Taxation of international executives
Source: Inland Revenue Act No. 10 of 2006, and amendments thereto.
When are tax returns due? That is, what is the tax return due date?
Tax returns should be filed by 30 November immediately after the end of the year of assessment.
What is the tax year-end?
What are the compliance requirements for tax returns in Sri Lanka?
All taxpayers are required to pay their taxes on self-assessment basis in quarterly installments on 15 August, 15 November, and 15 February during the relevant year of assessment and 15 May in the next year of assessment. The due date for final payment is 30 September following the end of the year of assessment (Commencing from Y/A 2006/07 a 10 percent discount is available on the quarterly taxes due if tax is settled 30 days prior to the statutory due date. However this concession will not be available effective 1st April 2018.). A Pay-As-You-Earn (PAYE) tax scheme applies to employees on their employment income. The employer makes deductions of tax at source.
PAYE tax withholdings are calculated according to tables provided by the Revenue Authorities. If any individual’s only source of income consists of employment income, the PAYE tax so deducted will be the final tax, effective from Y/A 2011/12. Provision for application of refunds is not available.
Currently there is no requirement to file an income tax return or open a tax file if the taxpayer’s sources of income are confined to one or more of the following.
Tax tabales pertinent to employment income has not been issued to the public yet under the new Act.
Spouses are taxed separately and are required to file separate tax returns. Income received by one spouse for services rendered in any trade, business, profession, or vocation carried on or exercised by the other spouse or by a partnership of which that spouse is a partner is deemed to be income of that other spouse.
The total statutory income of a child (under 18 years of age and unmarried) of a resident individual is aggregated with the total statutory income of the father if the marriage of his parents subsists in that year of assessment. Otherwise,, such income is aggregated with the parent who maintains him and with whom he lives in that year of assessment.
With effect from 1 April 2008, expatriate employee are taxed at the tax rates applicable to residents in Sri Lanka but, they will be taxed only on their Sri Lankan-sourced income.
What are the current income tax rates for residents and non-residents in Sri Lanka?
Income tax is calculated by applying a progressive tax rate schedule to taxable income as follows.
Income tax slabs from the Year of Assessment 2011/2012 are as follows:
Income tax table for 2011/2012, 2012/13 & 2013/14
|Taxable income bracket||Total tax on income below bracket||Tax rate on income in bracket|
|From LKR||To LKR||LKR||Percent|
Income tax table for 2014/15, 2015/16 2016/17 & 2017/18
-Employment income received by a professional -(Citizens)
The income tax table for 2011/12 continued to apply until the taxable income from the above source reached the threshold parallel to the 16% tax rate. Taxable income from employment of a “professional” exceeding this threshold remained to be taxed at 16%.The definition of a “professional” has been prescribed by law.
For the year of assessment commencing after 1st April 2015, employment income is taxed at the maximum rate of 16%.
However, this position will change with effect from 1st April 2018. The employment income will be taxed at progressive rates, maximum rate being 24%.
-Other sources of income
The income tax table for 2011/12 remains to be the same.
Income tax table for 2017/18
-Total Income including employment income
Profits and income exceeding LKR 2.4 Mn. per annum is to be taxed at a flat rate of 15%.This amendment is however pending legal enactment.
For the Year of Assessment 2018/2019 – on other income
|Not Exceeding Rs. 600,000||4% of the amount in exces of Rs. 0|
|Exceeding Rs. 600,000 but not exceeding Rs. 1,200,000 amount||Rs. 24,000 plus 8% of the in excess of Rs. 600,000|
|Exceeding Rs. 1,200,000 but not exceeding Rs. 1,800,000 amount||Rs. 72,000 plus 12% of the in excess of Rs. 1,200,000|
|Exceeding Rs. 1,800,000 but not exceeding Rs. 2,400,000 the amount||Rs. 144,000 plus 16% of in excess of Rs. 1,800,000|
|Exceeding Rs. 2,400,000 but not exceeding Rs. 3,000,000 the amount||Rs. 240,000 plus 20% of in excess of Rs. 2,400,000|
|Exceeding Rs. 3,000,000||Rs. 360,000 plus 24% of the amount in excess of Rs. 3,000,000:|
With effect from 1 April 2008 all expatriate employees (other than certain experts with effect from 1 April 2008) will be taxed at the same tax rates applicable to resident employees of Sri Lanka.
For the purposes of taxation, how is an individual defined as a resident of Sri Lanka?
A resident is a person who is physically present in Sri Lanka for 183 days or more during a year of assessment.
The New Act defines an individual present in Sri Lanka during the year and that presence falls within the period or periods amounting in aggregate of 183 days or more in any twelve months period that commences or ends during that year, as a resident.
