Sri Lanka is preparing to revoke generous tax concessions granted to the Chinese-led Port City Colombo project, as part of its obligations under an International Monetary Fund (IMF) bailout agreement—a decision that may significantly affect the $1.4 billion initiative’s long-term prospects.
The move follows the IMF’s fourth review of Sri Lanka’s extended fund facility, designed to support the country’s recovery from its most severe economic crisis in decades. As part of the review, the government has pledged to revise the Strategic Development Projects (SDP) Act and the Port City Act by the end of 2024. These amendments aim to establish clear, transparent, and globally-aligned eligibility criteria for time-bound tax incentives, while also curbing the duration of existing tax holidays.
Concerns have long persisted over the commercial sustainability of Port City Colombo, which spans 269 hectares and is being developed by China Harbour Engineering Company (CHEC)—a subsidiary of China Communications Construction Company (CCCC), a firm sanctioned by the U.S. since 2020 due to its involvement in constructing militarised installations in the South China Sea. CHEC previously developed Sri Lanka’s Hambantota Port, which was leased to China for 99 years in 2017 after Colombo failed to meet its debt obligations—a move widely cited as a textbook case of Beijing’s “debt-trap diplomacy.”
Officials familiar with the reforms, speaking on condition of anonymity, said the Port City Act is targeted for amendment by October due to the unchecked tax privileges it grants. “In some cases, top executives operating in the Port City receive tax-free salaries, whereas others outside the zone are still subject to income tax. Moreover, many firms claiming Port City tax exemptions are actually based in Colombo,” said one official.
Reforms to the SDP Act are expected by the end of August, in coordination with IMF advisors. These changes are intended to ensure that only new foreign direct investments (FDIs) qualify for incentives and to prevent misuse of concessions.
The IMF’s latest staff report emphasized that overly generous tax exemptions have significantly weakened Sri Lanka’s revenue base and were among the contributors to the 2022 financial collapse. Although the government had earlier assured the IMF that no new tax exemptions would be granted without consultation, 24 companies reportedly received such benefits between January and September 2024—bypassing prior commitments.
“These exemptions have sparked concerns that domestic firms may migrate operations to the Port City to exploit the tax loopholes,” said another source. “With growing unease about regulatory ambiguity, potential money laundering, and increasing Chinese influence, the viability of the Port City project remains under serious doubt.”
