Sri Lanka

Sri Lanka

Thinking beyond borders

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Residents are taxed on worldwide income, whereas non-residents are taxed on income arising or derived from Sri Lanka.

The extent of an individual’s liability for Sri Lankan tax on the individual’s earnings depends on the individual’s 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 year of assessment 2013/14.

Commencing April 1, 2013, the profits from employment arising in Sri Lanka to any non-citizen expert brought to Sri Lanka by a Board of Investment (BOI) in Sri Lanka is exempt from income tax during the tax holiday period of that company if following conditions are met:

  • The Company has invested more than $ 50Mn. as foreign direct investments on or after 01.04.2013.
  • The Company qualifies for a tax holiday under section 16D or 17A of the Inland Revenue Act.
  • Services rendered by the expert employee is essential for the company and such service is not available in Sri Lanka.
  • The number of experts not exceeding five.

The maximum rate on employment income in Sri Lanka is 16 percent effective from the year of assessment 2015/16 (i.e., April 1, 2015). The relevant statutory provisions are yet to be enacted into law.

Key message

Chargeability of income tax in Sri Lanka on expatriate employees is limited to Sri Lanka–source income.

Income tax

Liability for income tax

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).

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.

Definition of source

Employment income is generally treated as Sri Lankan-sourced compensation where the individual performs the services while physically located in Sri Lanka.

Tax trigger points

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.

Types of taxable income

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 includes salary, bonuses, commissions, accommodation allowances, education, allowances for children, employer-provided domestic assistance, and contributions to medical, dental sickness, and disability plans.

Tax rates

Effective April 1, 2015, net taxable income is taxed based on progressive income tax rates ranging from 4 percent to 24 percent. This widens the slabs and reduces income liable for tax at the higher rates significantly.

Effective from 2015/16, employment income is to be taxed at the maximum rate of 16%.

Social security

Liability for social security

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 provides for the payment of superannuation benefits to employees, prescribes that employers make a minimum contribution of 12 percent of an employee’s total earnings into the EPF. Employees are also required to contribute a minimum of 8 percent of their total earnings into the EPF.

The regulations for the ETF, which also provides 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.

Compliance obligations

Employee compliance obligations

Tax returns are due by November 30 following the tax year-end, which is March 31.

The requirement to file tax returns would be withdrawn on individuals if the individual’s income consists solely of one or more of the following income sources and tax from each has been deducted at the source:

  • employment
  • dividend
  • interest
If an employee is not within the Pay-As-You-Earn (PAYE) scheme, tax payments can be made in quarterly installments on a self-assessment basis.

Employer reporting and withholding requirements

Under the PAYE 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 to March 31 must be filed with the Department of Inland Revenue (DIR) on or before April 30 of that year.

Other issues

Work permit/visa requirements

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.

Double taxation treaties

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 Sri Lankan tax.

Permanent establishment implications

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.

Indirect taxes

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.

General Deductions from Income

Commencing April 1, 2012, a deduction not in excess of 1million Sri Lankan rupee (LKR) 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 their savings to commence 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 for a tax free allowance of LKR 500,000/- in ascertaining total taxable income and a qualifying payment relief of LKR 250,000/- on employment income.

Non-citizen - nonresident employees are entitled for a qualifying payment relief of LKR 250,000/-.

Transfer pricing

Sri Lanka has a transfer pricing regime. Sri Lanka’s transfer pricing regulations, however, do not cover employment benefits.

Local data privacy requirements

Sri Lanka does not currently have data privacy laws.

Exchange control

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 assignees

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.

Interest Income and Royalty

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.

Effective April 1, 2013, interest income on investments in bonds, debentures and corporate debt securities (after 1.1.2013) listed in the Sri Lanka stock exchange are 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.

Commencing April 1, 2012, offshore royalty received by a resident to Sri Lanka through a bank is exempt from income tax in 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. Furthermore interest income of senior citizens is to be exempt from tax.

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