Legal framework for business in the Colombo Port City

What are the objectives of the Port City Act?

To establish a special Economic Zone (“SEZ”) named “the Colombo Port City Special Economic Zone” which will be an international business and services hub with specialized infrastructure and other facilities. The Port City Act pays special attention to enhancing the ease of doing business in the SEZ.

The activities proposed to be carried out in the SEZ includes:

  1. International trade
  2. Shipping logistic operations
  3. Offshore banking and financial services
  4. Information technology and business process outsourcing
  5. Corporate headquarters operations
  6. Regional distribution operations
  7. Tourism, and other ancillary services

The Port City SEZ is expected to:

  1. attract new investments
  2. diversify the service economy,
  3. promote the inflow of foreign exchange
  4. generate new employment opportunities

To achieve this, the Port City Act:

  1. Promotes inflow of foreign currency by making it a condition to have funds “raised outside Sri Lanka” to engage in business within the Port City.
  2. Facilitates ease of doing business through minimizing compliance obligations that are otherwise applicable under various laws
  3. Sets up a special body called the Colombo Port City Economic Commission (“Port City Commission”) which will act as a single window investor facilitator through which all licenses and approvals required for the businesses in the Port City will be facilitated and obtained expeditiously.
  4. Sets up an International Commercial Dispute Resolution Centre for the purpose of offering mediation or any other alternate dispute resolution services within the Port City on any dispute between the Port City Commission, and an Authorized Person, an employee, a resident or an occupier of the zone.

Is Port City a part of Sri Lanka

The object of the Port City Act is to establish a SEZ and it sets out the boundaries of this zone.

The SEZ contains in extent 446.6153 hectares of reclaimed land situated in Colombo, in the Western Province of Sri Lanka.

The boundaries of the Colombo Administrative District were altered accordingly in the year 2019 in accordance with Administrative Districts Act No. 22 of 1955 by the inclusion of the reclaimed area of land known as “Port City Colombo” and by annexing the said area of land to the Divisional Secretary’s Division of Colombo.

The Supreme Court of Sri Lanka also upheld in its Determination on the Colombo Port City Economic Commission Bill that the Constitution of Sri Lanka that Port City is part of Colombo Administrative District and as such, it forms part of the territory of Sri Lanka in terms of the law.

As such, the Port City SEZ is a part of Sri Lanka.

What are the applicable laws to business in the Port City?

The general laws of Sri Lanka that apply to commerce will apply to business in Port City, subject to certain exceptions and modifications set out in the Port City Act and the regulations to be issued thereunder.

Here is a snapshot of the laws applicable to various aspects of business

Regulation of foreign exchange transactions

  1. Foreign Exchange Act No. 12 of 2017 which will be generally applicable for the regulation of foreign exchange but exemptions from this Act may be granted under the Port City Act to certain businesses.

Protection of Assets/Investment

  1. Article 157 of the Constitution gives recognition to any Treaty or Agreement between the Government of Sri Lanka and the Government of any foreign State for the promotion and protection of the investments in Sri Lanka of such foreign State, its nationals, or of corporations, companies and other associations incorporated or constituted under its laws
  2. Bilateral investment protection treaties entered into by and between Sri Lanka and foreign states for the promotion and protection of foreign investments
  3. Intellectual Property Act No. 36 of 2003 which provides for the necessary protections to all intellectual property

Dealings with consumers

  1. Consumer Affairs Authority Act No. 9 of 2003 which contains provisions safeguarding the rights of not only the consumers but also the traders
  2. Sale of Goods Ordinance which contains the relevant law relating to all aspects of sale of goods

E commerce

  1. Electronic Transactions Act No. 19 of 2006 which gives recognition to electronic contracts, electronic documents and other forms of electronic communication.
  2. Payment and Settlement Systems Act No. 28 of 2005 which provides for the regulation, supervision and monitoring of payments, clearing and settlement systems, the regulation of providers of money services and the electronic presentment of cheques in Sri Lanka
  3. Computer Crimes Act No. 24 of 2007 which provides for identification, investigation and prevention of computer crimes
  4. Payment Devices Fraud Act No. 30 of 2006 which seeks to prevent the possession and use of unauthorised or counterfeit payment devices
  5. Personal Data Protection Bill and Cyber Security Bill (once enacted)

Employment

  1. Industrial Disputes Act No. 43 of 1950 which deals with prevention, investigation and settlement of industrial disputes
  2. Factories Ordinance which contains provisions relating to employees working in factories
  3. Shop and Office Employees (Regulation of Employment and Remuneration) Act, No. 19 of 1954 which contains provisions relating employees working in shops and offices.
  4. Employees’ Provident Fund Act No. 24 of 1971, Employees’ Trust Fund Act No. 46 of 1980 and Payment of Gratuity Act, No.12 of 1983 which contains provisions on superannuation benefits of employees
  5. Termination of Employment of Workmen (Special Provisions) Act No. 45 of 1971 which deals with non-disciplinary termination of employees but exemptions from this Act may be granted under the Port City Act to certain businesses.

Money Laundering

  1. Prevention of Money Laundering Act No. 5 of 2006 which contains provisions of prevention of money laundering and the measures to be taken for such prevention
  2. Financial Transactions Reporting Act No. 6 of 2006 which contains provisions on collection of data relating to suspicious financial transactions
  3. Convention on the Suppression of Terrorist Financing Act No. 25 of 2005 which gives legal effect to International Convention on the Suppression of Terrorist Financing

Tax (subject to such exemptions or incentives given under the Port City Act)

  1. Inland Revenue Act No. 24 of 2017 which imposes income tax
  2. Value Added Tax Act No. 14 of 2002 which imposed Value Added Tax
  3. Other tax laws based on the businesses conducted such as the Finance Act, No. 11 of 2002, the Finance Act, No. 5 of 2005, the Excise (Special Provisions) Act, No. 13 of 1989, Betting and Gaming Levy Act, No. 40 of 1988.

