BOI vs Non-BOI in Sri Lanka Legal Differences and Strategic Choices Under the Economic Transformation Act

Legal Differences and Strategic Choices Under the Economic Transformation Act

Executive summary

For decades, Sri Lanka’s Board of Investment (BOI) operated a dual-entry incentive system: Section 16 Board of Investment of Sri Lanka Law, No. 4 of 1978 (as amended) (BOI Law) approvals for foreign investment under “normal law”, and Section 17 of the BOI Law agreements that conferred negotiated exemptions and concessions. In 2024, Sri Lanka enacted the Economic Transformation Act (ETA), which repeals the BOI Law and creates the Economic Commission of Sri Lanka (EC) and Investment Zones Sri Lanka (IZSL). The Act grandfathers existing BOI approvals and incentives, but new projects will be routed through the Economic Commission of Sri Lanka (EC) Investment Zones Sri Lanka (IZSL) framework, with incentive powers and zone administration transferred accordingly.

This article clarifies the legal differences between BOI and non-BOI (now, EC/IZSL vs. “normal law”), what benefits an investor can expect, and how recent changes, especially to Strategic Development Projects (SDPs) and tax incentives, affect project structuring.

1. From the BOI Law to the Economic Transformation Act

The legacy framework (still relevant to existing projects).

Under the Board of Investment of Sri Lanka Law No. 4 of 1978 (as amended), foreign investors could enter under Section 16 (operate under normal national laws without special tax breaks) or under Section 17 (operate under a BOI agreement that could modify the application of specified statutes, e.g., Customs, Inland Revenue, subject to schedules and gazette notifications).

The new framework (for new projects)

The Economic Transformation Act, No. 45 of 2024 (ETA) establishes:

• the Economic Commission of Sri Lanka (EC) to set national policy on investment, grant incentives/exemptions, and regulate foreign investments; and
• Investment Zones Sri Lanka (IZSL) to develop and administer investment zones. The ETA expressly repeals the BOI Law and contains transitional provisions: approvals, licenses and incentives issued by BOI remain valid; functions shift to EC/IZSL; references to BOI in instruments are construed as EC/IZSL.
• Practical takeaway: If you already hold a BOI Section 16/17 approval, your rights continue. If you are applying now, expect to engage with the EC/IZSL (even though BOI guidance documents may still circulate during transition).

2. “BOI/EC route” vs. “non-BOI (normal law)”—what actually differs?

A) Entry, ownership and corporate law governance

Normal law route (non-BOI): Incorporation, governance, and disclosure under the Companies Act No. 7 of 2007, with any amendments (e.g., forthcoming beneficial ownership registers). No special investment authority agreement; compliance follows general company, tax, customs, FX rules.

BOI/EC route: Previously, BOI Section 16 facilitated entry of foreign investors who then operated under normal law; Section 17 added an incentive agreement. Under the ETA, EC now administers registration of foreign investments, fair and equitable treatment, transferability of funds, and can grant incentives/exemptions from listed laws (Customs Ordinance, Inland Revenue Act, Foreign Exchange Act, etc.) within the new legal mandate.

Corporate governance remains under the Companies Act for both paths; the “BOI/EC route” adds an investment authority agreement with tailored incentives/conditions.

B) Tax and Fiscal Treatment

Normal law route: Subject to the Inland Revenue Act, No. 24 of 2017 (as amended)— standard corporate rates and sectoral concessions; no bespoke tax holidays. Enhanced Capital Allowances (ECAs) and certain incentives apply generally under IRA, but without the broader exemptions that a Section 17/EC incentive agreement can confer.

BOI Section 17 / EC incentives: Historically, Section 17 agreements enabled exemptions or modified application of specified enactments (via schedules/gazettes). Current BOI guidance still references ECAs and expatriate income relief for qualifying large investments; the EC is now the competent authority to grant incentives/exemptions under ETA Part II (e.g., from IRA, Customs Ordinance, Ports and Airports Development Levy (PAL), FX Act, etc.), subject to criteria and transparency.

