Residents are taxed on worldwide income, whereas non-residents are taxed on income arising or derived from Sri Lanka.
Tax exemption for non-citizens/citzens
The extent of liability for Sri Lanka tax on an individual’s earnings depends on his residence status in Sri Lanka. Profits and income derived from outside Sri Lanka by a dual citizen or a non-citizen employed in Sri Lanka will be exempt from income tax in Sri Lanka. The exemption is available to any citizen of Sri Lanka who holds a permanent residency status in a foreign country effective from the year of assessment 2013/14.
Commencing April 1, 2013, profits from employment arising in Sri Lanka to any non-citizen expert brought to Sri Lanka by a Board of Investment of Srii Lanka (BOI) are exempt from income tax during the tax holiday period of such company if the following conditions are met:
The maximum rate on employment income in Sri Lanka is 16 % effective from the year of assessment 2015/16 (i.e., April 1, 2015). As per the budget proposal, effective from the year of assessment 2016/17,this tax rate is to be reduced to a flat rate of 15% on any income exceeding LKR 2.4 Million per annum (subject to specified exemptions and deductions available). The relevant statutory provisions are yet to be enacted into law.
Individuals who pay LKR 25 Million or more will be granted special privileges which will be notified via a gazette notification.
Chargeability to income tax in Sri Lanka on expatriate employees is limited to Sri Lanka sourced income.
A person’s liability for Sri Lankan tax is determined by residency status. An individual who is physically present in Sri Lanka for 183 days or more during any year of assessment is deemed to be resident in Sri Lanka throughout that year of assessment.
Residents are assessable on their worldwide income, whereas non-residents are liable only on their income arising in or derived from Sri Lanka. A non-citizen employed in Sri Lanka whether or not resident is exempt from income tax on income arising in/derived from outside Sri Lanka. Effective from year of assessment 2013/14, the exemption is extended to resident citizens of Sri Lanka provided the offshore income is remitted to Sri Lanka through a bank in Sri Lanka.
Commencing April 1, 2008, foreign currency earned by a resident individual for any service rendered to a person outside Sri Lanka, whether the service itself was performed in or outside of Sri Lanka, is exempt from income tax (Such exemption does not apply if the income is received in the form of commission, discount or similar receipt, in the event the service is performed in Sri Lanka) if such profits are remitted to Sri Lanka via bank.
Effective April 1, 2009, any profits earned in foreign currency from employment under any “qualified person” (relevant profits) and included in the taxable income of a “qualified individual” are taxable at a maximum of 20 percent. This maximum is reduced to 16 percent effective from year of assessment 2013/14.
Employment income is generally treated as Sri Lankan-sourced compensation where the individual performs the services while being physically located in Sri Lanka.
Technically, there is no threshold/minimum number of days that exempts the employee from the requirements to file and pay tax in Sri Lanka. To the extent that the individual qualifies for relief in terms of the dependent personal services article of the applicable double tax treaty, there will be no tax liability.
Tax rates for residents and non-residents are the same.
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. Taxable remuneration and benefits include salary, bonuses, commissions, accommodation allowances, education, allowances for children, employer-provided domestic assistance, and contributions to medical, dental sickness, and disability plans.
Effective from 2015/16, employment income is taxed based on progressive rates ranging from 4% to 16%. Effective from 2016/17 profits and income accruing to any individual in excess of LKR 2.4 Million per annum are to be taxed at a flat rate of 15%. This applies to employees under the PAYE tax scheme, self-employed persons and employees who are employed under more than one employer.
The Employees’ Provident Fund (EPF) and Employees’ Trust Fund (ETF) provide superannuation benefits to employees. Both employers and employees are required to contribute to the EPF. Employees are not required to contribute to the ETF.
The regulations regarding the EPF, which provide for the payment of superannuation benefits to employees, prescribes that employers make a minimum contribution of 12 percent of an employee’s total earnings to the EPF. Employees are also required to contribute a minimum of 8 percent of their total earnings to the EPF.
The regulations for the ETF, which also provide for the payment of superannuation benefits to employees, require employers (but not employees) to contribute 3 percent of their employees' total earnings to the Fund.
Tax returns are due by November 30 following the tax year-end, which is March 31.
The requirement for individuals to file tax returns would be withdrawn if the individual’s income consists solely of one or more of the following income sources and tax from each has been deducted at source:
Under the PAYE tax scheme, every employer is required to withhold income tax from the remuneration paid to its employees. Annual returns of employee income and taxes paid in the tax year must be filed with the Department of Inland Revenue (DIR) on or before April 30 of that year.
