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Business Tax Advisory and International Tax and Transaction Services –Transaction Tax Advisory
Duminda Hulangamuwa +94 (11) 267-8007, +94 (11) 557-8101 Email: duminda.hulangamuwa@lk.ey.com
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Business Tax Advisory
Duminda Hulangamuwa
+94 (81) 1223-2056 Email: duminda.hulangamuwa@lk.ey.com
Dhammika Gunasekera +94 (81) 1223-2056 Email: dhammika.gunasekara@lk.ey.com
This chapter reflects provisions contained in Inland Revenue Act No.24 of 2017, duly amended by Amendment Act No. 10 of 2021.
A. At a glance
Income
Lanka Paid to Nonresidents
Fees with a Source
(c)(e)
Payments Made to Nonresidents Conducting
Transport Business with Respect to the Carriage of Passengers, Cargo or Mail Embarking from Sri Lanka
Payments to Nonresidents Conducting
Specified Telecommunication Business
Sales of Gems Sold at Auction Conducted by Gem and Jewelry Authority
Branch Remittance Tax
Net Operating Losses (Years)
(f)
(a) This is the standard rate. For other rates, see Section B. (b) Capital gains tax is reimposed in Sri Lanka, effective from 1 April 2018. (c) This withholding tax applies to nonresidents, subject to double tax treaty provisions.
(d) The 5% withholding tax applies to interest (other than exempt interest) paid to nonresidents. The tax withheld must be remitted to the Inland Revenue Department when making payments of interest to persons outside Sri Lanka on loans granted by companies, partnerships or other bodies of persons out side Sri Lanka other than foreign banks or financial institutions. (e) Withholding tax at a rate of 14% must be deducted and remitted to the Inland Revenue Department when making payments to persons outside Sri Lanka. (f) See Relief for losses in Section C.
B. Taxes on corporate income and gains
Corporate income tax. Companies resident in Sri Lanka are sub ject to income tax on their worldwide income. Nonresident companies are subject to tax on their profits and income derived from Sri Lankan sources. A company is considered to be a resident company if its registered or principal office is in Sri Lanka or if the control and management of its business are exercised in Sri Lanka.
Rates of corporate income tax. The standard rate of corporate income tax is 24%.
A 14% rate of corporate income tax applies to profits and income derived by Small and Medium Enterprises (defined as persons conducting business solely in Sri Lanka that do not have an asso ciate that is an entity and that have gross annual turnover of less than LKR500 million) and to charitable institutions:
The 14% rate also applies to the following gains and profits:
• Gains and profits from agro-processing business
• Gains and profits from conducting a business of sale of goods or merchandise including export of goods for payment in for eign currency
• Gains and profits from providing educational services
• Gains and profits of an undertaking for the promotion of tourism
• Gains and profits from providing health care services
• Gains and profits from providing construction services
• Gains and profits from the consideration received with respect to gems and jewelry
• Gains and profits from the supply of electricity to the national grid generated using renewable energy resources by a company
• Gains and profits of a company that listed its shares on or after 1 January 2021 but prior to 31 December 2021 in the Colombo
Stock Exchange licensed by the Securities and Exchange Commission of Sri Lanka, for three years of assessment commencing from 1 April 2022
Gains and profits from manufacturing are subject to tax at a rate of 18%.
Gains and profits from conducting betting and gaming, and gains and profits from the manufacturing and sale or import and sale of any liquor or tobacco products are subject to tax at a rate of 40%.
Gains derived from the realization of investment assets by com panies are taxed at a rate of 10%.
A remittance tax of 14% is imposed on the remittance of profits by nonresident companies. However, there is a 0% rate subject to conditions (see Tax exemptions).
Tax exemptions. The following items are exempt from income tax:
• Gains and profits from the providing of information technology and enabled services as prescribed
• Gains and profits from any service rendered in or outside Sri Lanka to any person for use outside Sri Lanka, if the payment for the service is made in foreign currency that is remitted to Sri Lanka through a bank in Sri Lanka
• Any foreign-source gains or profits (other than gains and prof its referred to above) earned or derived in foreign currency and remitted through a bank in Sri Lanka
• Any amount derived by a nonresident person from laboratory services or standards certification services
• Any amount derived by any religious institution by way of grants and donations
An open-ended exemption is granted for the gains and profits derived by undertakings from letting bonded warehouses or warehouses related to offshore business in Colombo or Hambantota ports if the investment in the undertaking occurs after 1 April 2021.
