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Sri Lanka has a transparent, low-tax regime, and has signed double taxation relief agreements with 26 countries. These agreements provide for reduced tax rates on dividends, interest and royalties. .
All Sri Lankan businesses, except for BOI companies (enterprises that qualify for BOI incentives under Sec. 17 of theBOI Act) and enterprises that qualify for special concessions under the Inland Revenue Law, are liable to taxation.
Tax Treaties
Double Tax Relief Agreements signed between Sri Lanka and other countries provide for reduced tax rates on dividends, interest and royalties. Recently completed agreements include special provisions to ensure that foreign investors receive the benefits arising from the various tax incentives. The countries having tax treaties with Sri Lanka are:
Australia, Bangladesh, Belgium, Canada, China, Denmark, Egypyt, France, Finland, Germany, Hong Kong, India, Italy, Indonesia, Iran, Japan, Jordan, The Republic of Korea, Kuwait, Malaysia, Mauritius, Nepal, The Netherlands, Norway, Oman, Pakistan, Poland, The Philippines, Romania, Russia, Saudi Arabia, Singapore, Sweden, Switzerland, Thailand, The United Kingdom, The United Arab, The United States of America, Emirates, Yugoslavia.
Corporate Income Tax
Resident and Non-Resident companies are liable to a corporate income tax of 35 per cent. These rates are in line with those in other fast developing Asian economies.
Non-resident companies (companies whose head offices are located overseas, or are controlled from abroad) pay an additional tax of one-third of remittances abroad or one-ninth of taxable profits - whichever is less. Remittances exclude dividends for this purpose.
BOI companies that meet specific criteria i.e. size of total investment, type of investment and location of investment, qualify for tax holidays ranging from 5-12 years. In addition, a concessionary rate of income tax of 15% up to a maximum period of 20 years is also extended to these companies.
Dividends
Dividends declared out of tax-exempt profits during the tax holiday period and one year thereafter, is tax free. A withholding tax of 15% on dividends applies to all companies other than quoted public companies. This can be credited against the individual income (10%) tax of the shareholders. Quoted public companies have to deduct the 10% withholding tax on dividends paid to non-resident shareholders.
Personal Income Tax
Resident individuals pay personal income tax on a sliding rate scale up to a maximum of 35% of their income. The first Rs.300,000 per annum is exempt from income tax.
Non-citizens of Sri Lanka who are employed in qualifying BOI companies pay a concessionary tax of 15% of their Sri Lankan source income. This benefit, with the exception of BOI approved "flagship" projects, is restricted to the expatriate's first five years of employment.
Value Added Tax - Act, No. 14 of 2002
An act to provide for the imposition and collection of a value added tax on goods and services supplied in Sri Lanka or imported into Sri Lanka: to provide for the abolition of the National Security Levy and The Goods and Services Tax which was applicable earlier; and to provide for connected matters this act which was enacted by the Parliament of the Democratic Socialist Republic of Sri Lanka, was cited as the Value Added Tax act No. 14 of 2002 and came into operation on August 1, 2002
Imposition of Value Added Tax:
1. At the time of supply, on every taxable supply of goods or services, made in a taxable period, by a registered person in the course of the carrying on, or carrying out of a taxable activity by such person in Sri Lanka;
2. On the importation of goods into Sri Lanka by any person and on the value of such goods or services supplied or the goods imported, as the case may be, at the following rates :-
a) Zero Rate : Direct Export of goods Designated services receiving payments in foreign currency. Input tax credit is available
b) Exempted Categories : Totally exempted from VAT, No input tax credit in available
c) VAT @ 5% : Suger, Rice, Dhal, Milk Powder, Dried Fish, Chillies, Onion, Dry fish
d) VAT @ 18% : A list is avaible.
e) VAT @ 15% : All items which does not fall under the 5% or 18% rates, will be liable for 15%
Indirect Taxes:
BOI companies are not excempt from taxes that do not come under the Inland Revenue Act and its Amendments. A table of some to the taxes which will therefore be applicable to the BOI companies, is given below:
