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Doing Business in Sri Lanka

Forms of Business Organisation

Foreign investors may establish a business presence in Sri Lanka, through any of the following forms:

• Sole Proprietorship;
• Partnership;
• Private and Public Companies;
• People’s Company;
• Limited and Unlimited Companies;
• Off Shore Companies;
• Foreign Branches;
• Liaison Offices;
• Joint Ventures;
• Co-operatives.

Each of the above entities has its own unique characteristics and the exercise and operation of the different entities are governed by statutory laws based on English Law.

Sole Proprietorship

A Sole Proprietorship where a single foreign investor owns the business involves the least number of formalities before a business can commence. However, this carries with it some advantages and disadvantages.

(a) The ability to set off certain business expenses against trading profit for tax purposes.
(b) Individual business accounts do not need to be audited although it is generally desirable to draw accounts up to 31st March each year.

(a) No limitation of personal liability for trading debts.
(b) Higher liability to Sri Lankan taxation on trading profits than a company.


It is possible for foreign investors to enter into Partnership with either residents or non-residents of Sri Lanka to do business in Sri Lanka. In Sri Lanka, the law that governs Partnership is the English Partnership Act of 1980, which was introduced in Sri Lanka by statute.

Partnership is a relationship, which subsists between two or more persons carrying on a business in common with a view to profit. Business includes any trade, occupation or profession.

To create a Partnership, no formalities are necessary, although for practical reasons writing is usually used. The maximum number of partners is 20.

In a Partnership:

• the partners share profit and losses in accordance with the partnership agreement;
• partnership is not taxed separately but rather each partner is taxed on the share of the partnership profits;
• shares of a partnership losses may be offset against other income of a partner for the purpose of determining the taxable income;
• partnership has unlimited liability and has tax advantages over sole proprietorships;
• partners are jointly and severally liable for the debts of the partnership which means the creditors can, if they wish, recover partnership debts from any of the partners, leaving the partners to seek recovery from other partners;
• partnership is normally regulated by specific agreements between the partners, but in the absence of specific agreement, the partnership Act of 1890 makes provisions for certain matters.

A Sole Proprietorship and Partnership are not generally found suitable by foreign investors due to unlimited liabilities for debts.

Private and Public Companies

A Private Company can restrict the right to transfer its shares, limit the number of its members to not more than 50 and prohibit public subscription to its share capital or debentures of the company. Any other company, which has no such limitations, is a public company.

A Private Company may be converted into a public company and in certain circumstances deemed to be a public company. The Companies Act of 1982 has widened regulations for public companies in respect of
management and operation due to greater public participation.

People’s Company

A People’s Company is a company, which satisfies the following conditions:

• maximum membership is unlimited;
• the nominal value of a share shall not exceed Rs. 10;
• no person can hold more than 10% and no company other than people’s company can hold shares;
• minimum number of directors 3 and each director should hold at least 1 share and each director must be elected annually;
• transfer of shares is subject to the Articles of Association.

Limited and Unlimited Companies

In Sri Lanka, the most common form of company is the limited liability company. A limited liability company is the most suitable form of business enterprise for a foreign investor in Sri Lanka because:

• it ensures clean cut off between affairs in Sri Lanka;
• it provides limited liability to the share holders in the event of insolvency;
• it limits the liability of each shareholder for the debts of the company to the amount he/she has undertaken to pay to the company for his/her “Shares” or by way of guarantee.

Off Shore Companies

Any company either incorporated in Sri Lanka or outside Sri Lanka may apply to the Registrar to be registered as an Off Shore Company. The Registrar may having regard to national interest or in the interest of the national economy issue a Certificate of Registration after the required fee is paid and a Certificate is produced from a bank that a sum of US$100,000 has been deposited to meet its expenses in Sri Lanka. Such company shall be exempt from complying with any other provisions of the Act.

An Off Shore Company cannot carry out any business in Sri Lanka.

Foreign Branches

A company incorporated outside Sri Lanka, which establishes a place of business within Sri Lanka need to seek registration within one month of the establishment of the place of business. Such a company has the same powers to hold lands in Sri Lanka as if it was a company incorporated in Sri Lanka.

Any non-citizen who purchases land in Sri Lanka is subject to a 100% transfer tax. All branches in Sri Lanka are registered as foreign branches.