Other exemptions to be effective from 1 April 2021 include the following:
• Exemption from remittance tax of profits and income earned by a nonresident company carrying on business through a perma nent establishment if such profits are retained for a minimum of three years and if such profits are used for investing in Sri Lanka for expansion of business or the acquisition of listed shares, treasury bills or bonds or Sri Lanka international sovereign bonds. The exemption is applicable to remittances of such profits after the three years.
• An exemption applies for five years from 1 April 2019 to prof its and income from the sale of produce of an agro-farming undertaking without subjecting such produce to any manufac ture or production process.
• An exemption applies to gains on the realization of land sold, exchanged or transferred to a Sri Lanka Real Estate Investment Trust (SLREIT) listed in the Colombo Stock Exchange.
• An exemption applies to dividends or gains on the realization of units or gains from the realization of capital assets of a business or investment by a unit holder of a SLREIT.
• An exemption applies to gains from the realization of Sri Lanka international sovereign bonds received by commercial banks or authorized dealers if the aggregate investment on or after 1 April 2021 is not less than USD100 million.
• Gains and profits exempt for five years of assessment of any vocational education institution if its student intake has doubled in any year of assessment compared to the immediately preced ing year of assessment.
• An exemption applies to any amount derived by any nonresi dent person as a payment for aircraft, software licenses or other related services from SriLankan Airlines Limited.
Time-limited exemptions. The following time-limited exemptions apply to gains and profits derived from business by new under takings commencing after 1 April 2021, subject to stated condi tions:
• A 10-year tax exemption for an undertaking selling construc tion material recycled at a selected site used for construction services
• A 5-year tax exemption for a business commenced by an indi vidual who has completed vocational education from specified institutions
• A 7-year tax exemption for a business commenced by a resident person that manufactures boats and ships in Sri Lanka and that derives gains and profits from the supply of such boats and ships
• A 7-year tax exemption for any renewable energy project with the capacity to generate solar or wind power of not less than 100 megawatts that supplies power to the national grid
• A 5-year tax exemption for an undertaking that commenced after 1 January 2021 by a resident person for the construction and installation of communication towers and related appliances using local labor and raw materials or for the provision of technical services for such construction and installation
Tax incentives. Tax incentives are provided through enhanced capital allowances for new companies in addition to the normal capital allowances.
The following are the enhanced capital allowances:
• An enhanced capital allowance of 200% is granted for invest ment exceeding USD3 million in depreciable assets other than intangible assets in the Northern Province.
• An enhanced capital allowance of 100% is granted for invest ment exceeding USD3 million but less than USD100 million in depreciable assets other than intangible assets in other prov inces.
• An enhanced capital allowance of 150% is granted for invest ment exceeding USD100 million in depreciable assets other than intangible assets in other provinces.
• An enhanced capital allowance of 150% is granted for invest ment exceeding USD250 million in assets or shares of a stateowned company.
• Annual capital allowances of 50% are granted within two years for milking machines with the latest technology for the manu facturing of liquid milk and related products.
The enhanced capital allowance must be claimed in the year of assessment of the investment.
Any unrelieved loss arising from the enhanced capital allowance must be claimed within 10 years. This period is extended to 25 years if the investment exceeds USD1 billion.
The following temporary concessions apply for the three years of assessment after the effective date (1 April 2018) of the new Inland Revenue Act:
• An enhanced capital allowance of 200% is granted for an in vestment up to USD3 million in computers, data-handling equipment, specified plant and machinery, or buildings and structures in the Northern Province.
• An enhanced capital allowance of 100% is granted for an in vestment up to USD3 million in computers, data-handling equipment, specified plant and machinery, or buildings and structures in other provinces.
• Gains and profits (surplus) distributed to a policyholder of a life insurance company is subject to a reduced income tax rate of 14%.
• A headquarters or regional head office, as specified by the Commissioner General of Inland Revenue, established in Sri Lanka on or after 1 October 2017 is exempt from income tax.
• A company entering into a standardized power purchase agree ment regarding renewable energy on or before 10 November 2016 with the Ceylon Electricity Board is subject to a reduced income tax rate of 14%.
