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 following the relevant 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). 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.
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
-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.
-Other sources of income
The income tax table for 2011/12 remained to be the same.
Income tax table for 2015/16
The tax treatment of employment income of a professional was extended to all employees. The application of the income tax table 2011/12 continues to apply on employment income up to a maximum of 16%. This is awaiting legal enactment.
-Other sources of income
The income tax table for 2011/12 remains to be the same.
Income tax table for 2015/16
-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.
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.
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.
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:
Reimbursement of wages of a chauffeur on production of bills is tax-exempt.
The value of travel warrant or passage granted to an expatriate and his/her family to visit his/her home abroad is tax-exempt.
Moving expenses that form part of relocation expenses are tax-exempt.
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.
It has been proposed to limit the exemption to the following effective from 1 April 2016.However same is pending legal enactment.
All other cash or non cash benefits will be taxed, if the aggregate exceeds the tax free threshold of LKR 2.4 million.
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.
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.
If 10 percent taxes have been withheld, that is considered final tax to an individual. 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.
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.
It has been proposed that with effect from 1 April 2016,the prevailing withholding tax rate of 2.5% on interest income accruing to an individual be removed and such income will be considered as part of the taxable income of an individual. This amendment is pending legal enactment.
With effect from 1 April 2016 interest income accruing to senior citizens will continue to be exempt from tax.
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 January 1, 2013) listed in the Sri Lanka Stock Exchange, is exempt from income 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 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).
|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.
Not taxed - no tax on capital gains.
Since capital gains is out of scope, no availability for offset.
Not taxed. However, if provided by employer then taxed at a nominal rate.
No gifts tax.
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?
As capital gains are out of scope, question of exceptions does not arise.
Capital gains are out of scope
Capital gains are out of scope.
What are the general deductions from income allowed in Sri Lanka?
Deductions are allowed against the following:
Effective 1 April 2016 it has been proposed that the above said deductions are proposed to be removed except for the setting off of losses incurred from trade, business, profession or vocation subject to specified limitations.
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.The aggregate deduction will be increased to LKR 2.4 million per annum from 1 April 2016(This is pending legal enactment).
Nonresident, noncitizen employees are currently entitled for a qualifying payment relief of LKR 250,000 per annum against their 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?
Foreign tax credit is available where Sri Lanka taxes foreign-source income if it is provided for in the relevant double tax treaty. In the absence of a treaty, income net of tax is subject to Sri Lankan tax.
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.
Effective 1 April 2016 the tax free threshold is proposed to be increased to LKR 2.4 million. This is pending legal enactment.
The calculation for YA 2016/17 is based on the amendments proposed in the budget 2016 which are pending legal enactment.
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.
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