15 December, 2016
The third and final reading of the Appropriation Bill (2017) of the Sri Lankan Government, commonly known as the '2017 Budget', was passed by Parliament on 10th December 2016 with a 110 vote majority.
The 2017 Budget (incidentally the second budget of the incumbent coalition government) contained several key proposals which we consider may impact foreign investment in Sri Lanka. We have provided a summary and brief analysis of these proposals below.
Prospective investors should however be aware that legislative and investment incentivisation proposals in the 2017 Budget are subject to implementation, which may be delayed, and that historical evidence indicates that implemented proposals may also vary from those contained in the bill. It is therefore prudent to seek professional advice on the applicable laws and regulations, and conduct extensive due diligence, prior to making any investment decisions.
A. Easing of land ownership restrictions for foreigners
Presently, foreigners, foreign companies and Sri Lankan companies with a foreign shareholding of 50% or more cannot own land in Sri Lanka (although there are certain limited exemptions). These restrictions were formally introduced in 2014 under the provisions of the Land (Restriction on Alienation) Act.
While such foreign persons could obtain land on leasehold terms, a statutory land lease tax of up to 15% of the total rental was to be levied on such lease agreements.
The 2017 Budget proposes to:
- Exempt public limited companies from the land ownership restrictions.
- Entitle private companies with majority foreign ownership to acquire land on long lease terms if such companies invest at least LKR 250Mn (excluding the value of the land), provide employment to a minimum of 150 persons and maintain the status quo for 3 years. If the conditions are not fulfilled, a tax equal to 100% of the lease value will be 'payable up front based on the market value of the land as determined by the Government valuer' (sic).
- Remove the existing restrictions on foreign ownership of units in the first 4 floors of condominium properties, and permit up to 40% of the cost to be raised from domestic banks.
SHSA comment: The exemption granted to public limited companies will be a welcome one, encouraging greater foreign participation in public M&A in Sri Lanka. The proposals relating to private companies, however, require further clarification, particularly as there are currently no restrictions on leasehold ownership of property by foreign companies.
It is however possible that the intention is to refer to an exemption from the land lease tax.
B. The introduction of a capital gains tax
Capital Gains Tax will be introduced at a flat rate of 10% on the gains derived on the disposal of immovable properties, at the time of realising the gains.
SHSA comment: Although in June 2016 the Sri Lankan Government indicated that a capital gains tax on share transactions will be introduced as well, it appears that a more muted approach has prevailed. Incidentally, the Government removed the imposition of stamp duty in relation to share issuances and transfers in January 2016.
C. Tax incentives for new investments
Capital allowance incentives for development provinces
The 2017 Budget provides that entities that invest over US$3 Million in fixed assets (excluding the value of any land) in the Eastern and Uva Provinces and provide new employment opportunities to at least 250 persons will be entitled to a 100% capital allowance. If these criteria are met in relation to investments in the Northern Province, the capital allowance entitlement will be 200%.
General capital allowance incentives
An entity that invests elsewhere in Sri Lanka, with an investment between US$5 Million and US$100 Million (excluding the value of any land), generating employment for at least 500 persons and providing value addition of over 40%, will be entitled to a 100% capital allowance. Such entities will also be provided with an additional tax credit of 5% of the investment amount after the 2nd year of commercial operations, which will be doubled if the terms of investment are maintained for 5 years.
Incentives for employment generation
Entities which create at least 500 new employment opportunities would be granted a 3 year, 50% corporate income tax concession, with the concession increased to 5 years if 800 employment opportunities are created.
Incentives for 'landmark' investments
'Landmark' investments over US$100 Million will be entitled to 'special incentive packages' with 'specific tax concessions' (sic).
Sugar industry investment incentives
Investments in sugar mills in Moneragala, Batticaloa, Kilinocchi and Ampara districts with a minimum plant size of 2000 Tonnes crushed per day (tcd) will also be provided 100% capital allowances.
Relocation incentives
International organisations and businesses which relocate their headquarters to Sri Lanka are to be granted exemptions from corporate income tax.
SHSA comment: Although in June 2016 the Sri Lankan Government indicated that a capital gains tax on share transactions will be introduced as well, it appears that a more muted approach has prevailed. Incidentally, the Government removed the imposition of stamp duty in relation to share issuances and transfers in January 2016.
SHSA comment: There is significant discrepancy between the capital allowance and other tax incentive proposals contained in the main text of the 2017 Budget and those set out in the technical notes relating to taxation. In our analysis we have referred to the former (which are more restrictive). As these allowances and incentives would in any case be introduced by way of amendments to the Inland Revenue Act No. 10 of 2006, investors would have greater clarity on the eligibility criteria thereafter. Amendments are expected to be introduced by around April 2017.
D. Revisions to corporate income tax rates
Corporate income tax rates are to be revised to a three tier system, with a flat rate of:
- 14% for SMEs, and entities engaged in export, agriculture or education;
- 40% for those engaged in betting/gaming, liquor or tobacco; and
- 28% for all other entities.
E. Residency visas for foreign investors
SHSA comment: While the general rate and that applicable to the liquor and tobacco industries have been maintained, the rates for all other businesses have been increased. Incidentally, the lowest corporate income tax band in 2016 was
10%, and aimed at agriculture and education oriented businesses.
Eligible investors (and their skilled expatriate staff) are to be entitled to 5 year multiple entry visas.
F. Amendments to business laws
An 'Investment Inflow Management Act' is proposed to be introduced, to facilitate inward remittances of foreign exchange with minimal restrictions. The laws relating to insolvency and bankruptcy are also to be amended in line with contemporary practices.
For further information, please contact:
Dushyantha Perera, Virtus Law LLP
(a member of the Stephenson Harwood (Singapore) Alliance)
dushyantha.perera@shlegalworld.com