• R&D expenses are 100% deductible from business income. This concession has been extended to the 2021-22 and 2022-23 years of assessment.
• A company providing information technology services may claim an additional deduction in computing business income equal to 35% of the total amount of payments that are included in computing the taxable income of its employees other than company directors. The conditions for this deduction are 80% of gross income from the business of providing information technology services, at least 50 employees during the whole year and no entitlement to enhanced capital allowances. Any unrelieved losses resulting from the additional deduction may not be claimed in any succeeding years of assessment.
• An additional deduction equal to 100% of the total amount of marketing and communication expenses is granted, subject to certain conditions.
Capital gains. Capital gains tax is re-imposed on gains from the realization of investment assets (capital assets held as part of an investment). In computing capital gains, the cost of an investment asset held as at 30 September 2017 is the market value of such asset at that time. Specific exclusions and exemptions, such as gains on sales of listed shares, are provided.
In computing the capital gain, the consideration received is the amount received or receivable or the assessed value (value certi fied by a professional valuer) at the time of realization, which ever is higher.
Administration. The normal fiscal year (year of assessment) runs from 1 April to 31 March. Accounts should be kept based on this period. However, if a company is unable to keep and submit
accounts based on this period, it may apply to the Commissioner General of Inland Revenue (CGIR) to follow an alternative period for keeping accounts. The CGIR may approve such a request subject to any condition. Income tax for any year of assessment is payable in four quarterly installments based on a statement of estimated tax provided in advance. Any balance needs to be paid by 30 September of the following year, and a company is required to file the tax return by 30 November (self-assessment).
If a company fails to file a return, the Assistant Commissioner can issue a default assessment at any time. Filing a return after a default assessment is issued is not considered to be a selfassessment.
The Assistant Commissioner also has the power to issue, when necessary, an advance assessment, usually in advance of the due date of the return.
The Assistant Commissioner also has the authority to revise a previously issued assessment or make an additional assessment in relation to self-assessment, default assessment or an advance assessment.
For any assessments (self, default or advance), an amended or additional assessment can be made within 30 months from the date of submission of self-assessment return, or in the case of other assessments, 30 months from the date on which the Assistant Commissioner issued the default or advance assess ment. A taxpayer that filed a self-assessment return is permitted to amend the self-assessment return within 30 months from the date of submission of self-assessment return.
If the Assistant Commissioner has served an amended or addi tional assessment as above, the Assistant Commissioner may further amend such assessment (self, default or advance) within four years from the date of the respective original assessment.
In the case of fraud, no time limit applies for the issuance of an amended or additional assessment.
Separate sets of accounts must be maintained for different activi ties of a trade or business if any of those activities is exempt or subject to tax at different tax rates.
A refund claim for a year of assessment must be made in writing within four years after the date of payment or, if made on the Commissioner General’s initiative, within the specified time period.
The Commissioner General may make a public ruling setting out the Commissioner General’s interpretation of the application of the Inland Revenue Act.
A taxpayer may apply for a private ruling setting out the Commissioner General’s position on the application Inland Revenue Act with respect to a transaction entered into or pro posed to be entered into by a taxpayer.
A single return must be filed for all capital gains transactions in a calendar month, and the submission of such return and the pay ment must be made within 30 days after the end of the month.
Effective from 1 April 2021, all companies are required to file income tax returns electronically (e-filing).
The use of a Taxpayer Identification Number is mandatory in all tax-related source documents or underlying documents of the taxpayer.
A taxpayer who is dissatisfied with an assessment or other deci sion can request the CGIR to review the assessment or the deci sion. This request must be made to CGIR in writing no later than 30 days after the taxpayer is notified. The taxpayer must be noti fied of the CGIR’s decision on the review.
If the taxpayer is aggrieved by the decision of administrative review, the taxpayer may make an appeal to the Tax Appeal Commission. Such an appeal can be made if the decision of the administrative review has been received or seven months have lapsed after the request for administrative review was made.
Punitive provisions can be instituted against auditors, tax practitioners and tax advisors for specified charges.
Tax relief measures for COVID-19 economic recovery. Income tax arrears of Small and Medium Enterprises (SMEs) arising from assessments made up to the 2018-2019 year of assessment and outstanding as of 24 June 2020 in the Inland Revenue Department records will be written off.
