office, project office, or any similar office. These funds shall be remitted through an Inward Investment Account opened by the overseas parent company.
    • In the case of overseas companies which engage in non-commercial, non-trading, and non-industrial activities (i.e., liaison, representative, or other similar offices), the aforesaid minimum investment requirement does not apply. However, it is required to receive funds for set-up and maintenance purposes through an Inward Investment Account of the overseas parent company.

3.   Is there a specific channel through which income generated by an overseas company is required to be remitted?

  • Yes.
    • Any profits, royalty, surplus funds or similar payments made by an overseas company established in Sri Lanka shall be repatriated outside Sri Lanka through the same Inward Investment Account through which the overseas parent company has funded the investment.