Is there, a de minimus number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to the host country for more than 10 days after their assignment is over and they repatriate.
An individual will be considered as a resident if he stays in Sri Lanka for 183 days in a year of assessment.
What if the assignee enters the country before their assignment begins?
Number of days present in Sri Lanka will be considered in counting the 183 days in a year of assessment, in considering the residency status.
Are there any tax compliance requirements when leaving Sri Lanka?
There are no special requirements.
What if the assignee comes back for a trip after residency has terminated?
As explained earlier, when a person returns to Sri Lanka,the 183-day rule would reapply, in order to determine the tax residency status. Since the New Act place much emphasis on the year instead of the year of assessment,if an individual is present for an aggregate of more than 183 days within the year, that person is construed as a resident in Sri Lanka.
Do the immigration authorities in Sri Lanka provide information to the local taxation authorities regarding when a person enters or leaves Sri Lanka?
Revenue Authorities could call for copies of relevant pages of the passport to verify.
Will an assignee have a filing requirement in the host country after they leave the country and repatriate?
The ideal situation would be to file all returns before leaving the country.
Do the taxation authorities in Sri Lanka adopt the economic employer approach1 to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in Sri Lanka considering the adoption of this interpretation of economic employer in the future?
No.There is no intimation from the Revenue Authorities.
Are there a de minimus number of days2 before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days?
What categories are subject to income tax in general situations?
In general, all remuneration and benefits received by an employee who is resident in Sri Lanka or for services rendered in Sri Lanka are taxable. Types of compensation included as taxable income are as follows:
Are there any areas of income that are exempt from taxation in Sri Lanka? If so, please provide a general definition of these areas.
The following are not taxed in Sri Lanka as per the prevailing law:
Effective from 1st April 2018, the exemptions have been limited to the following;
Reimbursement of wages of a chauffeur on production of bills is tax-exempt. This exemption will be withdawan with effect from 1st April 2018.
The value of travel warrant or passage granted to an expatriate and his/her family to visit his/her home abroad is tax-exempt.
This exemption will be withdawan with effect from 1st April 2018.
Moving expenses that form part of relocation expenses are tax-exempt.
This exemption will be withdawan with effect from 1st April 2018.
Employer’s contributions to local funds approved by the Revenue Authorities are tax-exempt.
Non-resident individuals rendering services outside Sri Lanka are tax-exempt.
Effective 1 April 2013 offshore income of any tax resident and citizen of Sri Lanka is exempt from income tax provided such income is remitted to Sri Lanka through a bank account.
This exemption will be withdawan with effect from 1st April 2018. However, a resident individual who earns income in foreign currency for the services rendered outside Sri Lanka to any person to be utilized outside Sri Lanka, a relief of Rs. 15,000,000 can be claimed for each year of assessment.
Are there any concessions made for expatriates in Sri Lanka?
Is salary earned from working abroad taxed in Sri Lanka? If so, how?
Residents are taxed on overseas earnings while non-residents are liable to tax on income arising in or derived from Sri Lanka. However as per the statutory provisions non-citizens irrespective of whether or not tax resident, are exempt from any income earned outside Sri Lanka.
Offshore income of a citizen of Sri Lanka who holds a permanent residency status in a foreign country, is exempt from tax effective from 1 April 2013.
The exemption given to citizens and non- citizens listed above will be with drawn from 1st April 2018, However, under the domestic law, credit will be granted for any taxes paid outside Sri Lanka on such offshore income.
Are investment income and capital gains taxed in Sri Lanka? If so, how?
From the year of assessment 2002/03, capital gains have not been taxed.
Non citizens are liable to tax on investment income if same is derived from Sri Lanka.
The New Act has introduced capital gains taxes, and gains from realization of investment assets will be taxed at the rate of 10%. For this purpose, the gain will be calculated as the difference between selling price and cost of the asset. For this purpose, the “cost” is deemed to be the market value of such asset as at 30.09.2018
If 10% taxes have been withheld, same is considered a final tax in respect of an individual. Effective from 1.4.2018, the withholding tax rate will be increased to 14%. Certain tax treaties provide for lower withholding rates.
Off shore dividend received by a resident of Sri Lanka is exempt from income tax provided such dividend is remitted through a bank account.
Exemption prevelant to off-shore dividend will be withdrawn with the implementation of the New Act.
From 1 April 2011 to 31 March 2015, the amended withholding tax rates on interest from moneys deposited by individuals in banks or financial institutions are as follows:
|Taxable Income||Rate of WHT|
|From LKR||To LKR||Percent|
With effect from 1 April 2015, interest income accruing to senior citizens is to be exempt from tax, and interest income accruing to any other individual is subject to a withholding of 2.5%.This withholding will serve as a final tax.
