Sri Lanka’s Port City Law introduces a 15-year tax holiday for billion-dollar investments, marking a strategic shift in attracting foreign capital. The law now ties tax incentives to investment size and job creation, aiming for transparency and sustainable growth.
Sri Lanka’s new Port City Law sets 15-year tax holidays for billion-dollar investments
Sri Lanka has officially amended the Colombo Port City legal framework to streamline tax incentives for investors. The new law limits tax holidays to 15 years for billion-dollar investments, while smaller ventures will receive shorter durations based on pre-defined rules, Deputy Minister of Finance and Planning Anil Jayantha Fernando confirmed.
Previously, tax holidays extending up to 25 years were granted without standardized criteria, which often led to discretionary deals and allegations of corruption. The revised system now links tax benefits to both the scale of investment and the number of jobs generated, with primary businesses classified into four tiers: A – billion dollars, B – 500 million dollars, C – 100 million dollars, and D – 25 million dollars.
Historically, Sri Lanka has secured only a few billion-dollar investments, with the Colombo Port City reclamation project being a notable 1.4 billion-dollar example. Land sales within the Port City alone could generate approximately 700 million dollars in government revenue. Businesses of secondary strategic importance will also benefit from a reduced tax rate of 7.5 percent for four years.
Additionally, the Strategic Development Project (SDP) Law exempts senior employees from personal income taxes in certain circumstances. However, analysts caution that discretionary tax holidays undermine broader fiscal integrity. While corporate tax concessions attract investment, personal income tax and value-added tax remain key revenue sources. Critics note that Sri Lanka still lacks a value-added tax on electricity, a feature commonly applied in East Asian countries.
Deputy Industries Minister Chathuranga Abeysinghe emphasized that personal income taxes will remain consistent whether individuals work inside or outside the special economic zone, preventing preferential treatment. Despite a 15 percent income tax rate for services, the country faces competition from destinations like the UAE, where taxes on similar services are around 10 percent. Dubai’s historical tax-free environment also facilitated substantial job creation for South Asians.
In East Asia, nations with stable monetary systems and restrained central bank policies maintain corporate income tax rates around 20 percent. Singapore, for example, benefits from economic stability, lower tax rates, and strong fiscal discipline. By contrast, Sri Lanka has experienced steep currency depreciation, fiscal imbalances, and successive government turnovers following aggressive monetary policy and tax adjustments.
The Port City remains a dollarized special economic zone, offering a relatively stable investment environment. Nonetheless, analysts caution that broader macroeconomic instability—driven by inflationary policies or flawed exchange rate management—could undermine investor confidence. They recommend the Treasury collect certain taxes in foreign currency to reduce reliance on domestic monetary authorities and bolster dollar reserves.
Interest from information technology companies and other sectors indicates a cautious optimism despite the reduction of the previous 25-year tax holiday. Investors are closely monitoring economic and political developments before committing to long-term projects.
Sri Lanka’s recurring fiscal challenges also include pressure from the International Monetary Fund (IMF) to expand wealth and income taxation. Critics argue that aggressive capital decumulation taxes can inhibit domestic investment, job creation, and economic independence, echoing historical challenges dating back to 1952.
Experts also compare Sri Lanka’s proposed policies with international practices. Singapore’s Finance Minister, Lawrence Wong, has emphasized the limitations of wealth taxes, highlighting that middle- and upper-middle-income groups often bear the burden, while higher earners can employ tax planning strategies. He advocates for value-added tax as a more effective mechanism to generate revenue, aligning tax contributions with consumption rather than assets.
Global shifts in corporate taxation, such as the Base Erosion and Profit Shifting (BEPS) project, further complicate the landscape. Pillar Two of BEPS introduces a global minimum corporate tax, which Singapore plans to implement via a Domestic Top-up Tax. While intended to increase revenue from multinational enterprises (MNEs), analysts note that the mobility of MNEs creates ongoing competitive pressures for countries like Sri Lanka to offer attractive incentives while maintaining fiscal stability.
Sri Lanka’s high electricity costs, partly due to expensive renewable energy feed-in tariffs and reliance on liquid thermal plants, add another layer of operational expense for investors. The current administration is transitioning to competitive energy tenders, seeking to reduce costs and improve the investment climate.
Despite these challenges, the 15-year tax holiday under the revised Port City Law represents a pragmatic step to attract substantial foreign investment. By linking incentives to measurable economic contributions and ensuring regulatory oversight, Sri Lanka aims to balance competitiveness with fiscal responsibility, positioning the Port City as a strategic hub in South Asia.