No amended or additional assessments will be issued on SMEs if the CGIR is satisfied that there is no fraud or willful neglect.
The CGIR may grant a grace period to SMEs to settle taxes in default or in arrears as of 24 June 2020.
Dividends. The definition of a “dividend” has been broadened. It now includes the following:
• A payment derived by a member from a company, whether received as a division of profits, in the course of a liquidation or reconstruction, in a reduction of capital or share buyback
• Capitalization of profits (bonus shares)
The definition of “dividends” excludes a payment to the extent that any of the following circumstances exists:
• It is matched by a payment made by a member to the company.
• It is debited to capital, share premium or similar account.
• It is otherwise included in calculating the income of the mem ber.
Gains and profits from dividends received by a resident company from another resident company is subject to income tax at a rate of 14%.
Dividends paid to nonresident members are exempt from income tax.
A dividend paid by a nonresident company or a gain on the real ization of shares of a nonresident company is exempt from income tax if it is derived by any person with a “substantial par ticipation” in the nonresident company.
A dividend paid by a resident company is exempt from tax (sub ject to certain conditions) if the company is engaged in any of the following:
• Entrepôt trade involving import, minor processing and reexport
• Providing front-end services to clients abroad
• Offshore business in which goods are procured from or manu factured in one country and shipped to another country without bringing the goods to Sri Lanka
• Headquarters operations of leading buyers for management of financial supply chain and billing operations
• Logistic services, such as bonded warehouses or multi-country consolidations in Sri Lanka
Interest. The following types of interest are exempt from income tax:
• Interest, discount or realization of any gain on sovereign bonds denominated either in local or foreign currency with respect to any nonresident person (other than a Sri Lankan permanent establishment) is exempt from income tax, effective from 1 April 2018.
• Interest or discount paid or allowed on any sovereign bond denominated in foreign currency, including Sri Lanka Development Bonds, with respect to any person, is exempt from income tax, effective from 1 April 2018.
• Interest paid to any person outside Sri Lanka on a loan granted to any person in Sri Lanka or to the government of Sri Lanka is exempt from income tax, effective from 1 April 2018.
• Interest income earned in foreign currency by any person on monies of the person in any foreign-currency account opened by the person in a commercial bank or specialized bank with the approval of the Central Bank of Sri Lanka is exempt from income tax.
• Any sum received by a public corporation out of funds voted by parliament from the Consolidated Fund or from any loan arranged through the government is exempt from income tax, effective from 1 April 2018.
• Interest accrued or derived after 1 April 2021 by a multina tional company on a deposit opened and maintained in foreign currency in a domestic bank and used to cover its import expen diture for that year of assessment is exempt from income tax.
• Interest or discount accruing or derived after 1 April 2021 by a Samurdhi community-based bank from security or treasury bills or treasury bonds is exempt from income tax.
Foreign tax relief. Foreign tax relief is available under various double tax treaties. In general, Sri Lankan tax payable (other than dividend tax) is allowed as a credit against any foreign tax com puted by reference to the same income. Similar relief is available for foreign tax paid in the other treaty country. However, the benefit is not available to a body that is a resident of the other state if 50% or more of the underlying ownership is held by an individual or individuals who are not residents of the other state. This restriction does not apply if the resident of the other state is a company listed on a stock exchange in that other state.
Foreign tax credits must be calculated for each source (employ ment, business, investment or other source) and for each gain from the realization of investment assets. For each calculation,
the credit cannot exceed the amount calculated by applying the average rate of Sri Lankan income tax to the person’s assessable foreign income.
Conditions apply for the claiming of such credit.
C. Determination of trading income
General. The assessment is based on financial statements prepared in accordance with generally accepted accounting principles.
