International Practice

# India-Sri Lanka Cross-Border
Legal Advisory

Sri Lanka

## Sri Lanka Legal Services

Sri Lanka occupies a uniquely strategic position for Indian businesses, combining geographical proximity, deep cultural and linguistic ties, and a rapidly evolving investment climate that offers significant opportunities across multiple sectors. India is consistently among the largest sources of foreign direct investment into Sri Lanka, with bilateral trade exceeding $5 billion annually and Indian companies maintaining a substantial presence in sectors including petroleum, telecommunications, banking, manufacturing, real estate, and hospitality. The India-Sri Lanka Free Trade Agreement (ISFTA), in force since March 2000, has created a preferential trade corridor that enables Indian exporters and investors to access the Sri Lankan market on favourable terms, while ongoing negotiations for a proposed Economic and Technology Cooperation Agreement (ETCA) aim to deepen this relationship further.

At ESB Global Law Advisory, we provide comprehensive cross-border legal counsel from our Mumbai office for Indian businesses and professionals engaging with the Sri Lankan market. Our practice draws on a thorough understanding of both the Indian and Sri Lankan legal systems, which share common law roots and many structural similarities, enabling us to deliver commercially practical advice that bridges both jurisdictions. Whether you are seeking BOI incentives for a new investment, structuring exports under the ISFTA, incorporating a Sri Lankan subsidiary, deploying personnel to Colombo, or resolving a cross-border commercial dispute, our team is equipped to guide you through every stage of the process with diligence and precision.

### BOI Investment Incentives & Foreign Investment

The Board of Investment of Sri Lanka (BOI) serves as the principal government agency responsible for attracting, facilitating, and regulating foreign investment into the country. For Indian businesses, the BOI offers a compelling incentive framework that includes tax holidays of up to 12 years for qualifying investments in designated sectors and export processing zones, exemptions from customs duties on the importation of capital goods, machinery, and raw materials, concessionary corporate income tax rates upon expiry of tax holidays, and the ability to hold 100% foreign ownership in most sectors without requiring a local joint venture partner. The BOI also operates dedicated industrial zones and export processing zones that provide ready-built factory shells, reliable utilities, and streamlined regulatory interfaces.

The specific incentives available to Indian investors depend on several factors including the sector of investment, the capital outlay committed, the number of direct and indirect jobs created, the proportion of output destined for export, and the location of the project within Sri Lanka. Strategic development projects in areas such as infrastructure, tourism, manufacturing, and information technology may qualify for enhanced incentive packages negotiated directly with the BOI under Section 17 agreements. We advise Indian businesses on structuring their investments to qualify for the most favourable BOI incentive packages, preparing and submitting BOI applications, negotiating project-specific agreements, and ensuring ongoing compliance with BOI conditions including minimum investment and employment commitments. Our practice also covers investments in the Colombo Port City Special Economic Zone, which operates under its own legislative framework and offers additional incentives for qualifying enterprises.

### India-Sri Lanka FTA & Trade Compliance

The India-Sri Lanka Free Trade Agreement (ISFTA) is the cornerstone bilateral trade arrangement between the two nations, providing preferential tariff treatment on a substantial portion of bilateral goods trade. Under the ISFTA, Sri Lanka has eliminated duties on approximately 4,000 tariff lines covering Indian exports, while India has extended duty concessions on over 4,000 Sri Lankan tariff lines. The agreement covers a wide range of products including textiles and garments, food products and spices, machinery and equipment, chemical products, plastics, rubber, and auto components. To qualify for preferential tariff treatment, goods must satisfy the rules of origin criteria specified under the agreement, which generally require a minimum domestic value addition of 35% in the exporting country.

Indian exporters seeking to utilise ISFTA concessions must obtain Certificates of Origin from the designated authorities, comply with product-specific rules where applicable, and ensure that their documentation meets the requirements of Sri Lanka Customs for claiming preferential rates at the point of entry. We advise Indian trading companies on ISFTA utilisation strategy, rules of origin compliance, product classification under the Harmonized System, and procedures for resolving disputes relating to customs valuation, origin verification, and tariff classification. Our practice also covers the negative list of products excluded from ISFTA concessions, safeguard measures that Sri Lanka may invoke to protect domestic industries from import surges, and the implications of the proposed ETCA negotiations which aim to expand the scope of bilateral economic cooperation beyond goods trade to include services, investment, and economic cooperation.