Budget-era recalibration: Post-crisis reforms constrain open-ended tax holidays. SDP concessions have been trimmed (now max 10 years), with tighter ex-ante cost-benefit analysis,1 mandatory tax filing, and ex-post monitoring2; existing concessions remain honored.

C) Customs, import duty, VAT, and trade facilitation

Normal law route: Imports/exports under the Customs Ordinance and Imports & Exports (Control) Act No. 1 of 1969; duty, PAL, CESS, VAT apply unless a separate statutory exemption or scheme applies.

1Ex ante cost–benefit analysis is an evaluation carried out by the Economic Commission of Sri Lanka before approving an investment or incentive, to assess whether the expected economic and social benefits justify the likely costs to the State. 2Ex post monitoring is the review carried out by the Economic Commission of Sri Lanka (with support from agencies such as the Inland Revenue Department and Sri Lanka Customs where relevant) after an incentive or approval is granted, to ensure compliance and to confirm that the promised outcomes are actually being delivered.

BOI/EC route: Historically, BOI enterprises enjoyed duty-free or concessionary treatment on capital goods/raw materials under Section 17 agreements and gazette instruments; the EC may now grant exemptions from specified laws under ETA. Official data shows significant trade-related duty/VAT expenditure on BOI companies, illustrating the materiality of this route.

D) Foreign exchange and repatriation

Normal law route: Governed by the Foreign Exchange Act No. 12 of 2017 and FX Regulations (No. 2 of 2021)—clear rules on capital transactions by non-residents (share acquisitions, debt, loans ≥3 years, etc.).

BOI/EC route: Under ETA, payments relating to foreign investments are freely transferable, consistent with FX law; EC can grant incentives/exemptions and acts as lead investment authority for transparency and dispute resolution.

E) Zones, infrastructure, and one-stop facilitation

Normal law route: Location and licensing managed through the usual agencies; no integrated zone facilitation.

BOI/EC route: Legacy BOI zones (EPZs) and future investment zones administered by IZSL provide industrial land, utilities, and streamlined approvals. Policy papers and official updates point to new/expanded zones as part of the investment push.

BOI / EC–IZSL Route vs. Normal Law Route

Feature	BOI / EC–IZSL Route	Normal Law Route
Legal Basis	Economic Transformation Act, No. 45 of 2024 (formerly BOI Law No. 4 of 1978)	Companies Act No. 7 of 2024, Inland Revenue Act, Customs
Entry Approval	EC registration + incentive agreement (formerly BOI Sec. 17)	Standard incorporation under Companies Act
Tax Incentives	Possible exemptions / concessions (IRA, Customs, PAL via EC instrument)	Full duties, PAL, CESS, VAT apply
Customs & Import Duties	Duty-free or concessionary treatment for capital goods / raw materials	Governed by FX Act, no special facilitation
Investor & Infrastructure	Access to Investment Zones (IZSL) with utilities and one-stop facilitation	No zone-based benefits
Strategic Development	Eligible for SDP incentives (up to 10 years, subject to evaluation)	General legal protections only
Compliance Burden	EC reporting + performance monitoring for incentives	Standard statutory filings

3. Benefits of choosing the BOI/EC route (as opposed to non-BOI)

1) Tailored, rule-based incentives with legal durability

Under ETA, the EC can grant incentives/exemptions (e.g., from Customs, Inland Revenue, FX, Companies Act provisions) by instrument, replacing legacy Section 17 agreements. This enables project-specific fiscal treatment while anchored to statutory authority with grandfathering for existing BOI approvals.

2) Material reductions in landed cost and fiscal friction

Historic data confirms the scale of duty/PAL/VAT savings available to BOI enterprises; the EC framework preserves the ability to structure duty-free capital imports and optimized VAT treatment for qualifying projects. This can significantly improve IRR and cash-flow in build-out phases.

