How to Start an Overseas Business in Sri Lanka | Business Impact of Foreign Exchange and Tax Regulations on Business Expansion from Sri Lanka to Overseas Markets

This article delves into the foreign exchange regulations and tax policies that affect the expansion efforts of Overseas Businesses in Sri Lanka. in overseas markets. It focuses on resident investors and does not cover investments made by entities other than private limited companies or alternative forms of foreign exchange transactions.

Foreign Exchange Regulations

Under the Foreign Exchange Act, eligible resident investors are permitted to establish and maintain overseas offices, branches, or projects (referred to as overseas offices) in foreign countries.

Limits on Outward Investments

Capital transactions for outward remittances must be conducted through an Outward Investment Account (OIA), which is opened and maintained by the eligible resident investor through an authorized dealer or a restricted dealer. These transactions are subject to limits specified in issued directions and the provisions of the Foreign Exchange Act.

For companies or partnerships investing in overseas offices/branches, the limit is set at USD 300,000 per calendar year or an equivalent amount in other designated foreign currencies. However, the usage of outward investment accounts for payments has been suspended since June 2022, following a gazette notification by the finance minister at that time.

Additionally, the gazette order imposes a maximum limit of USD 20,000 or its equivalent in other designated foreign currencies for outward remittances on capital transactions made through Business Foreign Currency Accounts or Personal Foreign Currency Accounts held by resident individuals in Sri Lanka, during the effective period of the notification.

Repatriation of Income and Liquidation Proceeds

Any income and capital proceeds from investments must be brought back to Sri Lanka through the same outward investment account used for the initial investment, within three months from the date of receipt.

Incentives for Resident Investors

Eligible resident investors are allowed to utilize funds up to fifty per cent (50%) of the value of capital gains from previous outward investments credited to their outward investment account, without being subjected to the permitted limits. However, this incentive has also been restricted by the aforementioned gazette notification since June 2022.

Other Terms, Conditions, and Reporting Requirements for Foreign Investments

1. Prior to each outward remittance, the investor must obtain a clearance letter from the Head of the Department of Foreign Exchange through an authorized dealer or a restricted dealer. Investors planning subsequent foreign investments must provide a certificate obtained from a Fellow member of the Institute of Chartered Accountants of Sri Lanka or a Charter holder of the Chartered Financial Analyst (CFA) Institute, outlining the progress and status of their previous investments, along with supporting documents. The Head of the Department of Foreign Exchange will issue the clearance letter upon being satisfied with the progress of the previous investments.
2. The Board of Directors of an investment company that has invested in an unlisted company outside Sri Lanka must evaluate the progress of such investment annually and submit a report to the Head of the Department of Foreign Exchange, including details on the investee's profit or loss, dividends declared by the investee, or dividends received by the investor. This report must be submitted on or before March 31 of the following year or as specified by the Head of the Department of Foreign Exchange for a particular investment.
3. In order to be eligible for permitted investments under foreign exchange regulations, investors must maintain a sound financial position and performance. They must also provide a recommendation from a Fellow member of the Institute of Chartered Accountants or a Charter holder of the Chartered Financial Analyst Institute, in line with the directions issued by the Central Bank. Additionally, the feasibility of the proposed investment must be demonstrated to the Head of the Department of Foreign Exchange.

Tax Regulations

Determining Applicable Taxes for Foreign Subsidiaries/Branches

To ascertain the applicable taxes for foreign investments, companies must submit relevant agreements, business details, business process details, and organizational charts in writing to the tax policy unit of the Inland Revenue Department. Subsequently, the tax policy unit will consult with the interpretation committee and provide details regarding the taxes applicable to the specific foreign investment.

Tax Clearance Requirements for Outward Remittances in Foreign Currency

For foreign currency remittances, a tax clearance must be obtained from the Inland Revenue Department (IRD), except in cases mentioned in the negative list under the Inland Revenue Act. The tax clearance certificate issued by the IRD must then be submitted to the bank to initiate the remittance process.

Due to the Withholding Tax (WHT) imposed on payments received by non-residents, the company must submit a tax clearance certificate issued by the IRD to the bank in order to process outward remittances. The WHT rate will be determined based on the provisions of the Inland Revenue Act but will be subject to the provisions of double tax avoidance agreements.

Payments to resident individuals will be subject to the Advance Personal Income Tax (PAYE/WHT) as per the provisions of the Inland Revenue Act. Invoices and related agreements must be submitted to both the IRD and the bank in all the aforementioned circumstances.

Note: The above information is based on the current regulations and should be verified with the relevant authorities for any updates or changes.

POLICY IMPLICATIONS OF ETCA AGREEMENT TO PROTECT SRI LANKA

Introduction

The proposed Indo Sri Lanka, Economic, and Technology Cooperation Agreement has been criticized by most of the intellectuals, including professors, doctors, lecturers, and specialists in various field. But still, the government not hear their voices and not answer to the questions they raised. Since no one knows the real terms and conditions of the proposed ETCA agreement. If the ETCA agreement practically come into operation, the following policies must be implemented to get the benefits from that agreement and protect Sri Lankan economy also.

1. Sri Lanka government should be given the definition for each profession and name the particular qualifications for each profession

Sri Lanka doesn’t have a definition for most of the profession. As an example, who is an information technology specialist? Since after signing ETCA agreement, anyone can come as a professional even though he or she does not possess the particular academic qualifications, professional qualifications, and experiences in that field. Therefore, the government should publish the definition with required academic and professional skills for each area.

2. The government should assess the employment deficiencies in each field and limit the number of visas issuing Indian professionals accordingly

According to the department of census and statistics of Sri Lanka and ministry of labor and employment of India Sri Lanka unemployment is 422446 (4.7%) and India unemployment was 48.26 MN (4.9%) in 2015. If the Sri Lankan government allow them to freely move here, it will negatively impact the unemployment of Sri Lanka as explain in the economic impact section of the report. Therefore, the government should asses the employment deficiencies in each sector and limited the number of visas issuing to Indians accordingly in each year.

3. Appoint an authority or people who get the credibility for the transparency of the agreement

Recently peoples and many professionals talks against ETCA agreement and they are conducting seminars, discussions, conferences regarding this agreement to carry on their opinion to the people. But still, the government not a response to them or do not try to reject their views or publish real terms and conditions of the agreement. That means the government does not hear the voices of people and professional. Since there is a dominant problem regarding the transparency of this agreement. On the other hand, the people who create and sign the deal may leave from their positions within a short period (Including ministers) but the impact of the agreement may long period. That’s why we should establish authority or appoint the persons who get the credibility of the transparency of the agreement.

4. Establish a sound industry policy which coincident with trade policy

When looking at the Indo Sri Lanka free trade agreement and import and export figures with India, we are maintaining sizeable negative trade balance with India. Even though we have entered a few trade agreement with the world, we have failed to promote our trade and promote our exports to the world. The main reason behind this situation is our production not expand to meet a sufficient amount of shipping to get benefits from those trade agreements. Therefore, we should increase our production to get the benefits from trading. Otherwise after signing the ETCA agreement, with what we are going to the Indian market and how we compete with Indian products in the Indian market. That’s why we need a sound industry policy which coincident with trade agreements to increase our production, make a pleasant environment for research and innovation.

5. Making a domestic system for solving problems arising in the agreement which has the consent of India without going to arbitration.

Domestic law system cannot provide provisions for the disputes raise between countries when trade under international trade agreement due to the states have to subjected to terms and conditions of the world trade organization. Therefore, the disputes can be solved going to the arbitration operates under WTO. Usually, the winning party determined by the which party has the most influencing power to the world. We don’t have such ability when compared with India. Since we should try to establish a domestic system which has the consent of India to solve the problems before going to the arbitration
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6. The agreement should be analyzed further engaging specialist in each field and analyze pre-trade agreement’s performance and issues

7. Stablish minimum wage policy for the professionals which has the feasibility
Due to the movement of Indians to Sri Lanka labor supply will increase. Therefore, it forces to decrease the wage rate within Sri Lanka. Since the government should take actions to stabilize the wage rate.

8. Take actions to impose the cultural barriers to protect Sri Lankan culture

Indians are one of the nations who mostly believe fictitious and fabulous things in the world. As the Sri Lankans, their some cultural habits and activities cannot be recommended. We should protect our culture from their culture. Since after signing ETCA agreement government should impose cultural barriers to protect our culture from them.