Interest rates under the New regime would be as follows:
Bank deposits maintained by residents - 5%
Bank deposits maintained by non-resient - 5%
Band deposits maintained by senior citizens (subject to a relief upto LKR 1,500,000/-) - to be prescribed.
Corporate debt instruments
Interest payable on investments in Sri Lanka corporate debt instruments and government securities are is subject to a 10 percent withholding tax which is a final tax. Withholding will be made at time of issue of such instrument. Withholding of tax on corporate debt securities that carry a floating interest rate will be made at the point interest is paid.
In the case of an individual, the tax so deducted will be the final tax.
Commencing from 1 April 2013 interest income on investments in bonds, debentures and corporate debt securities (investment made after J anuary 1, 2013) listed in the Sri Lanka Stock Exchange, is exempt from income tax. However, this exemption has been withdrawn effective from 1.4.2018.
Interest on corporate securities will be subject to withholding of tax at 5% , effective from 1st April 2018. In the case of a non resident, same will be considered as final tax.
Other Interest Income /Royalty Income
The following exemptions are available in relation to interest/royalty income.
Commencing 1 April 2012, interest on foreign loans granted to persons in Sri Lanka by a person outside Sri Lanka is exempt from income tax in Sri Lanka.
Commencing 1 April 2013, interest income on municipal bonds issued with the approval of the General Treasury will also be exempt from Income tax in Sri Lanka.
Commencing 1 April 2012, offshore royalty received by a resident and remitted to Sri Lanka through a bank is exempt from income tax in Sri Lanka.
The above mentioned exemptions will be removed with effect from 1st April 2018, and the royalty income will be taxed at the rate of 14%.
Furthermore, interest on government securities would not be subject to withholding of tax effective from 1st April 2018
The profits and income derived from renting of property would be determined by reference to gross rent less rates and less 25% of cost of repairs.
Rental on residential property is exempt for five years from date of construction (subject to pre-conditions). This exemption will be withdrawn effective from 1st April 2018.
|Residency status||Taxable at:|
|Other (if applicable)||N||N||Y*|
* With effect from 1 April 2011 and thereafter the benefit value assessed would be the excess of market value over option price. The benefit will be taxed at the time such employee exercise the option.
Thus far there has been no regulation issued in relation to the benefits awrded to employees.
Currently not taxed - no tax on capital gains.
Under the New Act, capital gains will be reintroduced on realization on investment assets.
The New Act provides for an exemption on gains made by an individual from realization of principal place of residence provided that the same has been owened by the person continuously for three years and lived by the individual for at least two of those three years
Since capital gains is out of scope, no availability for offset.
Effective from 1st April 2018 consequent to introduction of capital gains tax capital lossess also can be claimed subject to certain restrictions.
Not taxed. However, if provided by employer then taxed at a nominal rate.
No gifts tax.
Gifts received in respect of employment is identified as an employment income under the New Act.
Are there additional capital gains tax (CGT) issues in Sri Lanka? If so, please discuss?
No additional CGT.
Are there capital gains tax exceptions in Sri Lanka? If so, please discuss?
Currently, capital gains are out of scope, hence the question of exceptions does not arise.
Effective from 1st April 2018, any gain arising on realization investment assets will be liable to capital gain taxes .
Any gain arising from realization of the principal place of residence that has been owned by the person continuously for three years and lived by the individual for at least two years out of those three years shall not be liable to capital gains taxes.
Furthermore, the law provides for the ascertainment of a deemed gain in circumstances ,other than on death or on transfer of owner ship of an asset by an individual to an associate or charitable institution ,where a transfer has taken place for no consideration.
As of now, capital gains are out of scope.
Effective from 1st April 2018, capital gain tax is imposed on realization of an investment asset. For this purpose, an investment asset is defined to mean following assets held as part of an investment;
Excludes trading stock or depreciable assets
As of now, capital gains are out of scope.
As per the New Act provisions have been introduced to deem certain transactions as disposal or acquisition of assets.
What are the general deductions from income allowed in Sri Lanka?
Currently, deductions are allowed in relation to the following:
Residents and citizen nonresident individuals are entitled to a annual deduction of LKR 500,000/- in ascertaining total taxable income, and a annual deduction of LKR 250,000/- by way of a qualifying payment relief on employment income upto 31 March 2016.
Nonresident, noncitizen employees are currently entitled for a qualifying payment relief of LKR 250,000 per annum against their employment income.
The New Act has listed down two types of deductions, i.e. general and main deductions. Main deductions will be allowed in a situation where expenses are incurred in relation to business or investment income of a person during a year of assessment.