### Company Formation & Corporate Law

Establishing a corporate presence in Sri Lanka requires navigating the Companies Act No. 7 of 2007, which governs the incorporation, operation, and dissolution of companies in the country. Indian investors most commonly incorporate a private limited company (Pvt Ltd), which requires a minimum of two shareholders and one director, or a public limited company (PLC) for larger operations that may seek public listing. The incorporation process involves reserving a company name with the Registrar of Companies at the Department of the Registrar of Companies, filing the articles of association along with the prescribed incorporation forms, appointing directors and a company secretary, and obtaining a tax identification number from the Inland Revenue Department. Companies with foreign shareholders must also register under the applicable foreign investment regulations and comply with Exchange Control Act requirements for capital inflows and repatriation.

Indian companies may alternatively register a branch office or overseas company in Sri Lanka, which operates as an extension of the Indian parent rather than a separate legal entity. This structure may be appropriate for specific project-based operations or activities that do not require a permanent corporate establishment. Joint ventures with Sri Lankan partners remain a popular entry strategy, particularly in sectors where local knowledge, relationships, and regulatory expertise add significant value. We draft and negotiate shareholders' agreements, joint venture documentation, articles of association, and corporate governance frameworks that address the commercial realities of India-Sri Lanka operations, including provisions for board composition, reserved matters, profit distribution, transfer restrictions, deadlock resolution, and exit mechanisms tailored to both jurisdictions.

### Bilateral Investment Protection & Regulatory Compliance

Indian investments in Sri Lanka benefit from the protections afforded by the India-Sri Lanka Bilateral Investment Treaty (BIT), which provides guarantees including fair and equitable treatment, protection against expropriation without adequate compensation, free transfer of investment-related funds, and access to international arbitration for the resolution of investor-state disputes. Understanding and invoking these protections is critical for Indian investors, particularly in the context of regulatory changes, government action affecting business operations, or disputes with state entities. We advise Indian clients on structuring their investments to maximise the protections available under the BIT and on the procedures for initiating investor-state claims where treaty obligations have been breached.

On the regulatory compliance front, Indian businesses operating in Sri Lanka must navigate a range of sector-specific regulations and licensing requirements. The Telecommunications Regulatory Commission of Sri Lanka (TRCSL) oversees the telecoms sector, the Central Bank of Sri Lanka regulates banking and financial services, and the Securities and Exchange Commission of Sri Lanka (SEC) governs capital markets activities. Environmental compliance is administered through the Central Environmental Authority (CEA), which requires Environmental Impact Assessments for prescribed projects. We assist Indian companies with obtaining the necessary regulatory approvals and licences, maintaining ongoing compliance with reporting and disclosure obligations, and engaging with Sri Lankan regulatory authorities on policy consultations and enforcement matters.

### Employment Law & Work Permits

Indian companies establishing operations in Sri Lanka must comply with a comprehensive labour law framework that governs all aspects of the employment relationship. The Shop and Office Employees Act regulates working hours, rest intervals, overtime compensation, and leave entitlements for employees in commercial establishments, while the Wages Boards Ordinance establishes minimum wage rates for workers in specified trades and industries. Employers are required to contribute to the Employees' Provident Fund (EPF) at a rate of 12% of each employee's gross salary, with the employee contributing a further 8%, and to the Employees' Trust Fund (ETF) at 3% of gross salary, both administered by the Central Bank and the ETF Board respectively.

One of the most significant features of Sri Lankan employment law is the Termination of Employment of Workmen (Special Provisions) Act, which requires employers to obtain the prior written consent of the Commissioner of Labour before terminating the services of any workman who has been in continuous employment for not less than one year. This requirement applies regardless of the grounds for termination and makes the dismissal process in Sri Lanka substantially more regulated than in India or many other jurisdictions. Compensation packages for approved terminations are typically calculated based on years of service and last drawn salary. Foreign nationals, including Indian employees deployed to Sri Lanka, require work permits issued by the Department of Immigration and Emigration, with the application process requiring endorsement from the BOI for companies operating under BOI agreements. We advise Indian companies on employment contract drafting, HR policy development, statutory compliance including EPF and ETF contributions, work permit applications for Indian expatriates, and the procedures for lawful termination of employment under Sri Lankan law.

