Foreign exchange rules relaxed via latest order

A new order has been issued by the Minister of Finance relaxing foreign exchange rules on identified transactions dated 28 June 2023. This order is issued under Section 22 of the Foreign Exchange Act, No. 12 of 2017 (the Act), where the Minister for the preservation of financial stability, based on the advice by the Monetary Board can restrict or regulate remittance of foreign exchange into or out of Sri Lanka. 

A synopsis of the key relaxations/removal of suspensions introduced on foreign currency outward remittances covered under the order are provided below. 

i. Migration allowance

• The revised regulations allow an eligible migration allowance for the emigrants who are claiming the migration allowance for the first time up to a maximum of $ 50,000 or equivalent in any other designated foreign currency. The previous Gazette notification issued on 30 June 2022 only allowed $ 30,000.
• nThe repatriation of funds under the migration allowance through Capital Transactions Rupee Accounts (CTRA) by the emigrants who have already claimed migration allowance under the general permission is increased from $ 10,000 up to a maximum of $ 20,000/designated FC equivalent. 
• ii. Outward remittances for persons with Temporary Residence Visa
• The outward remittances or issuance of foreign exchange for any Sri Lankan individual who resides in or outside Sri Lanka and has obtained Temporary Residence Visa (TRA) of another country, up to a maximum of $ 20,000/designated FC equivalent per person, is allowed. The same provision was applicable previously. 
• The issuance of foreign exchange for any person resident in Sri Lanka who intends to leave Sri Lanka under the TRA of another country up to a maximum of $ 10,000/designated FC equivalent per person, is allowed.

iii. Investing outside Sri Lanka

The latest order seeks to relax the strict restrictions imposed in the recent years on investments overseas by persons resident in Sri Lanka. 

Although making investments overseas via the Outward Investment Accounts (OIA) is suspended, the following investments via the OIA for the purpose of making investments overseas by persons resident in Sri Lanka is allowed subject to the satisfaction of the Head of the Department of Foreign Exchange of Central Bank of Sri Lanka with the fulfilment of requirements set out.

(a) Investments to be financed out of a loan obtained by the investor from a person resident outside Sri Lanka in foreign currency.

(b) Where an additional investment to be made to fulfil the regulatory requirements in the investee’s country applicable on the investment already made in compliance with the provisions of the Act or repealed Exchange Control Act, in a company or a branch office in that country, or

(c) An additional investment/infusion of funds (as applicable) to be made by eligible resident companies in already established subsidiaries or branch offices overseas incorporated/registered (subject to the provisions of the Act), up to a maximum of $ 30,000/designated FC equivalent, for the purpose of working capital requirements of the investee. Previously only $ 15,000 was allowed. 

(d) Remittances for the purpose of maintenance of liaison, marketing, agency, project, representative or any other similar offices already established overseas (subject to the provisions of the Act), by eligible resident companies, up to a maximum of $ 30,000/designated FC equivalent.

(e) For the expansion of their core business, investments by following eligible investors in the ordinary shares of a company outside Sri Lanka is allowed subject to following thresholds. These investments were suspended via the previous order and are now allowed under the current order.

• Companies listed in the Colombo Stock Exchange (CSE) – up to a limit of $ 200,000/designated FC equivalent, or
• Companies that are not listed in CSE – up to a limit of $ 100,000/designated FC equivalent.

One may recall when the regulations were issues further to the Foreign Exchange Act being passed in to law, companies listed in the CSE was allowed to invest outside up to $ 2,000,000 per calendar year while a company not listed in CSE was permitted up to $ 500,000. These investments were suspended via the previous order and are now allowed under the current order subject to limitations.

(f) Investments by companies incorporated in Sri Lanka to set up overseas offices, up to a limit of $ 100,000; 

Capital transactions via BFCA

Up to a maximum of $ 100,000 outward remittances on capital transactions through Business Foreign Currency Accounts (BFCA) held by a person resident in Sri Lanka is allowed for the purpose of expanding their core business overseas. The core business means a business activity of a company which can be considered as the main source of company’s revenue, as confirmed by the auditor of the company. Previously only $ 20,000 was allowed via the BFCA.

Capital transactions via PFCA

A resident person is allowed outward remittances up to a maximum of $ 20,000 on capital transactions through Personal Foreign Currency Accounts.

Outward remittances for the purposes of ESOP/ESOS

The suspension introduced by previous order on making outward remittances by a company incorporated under the Companies Act, No. 7 of 2007 (a subsidiary or branch office of a company incorporated overseas, on behalf of its employees for the purpose of contributing to an Employee Share Ownership Plan (ESOP) or Employee Share Option Scheme (ESOS) is now removed. 

The above rules specified in the latest order are applicable for a period of 6 months from the date of the Gazette Notification (i.e. from 28 June 2023)

Case by case basis approval

The Monetary Board as per the FEA Act has authority to grant permission on case-by-case basis, for the investments which exceed the limits specified provided that, 

(a) the proposed investment is to be financed out of a foreign currency loan obtained by the investor from a person resident outside Sri Lanka or

(b) the proposed investment is to be made to fulfil the regulatory requirement in the investee’s country applicable on the investment already made in a company or branch office in that country in compliance with the provisions of the Act.

(The writer is the Principal – Tax and Regulatory, KPMG.)