General deductions contains of an exhaustive list pertatining to the deductions that cannot be taken into consideration in calculating person’s income.
Also, the New Act specifically states that a deduction shall not be allowed out of employment income.
As per the New Act residents and citizen non residents will be entitled for a tax relief of LKR 500,000/ - against taxable income from any source. Residents are entitled for a further relief upto LKR 700,000/- against employment income.
What are the tax reimbursement methods generally used by employers in Sri Lanka?
Employer bears tax on employee income subject to gross up (tax on tax).
How are estimates/prepayments/withholding of tax handled in Sri Lanka? For example, Pay-As-You-Earn (PAYE), Pay-As-You-Go (PAYG), and so on.
The employer makes deduction of taxes at source based on tables provided by the revenue authorities.
If not within the PAYE scheme, tax for a given year of assessment is payable direct to the Inland Revenue in quarterly instalments.
Withholding requirement under the PAYE scheme apply on terminal benefits such as, gratuity, ETF, and so on.
There is no instalment mechanism for payment of terminal benefits tax in Sri Lanka.
When are estimates/prepayments/withholding of tax due in Sri Lanka? For example, monthly, annually, both, and so on.
Is there any Relief for Foreign Taxes in Sri Lanka? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?
Currently, foreign tax credit is available where Sri Lanka taxes foreign-source income if it is provided for in the relevant double tax treaty.
A resident person is entitled to claim foreign tax credits under the New Act to the extent of any foreign income tax paid by that person in that year in computing persons accessable income. This provision acts independently even in the abscense of a DTA.
What are the general tax credits that may be claimed in Sri Lanka? Please list below.
There are no general tax credits available. However the following specific tax credits may be claimed against the taxpayer’s regular (or alternative minimum) tax liability:
This calculation assumes a married taxpayer resident in Sri Lanka with two children whose three-year assignment begins April 2013 and ends 31 December 2016. The taxpayer’s annual base salary is USD100,000 and the calculation covers three and a half years.
|Company car (engine capacity above 1,500 c.c.)||6,000||6,000||6,000|
|Moving expense reimbursement||20,000||20,000||20,000|
|Interest income from non-local sources||6,000||6,000||6,000|
Exchange rate used for calculation: USD1.00 = LKR110.00.
Calculation of taxable income
|Days in Sri Lanka during year||365||365||365||275|
|Earned income subject to income tax|
|Company car (over 1,500 c.c.)||0||0||0||50000|
|Total earned income||14,828,000||14,828,000||14,828,000||17,028,500|
|Add: Other income||0||0||0||660,000|
|Tax free allowance||500,000*||500,000*||500,000*||2,400,000|
|Total taxable income||14,228,000||14,228,000||14,078,000||15,288,500|
Calculation of tax liability
|Total income as above||14,228,000||14,228,000||14,078,000||15,288,500|
|Sri Lankan tax thereon||3,094,720||3,094,720||2,132,480||2,293,275|
|Domestic tax rebates (dependent spouse rebate)||0||0||0||0|
|Foreign tax credits||0||0||0||0|
|Social responsibility levy***||0||0||0||0|
|Total Sri Lankan tax||3,094,720||3,094,720||2,132,480||2,293,275|
*The expatriate employee is physically present in Sri Lanka for more than 183 days in each of the years, and is therefore treated in the same way as a resident. Hence such employee is entitled to a tax-free allowance of LKR500,000 upto 31 March 2016.
**Every resident non citizen employee is additionally given a special exemption of LKR100,000 per annum upto 31 March 2013. Effective 1 April 2013, this will be allowed as a deduction from assessable income. It was increased to LKR 250,000 effective from 1 April 2015 to 31 March 2016.
1Certain tax authorities adopt an ‘economic employer’ approach to interpreting Article 15 of the OECD model treaty which deals with the Dependent Services Article. In summary, this means that if an employee is assigned to work for an entity in the host country for a period of less than 183 days in the fiscal year (or, a calendar year of a 12-month period), the employee remains employed by the home country employer but the employee’s salary and costs are recharged to the host entity, then the host country tax authority will treat the host entity as being the "economic employer" and therefore the employer for the purposes of interpreting Article 15. In this case, Article 15 relief would be denied and the employee would be subject to tax in the host country.
2For example, an employee can be physically present in the country for up to 60 days before the tax authorities will apply the ‘economic employer’ approach.
3Sample calculation generated by KPMG, the Sri Lankan member firm of KPMG International, based on the Inland Revenue Statute.
© 2018 KPMG Ford, Rhodes, Thornton & Co., a Sri Lanka partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.