How to Review Licence, Tax and Employment Legacy Risks Before Acquiring a Sri Lankan Company

Acquiring an existing Sri Lankan company does not automatically give a buyer a ready-to-operate business vehicle. Before signing, buyers should build a due diligence checklist covering operating eligibility, historical compliance, employee liabilities and the transfer of control, then turn identified issues into closing conditions, remediation plans, or discussions on price and liability allocation.

Compared with forming a new company, the key question in an acquisition is not only whether the company remains registered. Buyers also need to understand what the company has done in the past, what it is currently permitted to do, and which liabilities may remain with it after the transaction. MMD Business Support can assist in clarifying business requirements, coordinating document checklists, connecting clients with appropriately qualified local professional firms, and following up on multi-party communications. Legal, tax, audit, immigration and specific licensing advice should be provided by the appointed professional firms.

First clarify what is being acquired: shares, business assets, or both

Before due diligence begins, the buyer's internal team should define the scope of the transaction clearly. Different transaction structures affect which documents need to be reviewed, how liabilities may be assumed, and the sequence of post-closing actions. Avoid relying only on the broad phrase “company acquisition”.

The following points should be clarified first:

• Whether the buyer intends to acquire shares in the target company, a specific business, certain assets, or a combination of arrangements;
• Whether the existing company will continue after completion, including use of its current name and operating premises;
• Whether the buyer plans to retain existing directors, authorised signatories, bank operators or key employees;
• Whether the target's historical business activities match the activities the buyer intends to carry on;
• Whether changes require confirmation from contractual counterparties, authorities, landlords or other relevant parties;
• Whether the operating address, business activity description, staffing arrangements or internal approval authority will need to change after closing.

The purpose at this stage is not to decide immediately whether the acquisition can proceed. It is to avoid asking professional advisers for opinions based on an incomplete transaction scope. The business activity description should be as specific as possible, such as sales, importing, warehousing, installation, repair, software services or project management, rather than simply stating “trading” or “consulting”.

Review area one: whether operating permissions and licences still fit the post-acquisition business

Many buyers start by reviewing company registration documents, but overlook the fact that the company's ability to operate may depend on specific licences, sector approvals, site conditions, responsible-person qualifications or ongoing filings. Even if the target was able to conduct a particular business in the past, buyers should not assume that its permissions will cover a new business, a change in ownership, or a revised operating model.

A useful approach is to prepare a table covering “business activity — required permission — existing evidence — points to confirm”, and collect documents for each item.

Review item	Documents or questions to review	Key transaction consideration
Basic company status	Company registration records, constitutional documents, director and shareholder details, and prior change records	Whether the entity information matches the seller's representations and whether any changes remain incomplete
Actual business scope	Recent contracts, invoices, quotations, website materials, purchasing records and sales records	Whether historical operations exceed the scope understood by the buyer
Sector permissions	Existing licences, approval letters, renewal records, and filing or inspection correspondence	Which activities, locations, equipment or responsible persons the permissions relate to, and whether they need to be reconfirmed after the transaction
Premises conditions	Lease agreements, site permits, and warehouse or operational site information	Whether permissions are tied to a specific address and whether the lease can continue
Import and distribution chain	Product lists, supplier documents, and descriptions of import and warehousing processes	Whether the buyer's planned products or operating model require additional review

For each licence or approval, buyers should not rely on a scanned copy alone. They should also ask whether the document remains valid, whether it has ongoing conditions, whether corrective action or regulatory queries have arisen, whether the holder name and address are correct, and who will be responsible for maintenance and renewal after the transaction. Whether a particular permission is affected by a change of control should be confirmed with the relevant authority and appointed professional advisers based on the sector involved.

Review area two: tax records require more than confirmation of a tax registration number

The focus of tax due diligence is to identify whether historical filings, payments, accounting records and transaction documentation are consistent with each other. It is not simply to confirm that the company has tax registration information. Buyers should ask the seller to organise documents by period and have tax and audit professionals review them in light of the target's actual operations.

The document list may typically include:

• Historical financial statements, management accounts, general ledgers and detailed account schedules;
• Filed tax returns, payment evidence, correspondence and explanations of any unresolved matters;
• Sales invoices, purchase invoices, credit notes, reconciliation records for key customers and suppliers;
• Explanations of related-party transactions, shareholder loans, advances, cash dealings and unusual adjustments;
• Supporting documents for receivables, inventory, fixed assets and contingent liabilities;
• Records of communications with tax authorities concerning enquiries, inspections, disputes or requests for additional documents.