### Commercial Arbitration & Dispute Resolution

Cross-border commercial disputes between Indian and Sri Lankan parties are most effectively resolved through international commercial arbitration, which provides a neutral forum, procedural flexibility, and crucially, the advantage of cross-border enforceability. The Arbitration Act No. 11 of 1995 governs both domestic and international arbitration in Sri Lanka and is closely modelled on the UNCITRAL Model Law on International Commercial Arbitration. The Sri Lanka National Arbitration Centre (SLNAC) provides institutional arbitration services and administers proceedings under its own rules, offering a cost-effective and efficient forum for resolving commercial disputes with a Sri Lankan nexus. Ad hoc arbitrations under the UNCITRAL Arbitration Rules are also commonly used for India-Sri Lanka disputes, particularly in construction, infrastructure, and large-scale commercial matters.

Both India and Sri Lanka are signatories to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, ensuring that arbitral awards rendered in either jurisdiction are enforceable in the other. This mutual enforceability framework is a critical consideration when drafting dispute resolution clauses in India-Sri Lanka commercial contracts. For disputes arising under the India-Sri Lanka Bilateral Investment Treaty, investor-state arbitration provides an additional avenue for Indian investors to seek remedies against actions of the Sri Lankan government that breach treaty protections. We represent Indian clients in arbitration proceedings seated in Colombo, Mumbai, Singapore, and other international arbitration centres, and assist with the recognition and enforcement of awards across both jurisdictions. Our practice also covers mediation and conciliation as alternative mechanisms for resolving commercial disputes without the cost and adversarial nature of formal arbitration or litigation.

### Tax Planning & India-Sri Lanka DTAA

The India-Sri Lanka Double Taxation Avoidance Agreement (DTAA) governs the allocation of taxing rights between the two countries and provides relief from double taxation on cross-border income flows including business profits, dividends, interest, royalties, fees for technical services, and capital gains. The DTAA specifies reduced withholding tax rates on passive income streams, enabling Indian businesses to structure their Sri Lankan operations and cross-border payments in a tax-efficient manner while maintaining full compliance with the tax laws of both jurisdictions. Sri Lanka's corporate income tax regime, administered by the Inland Revenue Department under the Inland Revenue Act No. 24 of 2017, imposes a standard rate of 30% on most business income, with reduced rates available for certain preferred sectors and BOI-approved enterprises.

Key tax planning considerations for India-Sri Lanka operations include assessing Permanent Establishment (PE) exposure for Indian companies conducting business activities in Sri Lanka, structuring intercompany transactions including management fees, royalties, and service charges to comply with transfer pricing regulations in both countries, managing withholding tax obligations on cross-border payments under the DTAA, and understanding the interaction between BOI tax incentives and DTAA benefits. We also advise on Value Added Tax (VAT) obligations in Sri Lanka, the Nation Building Tax and other fiscal levies that may apply to specific transactions, and the practical procedures for claiming DTAA treaty benefits including the issuance of Tax Residency Certificates by the Indian tax authorities and the filing of refund applications with the Sri Lankan Inland Revenue Department. The Colombo Port City Economic Commission offers a separate tax regime for enterprises operating within the Port City zone, including potential exemptions from income tax, VAT, and other levies for qualifying investments.

### Our India-Sri Lanka Legal Services Include

- BOI application preparation, incentive negotiation, and Section 17 agreement advisory
- Sri Lankan company incorporation (Pvt Ltd, PLC) and branch registration
- India-Sri Lanka FTA tariff advisory, rules of origin, and Certificates of Origin
- Joint venture structuring, shareholders' agreements, and partnership documentation
- Bilateral Investment Treaty advisory and investor-state dispute support
- Employment contract drafting, HR compliance, and termination procedures
- Work permit applications for Indian expatriates deployed to Sri Lanka
- EPF, ETF, and statutory labour compliance advisory
- Commercial arbitration under SLNAC rules and UNCITRAL Rules
- India-Sri Lanka DTAA advisory, transfer pricing, and PE risk assessment
- Colombo Port City investment structuring and regulatory compliance
- Regulatory approvals, sector-specific licensing, and environmental compliance
- Real estate acquisition, project development, and construction contracts
- Intellectual property registration and enforcement in Sri Lanka

FAQ

## Frequently Asked Questions

### What incentives does the Sri Lanka Board of Investment offer to Indian investors?

The Board of Investment of Sri Lanka (BOI) offers a range of incentives to attract foreign investment, including from Indian businesses. These incentives include tax holidays of up to 12 years for projects in designated sectors or export processing zones, exemptions from customs duties on capital goods and raw materials, concessionary corporate income tax rates following the expiry of tax holidays, and 100% foreign ownership in most sectors without the need for local partnership. The BOI also provides streamlined approval processes, investor facilitation services, and access to industrial zones with ready-built infrastructure. The specific incentives available depend on the sector, scale of investment, employment generation, and location of the project. ESB Global advises Indian investors on structuring their investments to qualify for the most favourable BOI incentive packages.

