Sri Lanka

The most common for-profit organizational form utilized in Sri Lanka is the limited liability company, which is traditional in nature. A limited liability company can be either: (i) a private company with less than 50 shareholders, which is not permitted to offer shares to the public; or (ii) a public company, which can issue shares to the public. Both forms will be governed in accordance with its Articles of Association.

Two or more persons may also establish a company limited by guarantee, being a corporate form under which shares are not issued and its members undertake to contribute to the assets of the company in the event of liquidation as specified in the Articles of Association.

a. Enterprises that seek financing from investors and intending to have multiple owners tend to form limited liability companies.

b. The most common for-profit organization form, which may be used by Social Enterprises, is a company limited by guarantee. Guarantee Companies are often used for the promotion of commerce, art, science, religion, charity, sport, or any other useful object as specified in the Articles of Association. In such an event, payment of dividends to members will be prohibited.

The traditional organization forms do not require the board or managers to consider, balance or prioritize interests other than shareholder value in decision making but may do so, based on organizational policies and any specific objects set out in the Articles of Association.

a. The following organizational forms are specifically designed for Social Enterprises.

• Societies under the Societies Ordinance No. 16 of 1891, as amended;
• Social Service Organizations under the Voluntary Social Service Organizations (Registration and Supervision) Act No. 8 of 1991;

i. Societies under the Societies Ordinance No. 16 of 1891, as amended:

2. Materially differs from limited liability companies as a Society can be registered either as a ‘mutual provident society’ (i.e., a society with the objective of promoting thrift, giving relief to members in times of sickness or distress, aiding them when in pecuniary difficulties, and for making provision for their widows and orphans) or as a ‘specifically authorized societies’ being a society established for a purpose authorized by the relevant Minister. A Society can be established with a minimum of 7 members and will be subject to minimum capital requirements, as prescribed from time to time.
3. The main benefit to founders and funders is the promotion of the objectives for which the Society is founded.
4. The gross sum and annuities to which a member is entitled will be limited to sums prescribed under the Ordinance. Audits and annual returns must be prepared setting out the funds, expenditure and effects of the Society.
5. The timeline for setting up a Society will be longer than forming a traditional Enterprise. However, the costs involved are comparatively lower.
6. This organization form is well known and has been available for quite some time.

ii. Social Service Organizations (“SSO”) under the Voluntary Social Service Organizations (Registration and Supervision) Act No. 8 of 1991

2. Materially differs from limited liability companies as SSOs must be dependent on public contributions, charities, grants payable by the Government or donations (local or foreign) and have as its main objectives, the provision of reliefs/services for the mentally retarded or physically disabled, the poor, the sick, the orphans and the destitute, and the provision of relief to the needy in times of disaster. SSOs must also be non-governmental in nature.
3. The main benefit to founders and funders is the promotion of objectives for which it is founded.
4. SSOs must also register with the National Secretariat for Non-Governmental Organizations. The Registrar of Voluntary SSOs may inspect the premises of SSO to ascertain whether satisfactory standards of service are met and may highlight to the relevant Minister any fraud or misappropriation of funds. Such matters can be referred by the Minister to a Board of Inquiry established under the Act.
5. The time period to establish an SSO will be longer than forming a traditional Enterprise. However, the costs involved are comparatively lower.
6. This organization form is well known and has been available for quite some time.

Social Enterprises are permitted to be formed and operated as nonprofits.

1. The corporate name of a company limited by guarantee can be registered without the inclusion of the word ‘limited’ if it is established as a Social Enterprise. Further, different compliance and reporting requirements will be applicable based on the organizational form.
2. Nonprofit Social Enterprises are entitled to tax benefits under the Income Tax laws of Sri Lanka. Please refer to responses under Part III – Tax.
3. No.
4. Social Enterprises are commonly formed and operated as nonprofits

Yes, cooperative societies can be established under Cooperative Societies Law No. 5 of 1972, as amended. The objectives of the Cooperative Society must be the provision of specified services contributing to economic, social, educational and cultural welfare of its members in accordance with cooperative principles. A Cooperative Society can be registered with or without limited liability unless the members are themselves registered societies in which event the liability of the society will be limited.

Societies must consist of at least 10 persons, who are over 18 years of age, residing, employed and owning immovable property within the area of operation of the Cooperative Society and capable of utilizing the services rendered by the Cooperative Society or at least 3 registered Societies.

Every registered Cooperative Society must transfer an amount not less than 25% of net profits to its reserve fund and contribute a portion of the net profits, as prescribed, to the Cooperative Fund. The balance of the net profits may be utilized for prescribed purposes, including payment of dividends to members.

The payment of dividends to members and transfer of share/interest of a member will be subject to profit-caps and maximum holdings, as required under the Law. An annual statement of accounts and statistics relating to the activities of the Cooperative Society must be filed with the Registrar of Cooperative Societies within 3 months from the close of a financial year.

Please refer to responses under Q3 – Part IV Governmental Infrastructure.

Case law and jurisprudence in Sri Lanka have not evolved in relation to Social Enterprises.

No.

No. However, Social Enterprises may choose their objectives in line with certain ESG factors.

No.

There are no major investor classes required to look at ESG issues. Such factors may be considered based on internal organizational policies of the investor.

Social Enterprises receive grants, charitable investments and traditional investments. The type of funding typically varies based on the organizational form of the Social Enterprise. Nonprofit Social Enterprises receive more grants and charitable investments, whereas for-profit Social Enterprises receive more traditional investments.

For-profit impact investments are increasing in Sri Lanka and there are a few organizations [such as Lanka Impact Investing Network (Private) Limited and Lanka Social Ventures) promoting impact investments and providing ancillary support.   

There is no special government funding specifically available to Social Enterprises. Funding under programs backed by the Government of Sri Lanka (GoSL) may be available to enterprises depending on the form of the Enterprise and industry. For example, the Central Bank of Sri Lanka (CBSL), on behalf of GoSL, contributes to enhance access to finance by providing affordable finance to for-profit enterprises in sectors, such as agriculture, animal husbandry and micro, small and medium scale enterprises via a network of participating financial institutions.

No.

As a member of the United Nations Sustainable Stock Exchanges initiative, the Colombo Stock Exchange has issued Guidelines for ESG disclosure and performance among listed companies. The Guideline consolidates current practices of investors and issuers and carries Best Practice Recommendations.

Impact bonds are not commonly used in Sri Lanka. In 2018, UNDP’s Regional Bureau for Asia and Pacific launched Sri Lanka’s first social impact fund (i.e., Social Impact Fund and Social Entrepreneurship Fund) aimed at supporting social entrepreneurs access innovative financing and to help achieve the 2030 Agenda for Sustainable Development.

No.

Whilst crowdfunding is not prohibited in Sri Lanka, special laws/rules have not yet been formulated to facilitate the same.

The following funds received by Social Enterprises will be exempt from income tax:

1. Amounts derived as grants/donations by any Social Enterprise for advancement of religion (registered with the relevant Ministry of Religious Affairs);
2. Amounts derived by any registered Cooperative Society;
3. Interest derived by an institution established for charitable purposes where it is proved to the satisfaction of the Commissioner-General of Inland Revenue (“CGIR”) that such interest is applied solely for the purpose of providing care to children, the elderly or the disabled in a home maintained by such charitable institution;
4. Profits and income from any property donated by a Royal or other grant before 02.03.1815, to any place of public worship administered by a charitable institution, in so far as such profits and income are applied to the purposes for which such grant was made.

No.

a. Tax rates

• Taxable income of a charitable institution (excluding gains from the realization of investment assets) is subject to tax at 14%;

A “charitable institution” means the trustee or trustees of a trust or corporation or an unincorporated body of persons established for a charitable purpose only or engaged solely in carrying out a charitable purpose. “Charitable purposes” means a purpose for the benefit of the public or any section of the public in or outside Sri Lanka, of any of the following categories: (i) the relief of poverty; (ii) the advancement of education or knowledge other than by any institution established for business purposes or by any institution established under the Companies Act; (iii) activities for the protection of the environment or eco-friendly activities; (iv) the advancement of religion or the maintenance of religious rites and practices or the administration of a place of public worship; or (v) any other purpose beneficial to the community, not falling within any of the above categories.

• Non-governmental organizations (“NGOs”) – income tax at the rate of 28% on 3% of amounts received as grants, donations or contributions while other taxable income would be subject to the standard income tax regime.

A “non-governmental organization” is defined as any organization or association, whether incorporated or unincorporated, formed by a person or a group of persons on a voluntary basis and which is nongovernmental in nature, and established and constituted: (a) for the provision or relief and services of a humanitarian nature to the poor and destitute, the sick, orphans, widows, youth, children; or (b) generally for the provision of relief to the needy; unless such organization or association is determined by the CGIR not to be a non-governmental organization, but in all cases does not include an approved charitable institution.

b. Cash donations made by an individual or entity to an approved charitable institution (i.e., a charitable institution established for the providing institutionalized care for the sick or the needy; and declared by the Minister of Finance as an approved charitable institution) will be considered as a qualifying payment, subject to the following maximum limits:

• For an individual – 1/3 of the taxable income of the individual or LKR 75,000/-, whichever is lower;
• For an entity – 1/5 of the taxable income of the entity or LKR 500,000/-, whichever is lower.

c. In the event that the CGIR is satisfied that any NGO is engaged, in any year of assessment, in:

• rehabilitation and the provision of infrastructure facilities and livelihood support to displaced persons in any area identified by GoSL for the purposes of such rehabilitation and provision; or
• any other activity approved by the Minister of Finance as being of humanitarian in nature, taking into consideration the nature and gravity of any disaster and the magnitude of relief required to be provided consequently,

the CGIR is empowered to reduce or remove the tax payable by such NGO for that year of assessment if it appears that such reduction is just and equitable in all the circumstances of the case.

d. Where any charitable institution provides in any year of assessment institutionalized care for the sick or the needy and the CGIR is satisfied that the cost of provision of such care is borne by such institution, the CGIR is empowered to grant a tax credit against the tax payable on the charitable institution’s taxable income for the year of assessment, subject to specified conditions,  provided it appears to the CGIR  that such reduction or remission is just and equitable in all the circumstances of the case.

Yes, tax exempt status will be recognized in Sri Lanka if specifically recognized under a Double Taxation Avoidance Treaty or any other mutual assistance agreement with the relevant jurisdiction.

No.

GoSL through CBSL and legislative enactments provide access to finance to SMEs. Various credit facilities and concessions have also been implemented in order to mitigate the adverse effects of COVID 19 pandemic. 

Further, other GoSL institutions such as the National Enterprise Development Authority and Industrial Development Board provide a vast range of services and facilities including infrastructure facilities, engineering and technology services, entrepreneurship development and market access assistance.

Cooperative Societies

Such registered societies are required to:

• Keep proper accounts of the income and expenditure, assets and liabilities and of all other transactions of the society to be kept;
• prepare an annual statement of accounts and statistics relating to the activities of the society, as may be required by the Registrar and submit the same to the Registrar within 03 months of the close of the relevant financial year;
• prepare a budget in respect of every financial year. setting out projections of revenue, expenditure both recurrent and capital, financial and cash resources, investments of funds, budgeted profit and loss accounts, income and expenditure accounts and balance sheets and present the same to the general body of the society for its approval, 02 months prior to the commencement of the relevant financial year;
• submit the budget to the Registrar, 01 month prior to the commencement of the financial year.

Societies

Societies are required to:

• have accounts audited by a public auditor annually; and
• submit a general statement of the receipts and expenditure, funds and effects, of the society as audited (“Annual Return”) to the Registrar representing expenditure in respect of the several objects of the Society separately.

Voluntary SSOs and NGOs

Voluntary SSOs and NGOs are required to submit progress reports on projects and usage of finances to the National Secretariat for NGOs annually. 

No.

No.

A private limited liability company may be established within 7-10 working days and the average filing fee is likely to be LKR 12,000. The timeline and costs for the formation of other Enterprises differ based on the particular form and may take approximately 6-9 months and filing fees will be determined on a case-by-case basis.

No certifications/accreditations allow access for benefits save and except for income tax purposes, the deductibility of donations to charities (established to provide institutionalized care for the sick/ needy) as qualifying payments would be subject to the certification of the charity as an ‘approved charitable institution’ by the Minister of Finance by way of gazette notification. Please refer to responses Q3 – Part III Tax.

Yes, startups can easily form and flourish in Sri Lanka. They are several forms of Enterprises available to choose from and incorporation processes of for-profit Enterprises are simple and faster.

For-profit Social Enterprises can form relatively easily. However, nonprofit Enterprises but must go through a relatively lengthy application process.

In the general corporate form, directors and officers must use their powers in the best interests of the company and shareholders/members. While they are not prevented from considering other interests, such as the environment or the larger community, it would be better were they more easily able to consider those interests. Further, the current public procurement framework does not facilitate the participation of Social Enterprises in government contracts.

No.

The following reforms may be beneficial to Social Enterprises:

1. Establishing a specific regime for the establishment of Social Enterprises with hybrid motives, impact investment in Social Enterprises that do not prioritize financial return for investors and crowdfunding; and
2. Providing tax benefits to Social Enterprises utilizing for-profit Enterprise forms.

1. Implementing a uniform set of standards for ESG policies and reporting for all entities would make it easier for investors and consumers to compare and evaluate which enterprises are in fact doing good in the world, which would drive companies to perform better.
2. Develop and integrate an appropriate system for measuring and managing the social and environmental impact of Social Enterprises.

No.