Who has regulatory oversight?

  1. The main regulator is the Port City Commission
  2. Registrar General of Companies will have oversight on matters such as registration of business as offshore company
  3. Monetary Board of the Central Bank of Sri Lanka will have oversight on registration of offshore banks in the Port City
  4. Controller General of Immigration and Emigration will oversee the issuances of visa and work permits for Authorized Persons
  5. Securities and Exchange Commission of Sri Lanka will oversee the stock exchange or market operated within the Area of Authority of the Port City
  6. Other regulatory authorities depending on the nature of business including the Director General of Customs, Commissioner-General of Inland Revenue, the Director General of the Central Environmental Authority etc.

What Concessions and Exemptions from Laws will be granted to businesses in Port City?

Concessions and exemptions that are identified in the Port City Act are given only to an Authorized Person who carries on a “Business of Strategic Importance”

A “Business of Strategic Importance” is any business identified by the Port City Commission as having national interest or is in the interest of the advancement of the national economy.

The tax concessions granted by the Port City Commission will not be extended to any permitted business activities carried outside the Port City.

But in general, since Authorized Persons register as offshore companies, it becomes exempted the Companies Act No. 7 of 2007 as to the general administration of a company/

The Port City Act provides that exemptions from the following laws may be given to Businesses of Strategic Importance for a maximum of forty (40) years:

  1. The Inland Revenue Act
  2. The Value Added Tax Act
  3. The Excise (Special Provisions) Act
  4. The Customs Ordinance
  5. The Ports and Airports Development Levy Act
  6. The Sri Lanka Export Development Act
  7. The Betting and Gaming Levy Act
  8. The Entertainment Tax Ordinance
  9. Casino Business (Regulation) Act
  10. The Finance Act
  11. The Finance Act
  12. Termination of Employment of Workmen (Special Provisions) Act

Who can engage in business in the Port City

Only Authorized Persons are permitted to engage in business within the Port City.

An Authorized Person can be either a natural person, a company, a partnership or a foundation which has been validly established under the laws of Sri Lanka or in any other jurisdiction.

An Authorized Person can also apply to the Port City Commission for authorization to engage in business outside of the Port City. The approval will be given based on the interest of the national economy and subject to conditions. Tax concessions will not be extended to such business activities carried outside the Port City.

To become an “Authorized Person”-

A Natural Person intending to carry on business in Port City Company intending to carry on business in Port City Company intending to carry on business of offshore banking in Port City
must apply to the Port City Commission and obtain a License to do business in Port City must apply to the Port City Commission and obtain a License to do business in Port City must apply to the Port City Commission and obtain a License to do business in Port City
is also required to have a certificate of registration as an offshore company under the Companies Act No. 7 of 2007 is also required to have a certificate of registration as an offshore company under the Companies Act No. 7 of 2007
is also required to have a licence issued under the Banking Act No. 30 of 1988

 

Port City Act Development Control Regulations which are yet to be issued may further define or limit the types of business activities that could be carried out in the Port City.

Can local companies invest in the Port City?

Both locally incorporated companies and foreign companies can be registered as offshore companies.

General rule:

All investments made to carry on business in and from the Port City must be raised outside Sri Lanka. Therefore, a local company cannot, by itself, do business in Port City unless it brings in investment raised outside Sri Lanka.

What cannot be passed off as funds raised outside Sri Lanka?

  • Funds in a foreign currency account maintained or operated in Sri Lanka
  • Foreign currency loans obtained from a licensed commercial bank or a licensed specialized bank in Sri Lanka

There is one exception.

If a local investor who is not restricted by the Land (Restrictions on Alienation) Act No. 38 of 2014 has leased land from the Port City Commission, such local investor can apply to engage in business along with another investor or a consortium of investors who have foreign funding.

The value of the lease, in LKR, will form part of the investment of the company that will be granted licence as an Authorized Person.

How does one fall within the exception?

  1. Firstly. to fall outside the Land Alienation Act restriction, the local company should have foreign shareholding (direct or indirect), if any, below fifty per cent (50%).
  2. Next, the local company must have obtained leasehold rights over marketable land from the Port City Commission.

The lease rental of the above land is eligible to form part of the investment made to carry on business in and from the Port City

  1. The local company can then apply to the Port City Commission to obtain a licence as an Authorized Person along with another investor or a consortium of investors who have foreign funding.
  2. At the time of the application to the Port City Commission:
  • the direct or indirect foreign shareholding, if any, should continue to be less than fifty per cent (50%).
  • the foreign direct investment proposed to be made by the foreign investors must be specified.

What is the dispute resolution mechanism for disputes arising in Port City Zone?

The Port City provides for the establishment of an International Commercial Dispute Resolution Centre (“ICDRC”) within Port City.

Disputes arising within the Port City between the Port City Commission and authorized Persons or Port City residents will be resolved by way of arbitration conducted by the ICDRC.

Disputes (other than with the Port City Commission) may be resolved by mediation, arbitration or through the courts of Sri Lanka.

Sri Lanka is a party to the New York Convention on arbitration the provisions of which has been given legal effect to by the Arbitration Act.

Further, in order to ensure ease of doing business and efficient enforcement of contracts, where the dispute has been escalated to litigation, the courts are required to give priority to civil and commercial matters where the cause of action has arisen within or in relation to any business carried in or from the Port City.

Authors

Pavithra Navaratne
Devrangee Weerasinghe