All expenses incurred during the year in the production of income are allowable unless specifically prohibited. In addition, certain expenses that are specifically authorized are permitted as deductions. Nondeductible expenses include, but are not limited to, the following:
• Capital expenditures
• Personal and domestic expenses
• Expenditure incurred in deriving exempt amounts
• Final withholding tax payments
• Outlays or expenses for entertainment
• Payments subject to withholding tax if withholding tax has not been paid to the Inland Revenue Department
The following expenses, among others, are deductible:
• Interest expenses if money was borrowed under a debt obligation and used during the year to acquire an asset that is used in the production of income (see next paragraph)
• Repairs and improvements, whether or not capital, limited to 5% of the written-down value of buildings and 20% of the written-down value of other assets
• Research and development expenses (including capital expen diture incurred through an institution in Sri Lanka)
• Agricultural startup expenses such as opening up land for cul tivation or animal husbandry, purchase of livestock and cultiva tion of land
Interest expenses incurred (other than by financial institutions) on the excess of the total debt obligations under financial instru ments over the statutory limit (three or four times the amount of share capital and reserves) is not deductible in the year of assess ment in which they are incurred. Any unclaimed amount can be carried forward to be claimed in the next six years of assessment.
Qualifying payments. Companies may claim a deduction for qualifying payments, which are donations to the government and approved charities.
Donations to the government in cash are deductible in full.
Qualifying payment deductions for donations to approved chari ties established for the provision of institutional care for the sick and needy are limited to LKR500,000 or one-fifth of taxable income, whichever is less.
Amounts that cannot be deducted in a year of assessment as qualifying payments cannot be carried forward.
Effective from 1 April 2021, the cost of a merger or acquisition incurred by a financial institution, confirmed by the Central Bank of Sri Lanka, is deductible as an expense over three equal installments in three years of assessment.
Inventories. Inventories are normally valued at the lower of his torical cost or net realizable value. For agricultural produce, inventories are valued at subsequent sale prices. Cost is usually determined on a first-in, first-out (FIFO) formula or a weighted average cost formula.
Provisions. In general, no deductions are allowed for reserves or provisions. However, provisions may be deducted if the expenses provided for are paid within three years after the year of assessment.
For banks, the deductibility of a specific provision for bad debts is subject to the approval of the Commissioner General, based on the reasonableness of the provision.
Depreciation. Depreciation allowances are granted to the owner of the asset from the fiscal year in which the asset is first used. The allowance is computed using the straight-line method at the following rates, which are effective from 1 April 2018.
Asset Rate (%)
Buildings 5 (a)
Plant and machinery or equipment 20
Motor vehicles 20
Furniture 20 Computer hardware 20 Intangible assets (excluding goodwill) 5/20 (b)
(a) This rate applies to buildings, structures and similar works of a permanent nature. (b) If the intangible asset has an indefinite useful life, the rate is 20%.
Depreciation allowances are generally subject to recapture on the sale of an asset to the extent that the sales proceeds exceed the tax value after depreciation. Any amounts recaptured are subject to tax at the regular corporate tax rate. Losses on the sale of a depreciable asset may be claimed as business losses.
Relief for losses. Business losses can be deducted in full in deter mining the taxable income of a company. Any balance may be carried forward for six years of assessment.
Losses can be offset against business income or investment income, subject to restrictions.
Losses relating to particular rates can be deducted from income taxable at the same rate or a lower rate.
Losses from exempt activities can be set off only against exempt income.
D. Other significant taxes
The following table summarizes other significant taxes.
Nature of tax Rate
Value-added tax (VAT); imposed on all goods and services supplied in, or imported into, Sri Lanka and on retail and wholesale trade, excluding essentials, other than certain exempt items including the supply and import of motor vehicles, cigarettes and liquor (effective from 25 October 2014, these items are liable to the Excise [Special Provisions] Duty, which
Nature of tax Rate
replaces VAT at the point of import); effective from 1 December 2019, sales of condominium units are exempt from VAT, effective from 1 January 2020, the liability threshold for VAT is LKR300 million per year or LKR75 million per quarter
Standard rate 8%
Specified goods and services, including exports and international transportation 0% VAT on financial services (VATFS); imposed on the supply of financial services by specified institutions carrying on the business of financial services, including the provision of financial leasing facilities; unit trusts and mutual funds are exempt 18% Betting and gaming levy; annual amounts of the levy LKR25,000 to LKR400 million