3) Enhanced Capital Allowances and investment-grade tax planning

For large projects (e.g., >USD 3m/≥USD 250m thresholds in certain guidance), ECAs and expatriate income concessions have existed under BOI/IRA interplay; expect EC to continue criteria-based allowances under IRA and policy instruments, within IMF-aligned guardrails on blanket holidays.

4) Zone-based facilitation, utilities, and labor/regulatory support

IZSL’s mandate to develop and manage zones offers plug-and-play infrastructure, quicker environmental/engineering clearances, and customs/Visa facilitation—echoing the one-stop model investors seek.

5) Clarity on FX convertibility and dispute mechanisms

ETA codifies fair and equitable treatment, national treatment/MFN, free transferability of payments, and dispute settlement pathways—an upgrade from ad hoc executive practice.

If your project needs import duty relief, accelerated approvals, zone utilities, or formalized investor protections, the EC/IZSL route is superior to a purely non-BOI setup.

4) Strategic Development Projects (SDPs): a separate (tighter) track for big-ticket projects

The Strategic Development Projects Act, No. 14 of 2008 remains a powerful tool—but now reformed. The 2025 amendment trims tax holidays to 10 years, requires ex-ante cost-benefit analysis by the Finance Ministry, ex-post KPI monitoring, mandatory tax filing, and public tax-expenditure disclosure. Existing SDP concessions are unaffected.

When to use SDP: Where your project is nationally strategic and genuinely merits multi-year exemptions, but be prepared for rigorous evaluation and ongoing performance scrutiny.

5) What stays the same under “normal law” (non-BOI/EC)

Even outside EC/IZSL, you must navigate:

• Companies Act (incorporation, governance, filings, potential BO registers).
• Inland Revenue Act (rates, deductions, ECAs where applicable without special authority exemptions).
• Customs Ordinance & Imports/Exports (Control) Act (duties, PAL, CESS, licensing regimes).
• Foreign Exchange Act and regulations (capital transactions, loans, repatriations).

The non-BOI/EC route can suit service firms or light-asset businesses that do not need large capital imports, duty relief, or zones.

6. Illustrative structuring choices

• Export manufacturing with heavy capex:

EC/IZSL route to secure customs/VAT relief, zones, and ECAs; consider SDP if national-scale strategic benefits and strong economic case exist.

• Tech/knowledge services with minimal imports:

Normal law may suffice; add EC registration if seeking investor protections and FX transfer certainty without extensive exemptions.

• Renewables/large infrastructure:

EC plus SDP (10-year cap) for structured incentives, subject to cost-benefit and KPI monitoring.

7. Practical tips for counsel and boards

1. Check transition status: Confirm whether your application will be processed by BOI or the EC/IZSL desks, and which Part of the ETA is in force for your project window.
2. Map statutory hooks: Identify which laws you need exemptions from (Customs, IRA, FX, PAL, CESS) and whether your project meets EC/SDP criteria.
3. Model tax-expenditure impact: IIncentives are now more rule-based and time-bound; build scenarios under the 10-year SDP cap and IRA ECAs rather than open-ended holidays.
4. Zone due diligence: Evaluate IZSL sites for utilities, labor access, environmental baselines, and customs/port proximity; policy analyses urge higher standards and clearer separation of regulator vs. operator roles.
5. FX compliance by design: Structure capital and debt within FX Regulations; document free transferability under ETA for investor comfort.

Conclusion

Choosing the BOI/EC route remains compelling for capital-intensive, import-dependent, export-oriented, or zone-based projects. The ETA modernizes the incentive architecture, narrows unchecked tax holidays, and elevates transparency—without undermining grand-fathered BOI concessions. For many investors, this means more predictability, clearer legal footing, and credible facilitation.

If you are weighing BOI/EC versus non-BOI, ask: Do we need exemptions from Customs/VAT and a zone? Do we benefit from EC-level investor protections and FX transfer guarantees? Does our project merit the SDP track? Where the answer is yes, the EC/IZSL path is the right door.

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D & D Associates provides expert legal and company secretarial guidance on BOI, EC/IZSL structuring, incentives, and regulatory compliance in Sri Lanka.

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