Doing Business in Sri Lanka

Do you want to expand your business into Sri Lanka or hire employees there? Here are some key things you need to know about a Sri Lanka expansion.

Sri Lanka Economy Overview

Currency

Sri Lankan Rupee (LKR)

Working hours

45 hours/week

Public/bank holidays

26 public holidays

Capital

Sri Jayawardenepura Kotte (official), Colombo (commercial)

Languages

Sinhala and Tamil (official), English (widely used)

Population

21 million

Minimum hourly salary

LKR 62.5

Tax year

April 1-March 31

Date format

DD/MM/YYYY

Misclassification penalties

Employers can face significant fines and penalties for misclassifying employees as independent contractors, including back payment of wages and benefits, fines, and legal fees.

Fun fact

Sri Lanka is known for having the world’s oldest human-planted tree, a 2,300-year-old Sri Maha Bodhi, which is a sacred fig tree in Anuradhapura.

Table of Contents show

Overview of Sri Lanka's Economy

Sri Lanka’s economy is a mix of agriculture, manufacturing, and services. The country has faced economic challenges but is showing signs of recovery. Historically, Sri Lanka relied heavily on agriculture, particularly tea, rubber, and coconut. Today, while these sectors still remain important, manufacturing and services, especially tourism, are starting to play more significant roles.

The economy experienced significant growth between 2003 and 2012, averaging 6.4% annually. This growth helped reduce poverty by 50%, meeting the Millennium Development Goal. However, recent years have been challenging, with inflation, high debt, and rising poverty levels. In 2023, 25.9% of the population lived below the poverty line.

The labor force is diverse but faces issues like income inequality and underemployment. Women’s participation in the workforce is notably low. Despite these challenges, Sri Lanka’s strategic location in the Indian Ocean and its natural resources, including gemstones and fertile land, provide excellent economic opportunities.

The government’s new fiscal policies have led to higher revenues and a current account surplus for the first time in nearly fifty years. These changes are signs of stabilization, but high debt service obligations continue to pressure fiscal balances. As the country attempts to balance its economic recovery, understanding these key factors is essential for businesses that are considering entering the Sri Lankan market.

Taxes

Employer tax: 25.75%-30.75%

Employees’ Provident Fund (EPF)

12%

Employees’ Trust Fund (ETF)

Social Security Family Allowance

5.75%

Social Security (Work Injury)

Employee tax: 8%

Employees’ Provident Fund (EPF)

Income tax

Progressive tax rates.

Gross income

up to LKR 500,000
LKR 500,001 to LKR 1,000,000
LKR 1,000,001 to LKR 1,500,000
LKR 1,500,001 to LKR 2,000,000
LKR 2,000,001 to LKR 2,500,000
above LKR 2,500,001

Progressive tax rate

Business Regulation in Sri Lanka

Sri Lanka has a well-defined regulatory framework for businesses. Understanding these regulations is essential for the successful operations of your business.

Business Compliance Requirements

Starting a business in Sri Lanka involves several compliance steps. Companies must register with the Registrar of Companies and obtain a Business Registration Certificate. They also need to register for Value Added Tax (VAT) and obtain an Employer Registration Number for social security contributions. Compliance with the Companies Act No. 7 of 2007 is mandatory, which outlines the formation, management, and dissolution of companies.

Income Tax on Companies

Sri Lanka imposes a corporate income tax on resident and non-resident companies. The standard corporate tax rate is 30%, but certain sectors like export-oriented industries, education, and healthcare may qualify for reduced rates. The Inland Revenue Act No. 24 of 2017 governs these tax regulations. Companies are also subject to withholding taxes on dividends, interest, and royalties.

Employment Laws

Employment laws in Sri Lanka are designed to protect workers’ rights. The Shop and Office Employees Act regulates working hours, overtime, and leave entitlements. The Employees’ Provident Fund (EPF) Act mandates that employers contribute 12% of an employee’s salary to the EPF, while employees contribute 8%. Additionally, the Employees’ Trust Fund (ETF) requires employers to contribute 3% of an employee’s salary.

Labor Relations and Dispute Resolution

The Industrial Disputes Act provides the framework for resolving labor disputes. It includes provisions for conciliation, arbitration, and adjudication of industrial disputes. Employers must adhere to these regulations to maintain harmonious labor relations.

Foreign Investment Regulations

The Board of Investment (BOI) Act governs foreign investments in Sri Lanka. The BOI provides incentives such as tax holidays and duty exemptions to attract foreign investors. However, certain sectors have restrictions on foreign ownership, so it is essential to review these limitations before investing.

Benefits of Doing Business in Sri Lanka

Sri Lanka offers several attractive benefits for businesses. Here are some of the main advantages:

Strategic Location

Sri Lanka is located at the crossroads of major shipping routes in the Indian Ocean, making it a strategic location for international trade. This prime location offers easy access to markets in South Asia, Southeast Asia, and the Middle East.