Tax imposed on gross monthly collections from bookmaking and gaming; imposed instead of all indirect taxes other than the betting and gaming levy mentioned above 10%
Telecommunication levy
Standard rate 25% Services provided through internet and broadband 10% Levy for Crop Insurance Scheme; on banking, finance and insurance institutions; imposed on annual profits 1%
Excise duty; on specified imports and locally manufactured products 5% to 115% Import duty 0% to 30% Cess on specified imported items Various Stamp duty
On transfers of immovable property 3%/4% On specified instruments Various On receipts exceeding LKR25,000 (imposed on all transactions other than transfers of immovable property and transactions involving specified instruments) LKR25
On local credit card usage 0%
On foreign purchases 2.5%
Port and Airport Development Levy; imposed on declared cost, insurance and freight (CIF) value of all cargo; exports, the film industry, imports of goods for specified projects with foreign funds donations received by the government, imports of artificial limbs, crutches and similar items, and yarns and fabrics are exempt
Standard rate 7.5%
Other specified rates 2.5%/5%
Special Commodity Levy Various Cellular Tower Levy LKR200,000 per tower, per month
Short Message Service (SMS)
Advertising Levy LKR0.25 per SMS
Nature of tax Rate
Luxury Tax on motor vehicles
Super luxury vehicles
Luxury vehicles
Semi-luxury vehicles
Semi-luxury vehicles (dual purpose)
Reservations in Sri Lanka by online travel agents; imposed on commission 1% Surcharge tax, imposed on taxable income 25% Social security contributions, on employees’ gross earnings
Employees’ Provident Fund (EPF); paid by Employer 12% Employee 8%
Employers’ Trust Fund; paid by employer 3%
E. Miscellaneous matters
Foreign-exchange controls. Foreign-exchange regulations are gov erned by the Exchange Control Act No. 12 of 2017, effective from 20 November 2017, and other directives issued by the Central Bank of Sri Lanka. The regulations include those discussed below. Any licensed commercial bank as an authorized dealer can open the following types of accounts in Sri Lanka:
• Inward Investment Accounts (IIAs)
• Outward Investment Accounts (OIAs)
• Capital Transaction Rupee Accounts (CTRAs)
Persons outside Sri Lanka may engage in specified capital transactions in Sri Lanka that require remittance of foreign exchange into Sri Lanka, such as the following:
• Investing in shares issued by a company incorporated in Sri Lanka
• Acquiring shares or debt securities in companies not incorpo rated in Sri Lanka and listed on the Colombo Stock Exchange
• Granting loans through debt securities issued in foreign currency or Sri Lankan rupees by licensed, commercial banks, finance companies and specialized banks
Exclusions include the acquisition of shares of a company pro posing to carry on businesses of pawn broking, coastal fishing or retail trade if the capital contributed by persons resident outside Sri Lanka is less than USD5 million. For certain industries, such as growing and primary processing of tea, rubber, coconut, rice, sugar, and certain other items, deep-sea fishing and mining and primary processing of nonrenewable national resources, invest ments are limited to 40% of the stated capital or a higher percent age if special approval is granted by the Board of Investment of Sri Lanka.
Overseas companies registered under the Companies Act of Sri Lanka may carry on the following business in Sri Lanka:
• Any commercial trading or industrial activity provided that permission has been obtained from the government of Sri Lanka
• Any non-commercial, non-trading or nonindustrial activity, such as activities carried on by a liaison office, representative office or similar office
Overseas companies cannot carry on undertakings for money lending, pawn broking or retail trade if the capital contributed by a person resident outside Sri Lanka is less than USD5 million, coastal fishing or other prohibited activities as specified in the regulations. Permissible activities are also set out in the regula tions.
Overseas profits, royalties, franchise payments and similar pay ments may be remitted out of Sri Lanka net of tax through the IIA of the parent company through which the investments were routed.
A tax-clearance certificate is required for outward remittances other than for specific remittances, which include, among others, the following:
• Remittances of sales proceeds from quoted company shares owned by nonresidents in companies in Sri Lanka
• Dividends paid to nonresidents
• Permitted foreign investments made by resident companies
• Capital repayments of foreign loans obtained by resident com panies
• Remittances by export companies with respect to registration of trademarks outside Sri Lanka
Transfer pricing. Under the Inland Revenue Act, profits and losses from transactions between associated enterprises are determined taking into account the arm’s-length principle.
Currently, transfer-pricing regulations apply if the aggregate of the domestic and international associated enterprise transactions exceeds the threshold of LKR200 million for the year of assess ment. The arm’s-length price is determined using methods pre scribed for this purpose.
