Introduction

The Colombo Port City continues to take shape as Sri Lanka’s flagship special economic zone. Since the enactment of the Colombo Port City Economic Commission Act, No. 11 of 2021 (“the Principal Act”), the regulatory framework governing the zone has evolved in response to both investor expectations and broader macroeconomic realities, including the conditions set by the International Monetary Fund under Sri Lanka’s Extended Fund Facility.

Two recent developments are particularly significant. First, the Ministry of Finance issued the Colombo Port City (Guidelines on the Grant of Exemptions or Incentives to Businesses of Strategic Importance) Regulations, No. 1 of 2025 (“the 2025 Regulations”) on 20 September 2025, replacing the expired Regulation No. 02 of 2023. Second, Parliament passed the Colombo Port City Economic Commission (Amendment) Act, No. 1 of 2026 (“the Amendment Act”), certified on 20 January 2026, which strengthens the tax incentive oversight framework, overhauls the offshore banking regime, and recalibrates employment income tax exemptions.

This article examines both instruments, explains the key changes, and considers their implications for businesses operating in or looking to enter the Port City.

The 2025 Regulations: Recalibrated Incentives

The 2025 Regulations were issued pursuant to Section 52 of the Principal Act following the expiry of Regulation No. 02 of 2023 on 3 August 2025. Consistent with IMF recommendations under Sri Lanka’s Extended Fund Facility, the new regulations raise eligibility thresholds and tighten incentive periods for BSIs. As before, BSIs are classified into Primary Businesses of Strategic Importance (“PBSIs”) and Secondary Businesses of Strategic Importance (“SBSIs”).

Primary Businesses of Strategic Importance

A licensed Authorised Person operating within the Port City may be designated as a PBSI upon making an investment to lease and develop a plot of land. The 2025 Regulations subdivide PBSIs into four categories (A through D), differentiated by the scale of investment and employment, with corresponding tiers of exemptions.

All four subcategories are entitled to exemption from the Customs Ordinance (Chapter 235), the Ports and Airports Development Levy Act, No. 18 of 2011, and the Sri Lanka Export Development Act, No. 40 of 1979 during the Project Implementation Period, which runs from the date of the Designation Order for the maximum prescribed period unless terminated earlier.

Upon expiry of the Project Implementation Period, gains and profits of PBSIs are exempt from corporate income tax under the Inland Revenue Act, No. 24 of 2017 (“IRA”) for the following periods: 

•    Category A — 10 years; 
•    Category B — 12 years; 
•    Category C — 15 years; and 
•    Category D — 8 years. 

PBSIs are further exempted from the Betting and Gaming Levy Act, the Entertainment Tax Ordinance, the Foreign Exchange Act, and the Termination of Employment of Workmen (Special Provisions) Act from the date of the Designation Order.

Secondary Businesses of Strategic Importance

An Authorised Person that does not meet the PBSI thresholds may qualify as an SBSI. SBSIs enjoy the same customs and levy exemptions as PBSIs until commencing commercial operations, at which point they are entitled to a concessionary corporate income tax rate of 7.5% for four years. SBSIs are also exempted from the Entertainment Tax Ordinance, the Foreign Exchange Act, and the Termination of Employment of Workmen Act from the date of the relevant Designation Order.

The 2026 Amendment Act: What Changes

The Amendment Act introduces a range of changes to the Principal Act. The most consequential of these fall into three broad areas: the BSI incentive framework, the offshore banking regime, and the treatment of employment income within the zone.

Strengthening the BSI Incentive Framework

Perhaps the most welcome reform is the introduction of a structured oversight and accountability mechanism for BSIs. The Amendment Act inserts new Sections 52A through 52E into the Principal Act, which together establish an ex-post monitoring regime, a show-cause procedure, mandatory tax return filing, annual tax expenditure reporting, and a five-year review cycle.

Under the new Section 52A, the Commission is required to evaluate key performance indicators on an ongoing basis and publish the outcomes and fiscal impacts of BSI designations on its official website. Where an Authorised Person fails to meet approved KPIs, the Commission must issue a notice of non-compliance specifying the nature of the failure and a timeframe for corrective action. If corrective action is not taken, the Commission may restrict, suspend, or revoke exemptions, or impose administrative penalties.

Procedural safeguards accompany these enforcement powers. Under the new Section 52B, the Commission must issue a written show-cause notice giving the Authorised Person one month to respond and a reasonable opportunity to be heard before a final decision is made. Any decision to restrict, suspend, or revoke incentives must be recorded in writing with reasons. Section 52C mandates tax return filing under the IRA regardless of exemptions enjoyed, Section 52D requires the Ministry of Finance to publish annual tax expenditure reports on BSIs, and Section 52E empowers the Ministry to review tax holidays and incentives every five years.

