Pravin's Blog

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 (board of investment) companies (enterprises that qualify for BOI incentives under Sec. 17 of the BOI Act and enterprises that qualify for special concessions under the Inland Revenue Law, are liable to tax. TAX TREATIESDouble 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, Czechoslovakia, Denmark, Finland, France, Germany, India, Indonesia, Italy, Japan, Korea-South, Kuwait, Malaysia, Mauritius, Nepal, Netherlands, Norway, Oman, Pakistan, Poland, Romania, Saudi Arabia Singapore, Sweden, Switzerland, Thailand, United Kingdom, UAE, United States and Yugoslavia. CORPORATE INCOME TAXResident and Non-Resident companies are liable to a corporate income tax of 35 percent. 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 5-20 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. DIVIDENDSDividends 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 tax of the shareholders. Quoted public companies have to deduct the 15% withholding tax on dividends paid to non-resident shareholders. Resident companies pay an Advance Company Tax (A.C.T.) of 27% of gross dividend. The A.C.T. can be offset against the tax liability of the company to a level of 50% of the income tax payable. Any excess can be carried forward to the following year. PERSONAL INCOME TAXResident individuals pay personal income tax on a sliding rate scale up to a maximum of 35% of their income. The first Rs.144, 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. Basis of LiabilityIncome tax is charged for every year of assessment in respect of the profits and income of every person for that year of assessment. "Person" is defined to include the following:An Individual A Company Body of Persons Any GovernmentA "resident" person is liable to tax in Sri Lanka on that person's income arising in Sri Lanka and income arising outside Sri Lanka. A 'non-resident' person is liable to tax in Sri Lanka only on that person's income arising in Sri Lanka. Year of Assessment/Income PeriodAn year of assessment is the period of twelve months from the 1st of April of an year to the 31st March of the following year.e.g.: The year of assessment 1997/98 covers the period 1st April 1997 to 31st march 1998. Resident or Non-residentWhether an individual is 'resident' or 'non-resident' depends normally on the length of his stay in Sri Lanka. A company is deemed to be resident in Sri Lanka if its registered or principal office is in Sri Lanka or it is controlled and managed in Sri Lanka. Exemption LimitsA resident individual is liable to tax for any year of assessment only if his assessable income exceeds the exemption limit for that year. Sources of IncomeA person is liable to tax on his profits and income from the following sources:.Trade, business (including agriculture), profession or vocation; .Income from house properties and buildings; .Net annual value- Owner occupied houses, .Net annual value- Occupier's income, .Rents; .Dividends; .Capital gains; .Interests; .Royalties, premiums, discounts, charges or annuities; Payment of Taxes.

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