Sri Lanka - Distribution and Sales Channels

Distribution and Sales Channels

Last published date: 2022-12-13

Overview

International trade is centered in the capital city, with more than 90 percent of all imports and exports passing through the Port of Colombo. While there are many small to medium importers, 20 to 30 relatively large firms handle the bulk of international traffic. Only a few importers control distribution networks elsewhere in the country; most simply wholesale directly to regional distributors or to retailers. The government’s role in trade and distribution has decreased.

Using an Agent to Sell U.S. Products and Services

Most exporters find using local distributors an easy first step for entering the Sri Lankan market. Generally, this is the best method to compete successfully, as local firms are well-versed in local business practices. Many foreign firms select local agents on the basis of financial stability and technical capability. As the largest trading houses represent many (sometimes competing) foreign principles, medium-sized and smaller firms are becoming more attractive. If products require stocking, servicing or nationwide distribution, however, large firms are often the better choice. Sales commissions paid to agents range from 3 to 15 percent, depending on sales volume and product price. Agency relationships can be terminated for inefficiency, misappropriation, or inability to fulfill other conditions stipulated in the agency agreement. Due diligence on suitability of a potential agent/distributor is essential prior to entering the local market.

U.S. Department of Commerce’s Commercial Services - International Partner Search (IPS), International Company Profile (ICP), Single Company Promotion and Gold Key Services (GKS) - are available through the U.S. Embassy in Colombo for U.S. companies looking to appoint a local representative in Sri Lanka. Interested companies should contact the U.S. Department of Commerce Export Assistance Centers in their respective state (https://www.trade.gov/let-our-experts-help-0).

The U.S. Commercial Service has a network of export and industry specialists located in more than 100 U.S. cities.

Establishing an Office

Potential investors should initiate discussions with the Board of Investment (BOI) prior to establishing a company or a liaison office in Sri Lanka. One-hundred-percent foreign ownership is allowed in most industries with certain exceptions. The list of the regulated areas where foreign ownership is limited or requires approval of the statutory agencies can be obtained at Investment Opportunities – Board of Investment of Sri Lanka (investsrilanka.com).The BOI application processing fee is $330 for companies registering under section 16 of the BOI law; minimum investment requirement to qualify as a section 16 project is US$ 250,000. This can either be 100 percent foreign investment or a joint venture investment with a local collaboration. Companies registering under section 17 of the BOI law are charged $275 for application processing with further charges as agreement fees; Section 17 projects have a minimum investment threshold of $3 million and can enjoy special incentives in the form of enhanced capital allowances under the Inland Revenue Act No 24 of 2017.

A foreign company registered under the Companies Act of 2007 may carry on business in Sri Lanka as a branch, project, liaison or a representative office subject to the terms and conditions published in the Foreign Exchange Regulations No. 1 of 2017, Gazette No 2045/56 (G 26507 (E) Foreign Act (documents.gov.lk)).

The Inland Revenue Act of 2017, implemented April 1, 2018, includes concessionary corporate tax rates for investments in specific sectors and capital allowances (depreciation) on capital investments. The BOI Act provides for two types of investment approvals, one allowing concessions and the other without concessions.

Following BOI approval, the investor is required to form a limited liability company. Companies must register with the Department of Registrar of Companies. The proposed name of the company must be approved by the Registrar of Companies. Searching for a unique company name can be done online at http://www.drc.gov.lk/intro/. The application for registration should be accompanied by Articles of Association, consent from initial directors and general secretaries (Form 18 and Form 19), and the application in the prescribed form (Form 1). Companies approved under section 17 of the BOI law are required to include a primary objective approved by the BOI in the Articles of Association. The registration fee is approximately $100. The application forms can be downloaded from http://www.drc.gov.lk/intro/. According to Article 2 of the Companies Act of 2007, every company must have a Company Secretary. Companies need to give public notice of incorporation through the government Gazette and newspaper advertisements and register with the Inland Revenue Department and the Department of Labor. A foreign company such as a liaison office or a representative office needs to remit funds required for the setting up and maintenance through an Inward Investment Account (IIA.)

A foreign company can set up a branch office under the same name. The following documents need to be submitted for review: a certified copy of the charter, statute or memorandum, and articles of association of the company, a certified copy of the incorporation of the company, a list of directors, a statement containing the full address of the registered or principal office of the company and principal place of business within Sri Lanka, a valid power of attorney authorizing a resident in Sri Lanka to act on behalf of the company, and a certified extract of a resolution of the shareholders confirming the activities of the branch office. A foreign branch office, project office or a similar office needs to invest a minimum of USD 200,000 or equivalent, out of remittances channeled through an Inward Investment Account (IIA.) The registration fee for registering a branch office is approximately $370.

Once the documents are in order, registration of a new company takes approximately three days. Registration of a branch office takes two to four weeks.

For more information contact the Registrar of Companies, “Samagam Medura,” 400 D.R. Wijewardane Mawatha, Colombo 10, Phone: 94-11-268-9212; Fax: 94-11-268-9211. Email: registrar@drc.gov.lk

The U.S. Department of State’s Investment Climate Statement provides country-specific information on the investment and business environment in Sri Lanka pertinent to establishing and operating an office and to hiring employees: https://www.state.gov/reports/2022-investment-climate-statements/sri-lanka/

For the latest Investment Climate Statement (ICS) which includes information on investment and business environments in foreign economies pertinent to establishing and operating an office and to hiring employees, visit the U.S. Department of Department of State’s Investment Climate Statements website.

Franchising

Franchising is not as common as agents/distributorships. Existing U.S. franchises include Pizza Hut, UPS, Federal Express, Kentucky Fried Chicken (KFC), TGIFriday’s, Subway, Taco Bell, Coffee Bean, Burger King, and McDonald’s. Popeyes Louisiana Kitchen and Chili’s are the newest US franchises in the country. Local companies continue to express interest in attracting U.S. franchises to Sri Lanka, especially as international tourism and affinity for U.S. and Western goods and services continues to grow.

Direct Marketing

Direct marketing usually takes place when a product is sold on a one-time or irregular basis. Companies with regional branches or representatives have successfully entered the market directly, but an agent is often necessary to penetrate the market. Companies venturing into direct marketing in the country will ostensibly have a competitive-price advantage, as agency commissions will not increase the price, but some firms encounter requests for additional “commissions” in certain sectors.

Joint Ventures/Licensing

Joint ventures have become common in recent years, particularly in export-oriented projects. Joint ventures are eligible for the same preferences and tax benefits as domestic companies. There are no restrictions on foreign ownership, except for certain specified sectors.

Express Delivery

FedEx, UPS, and DHL offer express delivery to Sri Lanka from the United States and have offices in Colombo.

Transit times from the United States to Sri Lanka vary
Promises next day delivery depending on pick-up time
de-minimis concessions are applicable only for samples, imported via courier and parcel post, in relations to business, worth not more than $277 for Customs Import Duty (CID) and $55 for Value Added Tax (VAT)
Due Diligence

Publicly listed companies are required to publish audited financial results, which can be checked prior to entering into business agreements. Stockbrokers also publish corporate evaluations for publicly listed companies. Fitch Ratings, Moody’s, and Standard and Poor’s provide rating information for banks and financial institutions and some conglomerates and large companies.

Business consultancy firms and law firms can perform due diligence. In smaller transactions, letters of credit are a standard requirement for potential customers, while bank references and historical records can be checked prior to appointing agents.

U.S. companies doing business initially with local companies or distributors are advised to carry out proper due diligence to ensure the reliability of these companies. The U.S. Embassy can also assist in verifying the authenticity of local companies.