Internally, buyers should pay particular attention to three questions. First, can recorded revenue, contractual delivery and cash flows be reconciled? Second, are there loans, guarantees or related-party balances that remain in the company but are controlled by the seller? Third, how should revenue, costs and payments around the closing date be allocated, and what evidence should be retained?

Do not rely solely on a seller's verbal statement that “tax matters have always been in order”. A more practical approach is to maintain an issues register recording missing documents, discrepancies, matters requiring further explanation and matters requiring professional advice. The register should identify the responsible person, required evidence, completion standard and transaction impact.

Review area three: employee liabilities should be assessed alongside the workforce transition plan

Where the existing team will remain after the acquisition, employment risks do not usually disappear simply because the shareholders change. Buyers need to understand employee records, payroll history, records relating to statutory contributions, unused leave or other benefits, any disputes, and whether the current management approach can be sustained.

A confidential review checklist should be prepared for each employee and should cover at least:

• Position, start date, reporting line, work location and salary structure;
• Employment contracts, supplemental agreements, job descriptions, and confidentiality or intellectual property documents;
• Salary payment records, reimbursements, bonuses, commissions and other non-fixed payment arrangements;
• Employee provident fund contribution records and employee records;
• Leave, disciplinary action, complaints, workplace injuries, exit discussions or potential dispute materials;
• Work arrangements for foreign employees and any related immigration document coordination needs.

If the buyer plans to change roles, compensation, reporting lines or reduce headcount, the transaction closing and subsequent employment changes should be managed separately. It is generally more prudent to complete fact-checking, document filing and professional consultations before deciding the communication sequence and implementation plan, rather than making hurried commitments before closing. Guidance already published in this knowledge base on organising employee provident fund contribution records and personnel files before taking over a team may also be used alongside this review.

Review area four: whether key contracts, assets and control can actually be transferred

A company's ability to continue operating also depends on whether contracts, premises, system accounts, company seals, data and fund-access authority can be taken over lawfully and without interruption. Buyers should first identify the limited number of items with the greatest operational impact rather than merely collecting a large volume of contract copies.

Priority items include:

1. Key customer, supplier, agency, distribution, financing and lease agreements;
2. Change-of-control, assignment, termination, notice or consent provisions in those contracts;
3. Rights to use offices, warehouses, equipment, vehicles, domain names, software and communications accounts;
4. Custody arrangements for company seals, original licences and certificates, finance systems, tax accounts and online banking authority;
5. Litigation, debt collection, claims, guarantees, letters of undertaking and other unresolved disputes;
6. Access boundaries and handover records for customer data, employee data and business information.

A separate control-transfer checklist should be prepared for the closing date. It should identify the current custodian of each document or access right, the transfer method, handover time, reviewer and post-handover access settings. This can reduce the risk of operational disruption where the company has been acquired but accounts, systems or key documents remain controlled by the former team.

Turn due diligence findings into an actionable transaction checklist

The value of due diligence is not in producing a lengthy report. It is in helping the buyer decide which issues are acceptable, which must be resolved before closing, and which should continue to be monitored after closing. Findings can be divided into three categories:

• Must be completed before closing: missing entity documents, inability to explain key operating permissions, inability to continue essential contracts or premises, or failure to transfer important control rights;
• Responsibilities to be addressed in the transaction documents: historical tax matters, employee disputes, seller-related-party dealings, unresolved claims, and inconsistencies between representations and documents;
• Post-closing remediation and follow-up: internal approvals, file consolidation, system access rights, team communications and preparation for new business activities.

For each issue, record at least the facts, missing materials, questions requiring confirmation, responsible party, intended action and evidence requirements. Matters requiring professional judgement should be assessed by appropriately qualified local legal, tax, audit or other professional firms based on a clearly defined transaction structure and complete documentation.

Verifiable information sources

Requirements relating to company registration, investment, tax, labour and immigration can vary according to the nature of the business and the circumstances of each project. The following are official sources for checking relevant authority information. Review date: 18 August 2026.

• Department of Registrar of Companies: https://drc.gov.lk/en/
• Inland Revenue Department: https://www.ird.gov.lk/
• Department of Labour: https://labourdept.gov.lk/
• Department of Immigration and Emigration: https://www.immigration.gov.lk/
• Board of Investment of Sri Lanka: https://investsrilanka.com/

This content is provided for general informational purposes only and does not constitute legal, tax or immigration advice. Specific requirements should be confirmed with the relevant Sri Lankan authorities and appointed licensed professional firms based on their latest guidance.