The Amendment Act also tightens the criteria for BSI designation itself. Section 52(2) now requires that businesses be identified according to prescribed criteria, and Section 52(3A) mandates that the granting of tax-related exemptions be subject to a technical analysis by the Ministry of Finance, with the Commission providing the relevant technical inputs. The Commission retains responsibility for monitoring ongoing performance against specified targets.

Overhauling the Offshore Banking Regime

The Amendment Act substantially reworks the offshore banking provisions under Part V of the Principal Act. The most significant change is the formal entrenchment of the Central Bank of Sri Lanka’s regulatory and supervisory authority over offshore banking licensees within the Port City.

New Sections 42A through 42F vest the Central Bank with comprehensive supervisory powers, including the authority to issue Orders, directions, or determinations in accordance with international standards, defined in the Act to include principles published by globally recognised institutions such as the Basel Committee on Banking Supervision and the Financial Stability Board. These provisions cover capital adequacy (Section 42B), risk management frameworks (Section 42C), liquidity requirements (Section 42D), and disclosure obligations (Section 42E). Where a licensee fails to comply, the Central Bank may impose corrective measures, penalties, and restrictions, or recommend licence suspension, revocation, or cancellation to the Minister of Finance.

The revised Section 46 defines the permissible scope of offshore banking business, accepting deposits from non-residents, lending in designated foreign currencies, and engaging in inter-unit transactions. With the Central Bank’s prior written approval, licensees may also accept deposits from or lend to residents and authorised persons, subject to the Central Bank satisfying itself that such transactions will not be detrimental to domestic price stability, financial system stability, or the management of official international reserves. The new Section 51A clarifies that these provisions do not apply to banks licensed under the Banking Act that operate within the Port City with the Central Bank’s approval.

Employment Income: A Transitional Approach

The replacement of Section 35 introduces a transitional regime. For entities granted approval by the Commission prior to the section’s commencement, employees, whether resident or non-resident, must be remunerated in a designated foreign currency. For three years from commencement, the employment income of both resident and non-resident employees of such pre-existing entities is exempt from income tax. Resident employees’ income is deemed a permissible credit to their personal foreign currency accounts, and non-resident employees are additionally exempt from tax on income earned outside Sri Lanka.

Critically, however, any employment income of employees of entities that receive their registration or approval on or after the date the section comes into operation will be liable to income tax from day one. This is a clear signal that the era of blanket employment income tax exemptions is drawing to a close.

Other Noteworthy Amendments

The new Section 27(2a) prohibits the Commission from charging any fee, including land use fees, to an applicant until the relevant licence and certificate of registration have been issued. Section 36 is amended to align the foreign currency conversion regime with the Foreign Exchange Act, No. 12 of 2017, bringing the Port City’s foreign exchange framework into closer harmony with the national regulatory architecture.

Assessment: Merits and Perceived Shortcomings

Taken together, these instruments represent a meaningful maturation of the Port City’s regulatory framework. The introduction of KPI monitoring, show-cause procedures, tax expenditure reporting, and periodic reviews directly addresses earlier criticism that BSI incentives lacked oversight. The overhaul of the offshore banking framework, embedding Basel-aligned prudential standards into legislation, sends a clear message that the Port City is not a regulatory vacuum.

Certain aspects warrant scrutiny, however. The transitional employment income provisions create a two-tier system between pre-existing and new entities, which may generate competitive imbalances during the three-year window. The reliance on Central Bank discretion for resident-facing offshore transactions introduces uncertainty that prospective licensees will need to factor into their planning. And while the five-year review mechanism is welcome, it is permissive rather than mandatory (“may” rather than “shall”), leaving open whether reviews will be conducted with the regularity one might expect.

Concluding Observations

The Colombo Port City’s regulatory landscape is evolving in a direction that balances investor-friendliness with fiscal discipline and prudential rigour. The 2025 Regulations recalibrate the incentive structure in line with Sri Lanka’s post-crisis reform commitments, while the 2026 Amendment Act introduces the institutional infrastructure needed to ensure that incentives serve their intended purpose, attracting genuine, high-quality investment rather than facilitating tax arbitrage.

For businesses already operating within the zone, the key takeaway is the heightened compliance environment: KPI monitoring, mandatory tax filings, and the possibility of incentive revocation are now statutory realities. For prospective investors, the reforms offer greater regulatory certainty and a more credible institutional framework. We will continue to monitor the implementation of both instruments and advise our clients as the subordinate regulations and Central Bank directions take shape.

Disclaimer: This article is intended for general informational purposes only and does not constitute legal advice. Readers should seek independent legal counsel before acting on any of the matters discussed herein.