For domestic transactions, the transfer-pricing provisions apply only in the following cases:
• If exemptions are granted to any one of the associated enter prises
• If the associated enterprises are taxed at different income tax rates
• If any one of the associated enterprises has incurred losses
A permanent establishment in Sri Lanka is recognized as a dis tinct and separate entity from its head office and related branches in Sri Lanka.
Advance pricing agreements may be entered into with the Department of Inland Revenue with regard to “international transactions.”
The CGIR may specify safe harbor rules to simplify transfer pric ing compliance and administration. However, the relevant guid ance has not yet been issued.
No tax exemption or benefit is provided on taxable income enhanced as a result of transfer-pricing adjustments.
A specific transfer-pricing penalty regime is introduced for the following actions:
• Failure to maintain required documents: 1% of the aggregate value of transactions with associated enterprises
• Not furnishing required documents: an amount not exceeding LKR250,000
• Non-disclosure of required information: not exceeding 2% of the aggregate value of transactions with associated enterprises
• Failure to submit documents on or before the specified date: an amount not exceeding LKR100,000
• Concealment of income or furnishing inaccurate particulars or evasion: 200% of incremental tax on the transfer-pricing adjust ment
Debt-to-equity rules. A debt-to-equity ratio of 4:1 applies to all companies. Interest paid on loans in excess of the debt-to-equity ratio is not deductible for tax purposes. The excess may be car ried forward and treated as incurred during any of the following six years but only to the extent of any unused limitation.
However, interest incurred (other than carried forward from pre vious years) during the 2021-2022 year of assessment can be deducted regardless of the limit stated above.
Purchase of land by foreigners. The purchase of land by foreign companies and companies incorporated in Sri Lanka with direct or indirect foreign shareholding exceeding 50% is prohibited, except for quoted public companies. It is proposed that the restriction on the ability of foreigners to purchase condominiums below the fourth floor be removed.
F. Treaty withholding tax rates
The following table lists the maximum withholding tax rates under Sri Lanka’s double tax treaties.
Dividends Interest Royalties % % %
Australia 15 10 10
Bahrain 5/7.5/10 10 10
Bangladesh 15 15 15
Belarus 7.5/10 10 10
Belgium 15 10 10
Canada 15 15 10
China Mainland 10 10 10
Denmark 15 10 10
Egypt 15 15 15
Finland 15 10 10
France 10 10 10/15
Germany 15 10 10
India 7.5/15 10 10 Indonesia 15 15 15 Iran 10 10 8
Italy 15 10 10/15 (a)
Japan 10 15 0/7.5 (a)
Korea (South) 10/15 (b) 10 10
Kuwait 5/10 10 20
Luxembourg 7.5/10 10 10
Malaysia 15 10 10
Mauritius 10/15 (d) 10 10
Nepal 15 10/15 (e) 15 Netherlands 10/15 (b) 10 10
Norway 15 10 10
Pakistan 15 10 20
Dividends Interest Royalties % % %
Palestinian Authority 10 10 10 Philippines 15/25 15 15/25
Poland 10 10 10
Qatar 10 10 10
Romania 12.5 10 10
Russian Federation 10/15 10 10
Seychelles 7.5/10 10 10
Singapore 15 10 15
Sweden 15 10 10 Switzerland 10/15 (b) 10 10
Thailand 15 10/25 (c) 15
United Arab Emirates 10 10 10
United Kingdom 15 10 10
United States 15 10 5/10 (f)
Vietnam 10 10 15 Non-treaty jurisdictions (g) 14 5/14 14
(a) The lower rate applies to royalties for copyrights and cinematographic films. The higher rate applies to other royalties.
(b) The 10% rate applies if the recipient holds at least 25% of the payer. The 15% rate applies to other dividends.
(c) The 10% rate applies to interest received by a financial institution. The 25% rate applies to other interest.
(d) The 10% rate applies if the beneficial owner of the dividends is a company that holds at least 10% of the capital of the payer. The 15% rate applies to other dividends.
(e) The 10% rate applies to interest paid to banks. The 15% rate applies to other interest.
(f) Rent paid for the use of tangible movable property is taxed at the rate of 5%.
(g) See the applicable footnotes in Section A.
Sri Lanka has also entered into agreements covering interna tional air transport with the Hong Kong Special Administrative Region (SAR), Oman, Saudi Arabia and the United Arab Emirates.