Incentives for Foreign Investors

The Board of Investment of Sri Lanka provides various incentives to attract foreign investors. These include tax holidays, duty-free imports of capital goods, and exemptions from certain taxes. These incentives make it easier and more cost-effective to set up and operate a business in Sri Lanka.

Skilled Workforce

Sri Lanka has a highly educated and skilled workforce. The country has a strong education system with a high literacy rate, ensuring a pool of talented professionals. This skilled labor force is beneficial for businesses in various sectors, including technology, manufacturing, and services.

Growing Tourism Sector

Tourism is a rapidly growing industry in Sri Lanka, attracting millions of visitors each year. This growth presents numerous opportunities for businesses in hospitality, travel, and related services.

Natural Resources

Sri Lanka is rich in natural resources such as gemstones, tea, rubber, and spices. These resources provide significant opportunities for businesses in mining, agriculture, and export sectors.

Business Expansion Options in Sri Lanka

There are a few main methods that you can use to expand your business into Sri Lanka. Some of the most popular options are:

Sri Lanka Employer of Record (EOR)

An Employer of Record is a service that handles employment responsibilities on behalf of your company. This method allows you to hire employees in Sri Lanka without setting up a legal entity. The EOR manages payroll, taxes, and compliance, making it a convenient option for businesses looking to expand quickly and with minimal administrative burden. Using an EOR ensures that you stay compliant with local labor laws while focusing on your core business activities.

Learn more about EOR in Sri Lanka

Sri Lanka Professional Employer Organization (PEO)

Partnering with a professional employer organization (PEO) allows companies to employ local staff in Sri Lanka without the need to establish a legal entity. This approach is quicker and less expensive, making it ideal for businesses testing the Sri Lanka market or those with limited operations. PEOs handle administrative tasks and ensure that companies comply with Sri Lanka regulations, reducing the complexity and risk associated with hiring local employees.

Learn more about PEO in Sri Lanka

Subsidiary Incorporation

One of the most common methods is setting up a subsidiary. This involves creating a separate legal entity under Sri Lankan law. A subsidiary offers the advantage of limited liability and easier access to local markets. It requires registration with the Registrar of Companies and compliance with local regulations.

Branch Registration

Another option is branch registration, which allows a foreign company to operate directly in Sri Lanka without creating a separate entity. This method is simpler than setting up a subsidiary but does not provide the same level of liability protection. Branch offices must register with the Registrar of Companies and adhere to local laws.

Business Opportunities in Sri Lanka

Sri Lanka offers so many different business opportunities across various unique sectors. The tourism industry is booming, attracting millions of visitors each year, which opens up possibilities in hospitality, travel, and other related services. The tea industry remains a strong sector, with Sri Lanka being one of the largest tea exporters in the world. The country’s rich natural resources, including gemstones and agricultural products, offer even more opportunities in both mining and export.

Technology and manufacturing sectors are also growing, and are supported by a skilled workforce and government incentives for foreign investors. Also, infrastructure projects and urban development initiatives create opportunities in construction and real estate.

Business Opportunity	Reasons
Tourism and Hospitality	Sri Lanka’s stunning natural beauty, rich cultural heritage, and improving tourism infrastructure present significant opportunities in the tourism and hospitality sector. The country’s diverse attractions, including pristine beaches, ancient ruins, and vibrant cities, appeal to a wide range of travelers. Investors can explore opportunities in areas such as eco-tourism, luxury resorts, and adventure tourism.
Information Technology and Business Process Outsourcing (IT-BPO)	Sri Lanka has emerged as a competitive destination for IT and BPO services, thanks to its skilled and English-proficient workforce, cost-effective labor, and supportive government policies. The country’s growing IT sector presents opportunities for investors in areas such as software development, data analytics, and customer support services.
Renewable Energy	Sri Lanka has set ambitious targets for renewable energy adoption and is actively promoting investment in clean energy projects. The country’s abundant solar, wind, and hydropower resources, coupled with government incentives and a growing demand for sustainable energy solutions, present opportunities for investors in renewable energy generation, distribution, and storage.
Agriculture and Food Processing	Sri Lanka’s diverse agro-climatic conditions and rich agricultural heritage offer opportunities for investors in the agriculture and food processing sector. The country is known for its high-quality tea, spices, and coconut products, among others. Investors can explore opportunities in areas such as organic farming, value-added food processing, and agri-tech solutions.
Manufacturing and Exports	Sri Lanka’s strategic location at the crossroads of major shipping routes, combined with its access to key markets in South Asia and beyond, makes it an attractive base for manufacturing and export-oriented businesses. The country offers a competitive labor force, improving infrastructure, and government incentives for export-oriented industries, presenting opportunities in sectors such as textiles, electronics, and value-added manufacturing.

Understanding these opportunities can help businesses make informed decisions and take advantage of Sri Lanka’s potential. With proper strategic planning and a strong knowledge of the local market, businesses can thrive and grow in this dynamic environment.