### How can an Indian company set up a business entity in Sri Lanka?

An Indian company can establish a presence in Sri Lanka by incorporating a private limited company or public limited company under the Companies Act No. 7 of 2007, registering a branch office or an overseas company, or entering into a joint venture with a Sri Lankan partner. The incorporation process involves reserving a company name with the Registrar of Companies, filing the articles of association and other prescribed documents, obtaining a tax identification number from the Inland Revenue Department, and registering with the Employees' Provident Fund and Employees' Trust Fund for employee social security obligations. Foreign investments exceeding specified thresholds or in restricted sectors require BOI approval or approval under the Exchange Control Act. ESB Global guides Indian businesses through entity selection, incorporation procedures, and post-incorporation compliance requirements.

### How does the India-Sri Lanka Free Trade Agreement benefit Indian exporters?

The India-Sri Lanka Free Trade Agreement (ISFTA), in force since March 2000, provides preferential market access for Indian exporters to Sri Lanka by eliminating or reducing customs duties on a wide range of goods. Under the ISFTA, Sri Lanka has removed duties on approximately 4,000 tariff lines covering Indian exports including textiles, food products, machinery, chemicals, and auto components. To qualify for preferential treatment, goods must meet the rules of origin criteria which generally require a minimum of 35% domestic value addition in India. The agreement also includes safeguard mechanisms to protect domestic industries from import surges. Indian businesses must obtain Certificates of Origin from designated authorities to claim ISFTA benefits at the Sri Lankan customs border. ESB Global assists Indian exporters with ISFTA compliance, documentation, and dispute resolution related to customs valuation and origin determinations.

### What employment regulations must Indian companies comply with when hiring staff in Sri Lanka?

Indian companies operating in Sri Lanka must comply with the comprehensive labour law framework governing employment relationships. The Shop and Office Employees Act regulates working hours, overtime, and leave entitlements for commercial establishments, while the Wages Boards Ordinance sets minimum wages for specified trades. Employers must contribute to the Employees' Provident Fund (EPF) at 12% of gross salary and the Employees' Trust Fund (ETF) at 3% of gross salary. The Termination of Employment of Workmen Act requires prior written consent from the Commissioner of Labour for termination of employees with more than one year of service, making dismissal procedures significantly more regulated than in many other jurisdictions. Foreign nationals seeking employment in Sri Lanka require work permits issued by the Department of Immigration and Emigration. ESB Global advises Indian companies on employment contract drafting, HR policy compliance, work permit applications, and navigating termination procedures under Sri Lankan law.

### How are commercial disputes between Indian and Sri Lankan parties typically resolved?

Commercial disputes between Indian and Sri Lankan parties can be resolved through arbitration, mediation, or litigation before the Sri Lankan courts. International commercial arbitration is the preferred mechanism for cross-border disputes, and the Sri Lanka National Arbitration Centre provides institutional arbitration services under its own rules. Ad hoc arbitrations under UNCITRAL Rules are also common. Sri Lanka is a signatory to the New York Convention, meaning that foreign arbitral awards, including those from Indian-seated arbitrations, are enforceable in Sri Lanka, and Sri Lankan arbitral awards are similarly enforceable in India. For disputes arising under bilateral investment treaties, investor-state arbitration may be available under the India-Sri Lanka Bilateral Investment Treaty. The Arbitration Act No. 11 of 1995 governs domestic and international arbitration in Sri Lanka and is modelled on the UNCITRAL Model Law. ESB Global represents Indian clients in arbitration proceedings and assists with the enforcement of awards across both jurisdictions.

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## Expert India-Sri Lanka
Legal Counsel

Navigate the Sri Lankan legal landscape with confidence. Our cross-border team provides strategic counsel for Indian businesses at every stage of their Sri Lanka operations, from BOI-approved investments to commercial arbitration and dispute resolution.

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