TAXATION- SRI LANKA
Sri Lanka has a transparent, low-tax regime, and has signed double taxation relief agreements with more than 35 countries. These agreements provide for reduced tax rates on dividends, interest and royalties. .
Double Tax Relief Agreements signed between Sri Lanka and other countries provide for reduced tax rates on dividends, interest and royalties. Presently, they have concluded the agreement with more than 35 countries.
1. CORPORATE INCOME TAX
1.1 Meaning of Residence
A company shall be considered as a resident in Sri Lanka:
• If a company is controlled as well as managed from Sri Lanka, or
• Its principal office is located in Sri Lanka.
Any company which does not satisfy this requirement is termed as ‘non resident’
1.2 Basis of Taxation
Resident companies are taxed on the worldwide income whereas non resident companies are taxed only on the income which has a Sri Lankan source. If a resident company derives any income from a foreign source it shall also be taxable in Sri Lanka. Branches shall be taxed as a domestic company.
1.3 Taxable Income
A Taxable income can be categorized under several headings, i.e. income from dividend, interest, rental, royalties, trade and other income.
1.4 Tax Rate
Companies in Sri Lanka are taxable at the following tax rates:
1. Companies with taxable income less than SLR 5 million are taxed at 15 %
2. Venture Capital Companies are taxed at 20 %
3. Quoted companies listed less than 5 years are taxed at 33.33%
4. Companies listed more than 5 years are taxed at 35 %
The recipient’s assessable income does not include the dividends which are paid by one resident company to another or to a nonresident company if:
a. The tax is withheld from the payment by the payer or
b. The payer pays the dividends from the received dividend income.
A 10 percent withholding tax applies on the dividends paid to either a resident or a nonresident company at all times except when the rate is decreased due to an ongoing and relevant tax treaty.
1.6 Capital Gain Tax
Capital Gain tax is not applicable in Sri Lanka.
While operating a business or trade the losses incurred can be carried forward for an indefinite period but not exceeding 35 percent of the statutory income. However, losses cannot be carried back.
1.8 Taxation Rates
Companies shall be taxable at following rates:
1. A tax rate of 15 percent applies to the companies having a taxable income lower than SLR 5 million
2. Venture Capital Companies shall be taxable at a rate of 20 percent.
3. Companies which are quoted and listed for less than five years have an applicable tax rate of 33 1/3 percent.
4. Companies which are quoted and listed for more than five years are taxed at a rate of 35 percent.
This is fixed as 1.5 percent of the income tax liability and is levied as a social responsibility tax on the companies.
1.10 Minimum Alternative tax
There is no alternative minimum tax applicable on corporate.
1.11 Foreign tax credit
The tax paid for a foreign income by a Sri Lankan resident in a country that does not have a tax treaty with Sri Lanka may be reduced from the tax imposed by Sri Lankan government.
1.12 Withholding Tax
Interest: This can be divided into two categories for the interest paid to resident and nonresident company as below:
• Interest paid to a nonresident company: A 15 percent withholding tax is applicable in such a case provided the tax rate is decreased as per an applicable tax treaty.
• Interest paid to a resident company: A 10 percent withholding tax is applicable if the interest is paid by financial and banking organizations.
Taxation on Royalty
A 15 percent withholding tax is applicable when a royalty is paid to a nonresident company provided the rate is reduced by a tax treaty.
1.13 Branch Remittance tax
Apart from the standard corporate income tax, the branch offices are also subject to a 10 percent tax on remittance to a foreign head office.
2. ANTI AVOIDANCE RULES
2.1 Transfer Pricing
Any income arising on a transaction from associated enterprise shall be determined on the basis of Arm – length price. The revenue department has issued the guidelines for transfer pricing.
2.2 Thin Capitalization
The deduction of interest paid to a holding company or any other subsidiary company and vice versa, shall not be allowed.
2.3 Control Foreign Company regimes
Control Foreign Company regimes are not applicable on Sri Lanka.
GAAR is applicable for transactions not reflecting any economic reality
3. ADMINISTRATION AND COMPLIANCE (Corporate):
3.1 Tax year
A tax year commences from 01 April each year and ends on 31 March. Thus, it is a 12 month assessment period which forms the basis for income tax.
3.2 Consolidated returns
Companies cannot file a consolidated return thus a return must be filed separately by each company.
3.3 Filing requirements
Every company (resident or nonresident) should file a return before 30th September of the assessment year. Advance tax payments should be done on a quarterly basis.
3.4 Taxation Penalties
Any failure in paying the due taxes or not filing a return within the set deadline calls for penalties.
4. PERSONAL TAXATION
Sri Lankan residents are taxed on the basis of a worldwide income whereas nonresidents pay a tax for the income generated in Sri Lanka.
The physical presence of an individual in Sri Lanka for 183 days or more within one assessment year makes him/ her a Sri Lankan resident. Sri Lankan government does not give any recognition to citizenship and domicile concepts thus they do not apply in Sri Lanka. A person resident in Sri Lanka for two consecutive years or for a greater duration than that is deemed a Sri Lankan resident unless he/ she goes out of the country for 12 months consecutively.
4.1 Filing status
The income tax for married couples is assessed on a separate basis.
4.2 Taxable Income
The taxable income for individual persons is categorized into income from employment, rentals, trade, dividends, royalties, interests and other sources.
4.3 Capital gains
Sri Lanka does not have capital gains tax.
4.4 Deductions & allowances
An allowance of SRL 300,000 is granted to the individuals.
4.5 Taxation Rates
The maximum individual tax rate in Sri Lanka is 35 percent.
5. ADMINISTRATION AND COMPLIANCE (Individual):
5.1 Tax Year
The assessment year for income tax lasts for 12 months from 01 April to 31 March.
5.2 Filing & payment:
Tax returns must be filed annually before 30 September. Taxes can be paid on a quarterly basis according to a self-assessment system as per the following:
1st quarter: payment due on or before 15 August of that assessment year;
2nd quarter: payment to be done by 15 November of that assessment year;
3rd quarter: payment to be done by 15 February of that assessment year;
4th quarter: payment to be done by 15 May of that assessment year.
An individual is liable to penalties if he/ she fails to pay the due tax on a timely basis or fails to file a return.