A visa must be applied for before the individual enters Sri Lanka. The type of visa required will depend on the purpose of the individual’s entry into Sri Lanka.
Two categories of work permits are available in Sri Lanka .One is applicable for BOI approved companies with specified approved cadre of expatriates, and obtaining work permit clearance for such expatriate employees is less hazardous. The other is for companies other than BOI companies who hire the expatriate. They are required to establish the expertise of the expatriate sent to Sri Lanka in order to obtain clearance.
Sri Lanka has entered into double taxation treaties with 42 countries. A foreign tax credit is available where Sri Lanka taxes foreign-sourced 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 tax in Sri Lankan.
There is the potential that a permanent establishment (PE) could be created as a result of extended business travel, but this would be dependent on the type of services performed and the level of authority the employee has.
There are two tiers of value-added tax (VAT) rates. VAT is levied on the importation of goods into Sri Lanka and the making of taxable supplies in the course of carrying out a taxable activity. The VAT rate levied would be at the standard rate of 11 percent or 0 percent, depending on the nature of the taxable supply. In addition to this certain supplies /imports have been granted exempt status. There is a proposal to revise the VAT rates into three tiers (i.e 0%, 12.5% or 8%) but this is yet to be passed by Parliament.
Commencing April 1, 2012, a deduction not in excess of LKR 1million is available with respect to an expenditure on a community development project carried out in areas identified by the Government of Sri Lanka.
Commencing from 1 April 2014, capital repayment of a housing loan obtained from a licensed bank or a financial institution by a “professional” as defined in the Inland Revenue Act is entitled to deduct upto LKR 600,000/- as a qualifying payment relief from his assessable income. The condition to claim this relief is that the individual should file a tax return.
Any individual who returns from foreign employment and invests his savings to commence a new business is exempt on the turnover and profits from the business for a period of 5 years effective from year of assessment 2013/14.
Residents and citizen nonresident individuals are entitled to a deduction of LKR 500,000/- in ascertaining total taxable income and a deduction of LKR 250,000/- on employment income up to 31 March 2016, and the aggregate deduction will be increased to LKR 2.4 millionper annum from 1 April 2016 (This is pending legal enactment).
Non-citizen - nonresident employees are entitled to a qualifying payment relief of LKR 250,000/- up to 31 March 2016, and this deduction will be increased to LKR 2.4 million per annum from 1 April 2016 (This is pending legal enactment).
Sri Lanka has a transfer pricing regime. Sri Lanka’s transfer pricing regulations, however, do not cover employment benefits.
Sri Lanka does not currently have data privacy laws.
The Exchange Control Act specifies that foreign personnel engaged in contracts with the government or private organizations in Sri Lanka are permitted to maintain resident current accounts that may be credited with inward remittance and payments made on such contracts. It has also been the practice to permit expatriate employee earnings to be remitted offshore without exchange control permission or restriction.
Non-deductible costs for both an assignee and an employer will include contributions by an employer to pension funds that are not approved by the Commissioner General of Inland Revenue and insurance premium paid for policies (with any excluded medical condition for incurable diseases) issued outside Sri Lanka.
Effective April 1, 2015 interest income accruing to any individual is to be subject to withholding tax at 2.5%.This withholding tax will serve as a final tax. In prior years the prevailing law interest income was liable to tax dependent on income level at scale rates varying from 0 percent to 8 percent. Effective April 1, 2016 the prevailing withholding tax rate of 2.5% on interest income is to be removed and such income will be considered as part of the taxable income of an individual. In the event such interest accrues to a person outside Sri Lanka, same will be taxed at the rate of 15% unless the Double Tax Treaty provides for a lower rate.
Furthermore, interest income arising to senior citizens is exempt from tax.
Commencing April 1, 2012, offshore royalty received by a resident to Sri Lanka through a bank, is exempt from income tax in Sri Lanka.Commencing April 1, 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.
It has been proposed to limit this exemption only to loans granted by foreign banks or financial institutions. However this is pending legal enactment.
Effective April 1, 2013, interest income on investments in bonds, debentures and corporate debt securities (after 1.1.2013) listed on the Sri Lanka Stock Exchange is exempt from income tax in Sri Lanka.
Effective April 1, 2013, interest income on municipal bonds issued by the Municipal Council will also be exempt from income tax in Sri Lanka.
As businesses become global, few organizations seem to understand the risks that business travel may bring.