Liaison Offices

Companies incorporated outside Sri Lanka can have a liaison office in Sri Lanka for any of the following purposes:

• market intelligence, planning and coordinating business promotion activities;
• technical support and quality control;
• sourcing of raw material and manufactured products;
• not engage in any import, export, trade or investment in Sri Lanka.

Most of the foreign companies in Sri Lanka seek registration as liaison office.

Holding and Subsidiary Companies

A company is deemed to be a subsidiary of another company if:

• the other company holds more than half of the nominal value of its equity share capital; or
• is a member of it and controls the composition of its board of directors.

A company is a Holding Company of another company if that other company is its subsidiary.

Joint Ventures

Joint ventures with majority non-resident ownership may have access to the domestic credit market on a case-by-case basis with prior approval from the Central Bank.


Legislation has been passed to establish the Co-operative Employees’ Commission and it makes special provisions with regard to wages and salaries in respect of employees of Co-operative Societies and their terms and conditions of employment. The Commission consists of 3 members appointed by the Minister in charge of the subject of co-operative development.

Establishing a Company

Under the Companies Act of 1982, the formation of a company requires:

• selection of a name, which has to be approved by the Registrar of Companies;
• drafting a Memorandum of Association which mentions the name of the company, the district in which the registered office is situated, the objects for which the company is formed and its capital, the limited liability of its members and the Articles of Association which set out the regulations for its internal management including the rights and duties of members in their capacity as members;
• preparation of documents for submission to the Registrar of Companies for registration along with requisite fees.

Memorandum and Articles of Association lay down the objects for which the company is formed.The Articles of Association will contain details of how the company will be run from day to day. A registered company in Sri Lanka is a legal person.

The general requirements of a company are:


In Sri Lanka, there are statutory provisions, which ensure that the “capital” of a company is maintained and could only be reduced through certain established procedures. The term “capital” for this purpose comprises of paid up share capital and any share premium account.

In the memorandum, if the company is a company limited by shares, the amount of capital with which it proposes to be registered should be stated. This registered capital may be increased by an ordinary resolution. The share capital may be reduced if the reduction is authorised by the Articles of Association, by a special resolution and if the resolution is confirmed by the court.


Issue of shares requires compliance with various provisions of the Companies Act, of 1982. A company may issue different categories of shares: ordinary, preference, deferred and non-voting shares. Redeemable preference shares may be issued if authorised by the Articles of Association.

Share warrants may be issued by public companies subject to certain conditions. In order to issue or transfer such share warrants to non-residents, the permission of the Central Bank is required.

A company cannot purchase its own shares. It also cannot provide financial assistance for the purchase of or subscription of its shares except in regard to schemes for the purchase of shares by the trustees to be held for the benefit of the employees. When offering shares to the public, a prospectus must be issued.

Borrowing Powers

The borrowing powers of a company may be limited by the Memorandum or the Articles of Association. The issue of debentures, which are offered to the public, is prohibited unless a prospectus is issued. The reissue of redeemed debentures is allowed unless otherwise prohibited by the Article, a contract or a resolution. Floating charge is permitted.


A public company has a minimum of two (2) directors and a private company has a minimum of one director. The first directors of the company are nominated by the subscribers to the Memorandum and any subsequent appointments and retirements are governed by the Articles of Association.

The retiring age is 75 years. A company is prohibited from granting loans to its directors of its Holding Companies. Neither can it enter into guarantee or provide security in connection with a loan granted to such directors by any other person.


There must be at least two shareholders in the case of a private company and at least seven shareholders in the case of a public company.

A company cannot be a shareholder in a People’s Company. Where a share is transferred by a resident person to a non-resident person, the non-resident person’s name cannot be entered in the register of members without the permission of the Central Bank.

Company Secretary

Every company must have a secretary. The secretary is usually appointed by the directors. He/she is the chief administrative officer of the company. Every public and private company with a turnover of Rs. 1 million or an issued share capital over Rs. 500,000 requires a company secretary.


Every company is required to keep proper books of accounts with respect to:

• all receipts and expenditures;
• all sales and purchases of goods by the company;
• the assets and liabilities of the company.

Every company requires that the Balance Sheet of the Company be signed on behalf of the Board by two directors.
The Profit & Loss Account and the Balance Sheet should give a “true and fair view”. Only a member of the Institute of Chartered Accountants of Sri Lanka or a registered auditor can function as an auditor of the company.





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