Sri Lanka Personal Income Tax

Resident individuals are taxed on worldwide income. Nonresident individuals are taxed on income derived from Sri Lanka only. All individuals other than nonresident non-citizens are subject to tax on income exceeding LKR500,000 per year. For employment income only, resident and nonresident citizens are subject to tax on income exceeding LKR750,000 (additional allow­ance for employees).

Individuals are considered resident for tax purposes if they are present in Sri Lanka for more than 183 days in a tax year. A resident guest and a dual citizen are subject to tax only on income derived in Sri Lanka.

Income subject to tax. The taxation of various types of income is described below.

Employment income. Taxable compensation includes any wages, salary, allowance, directors’ fees, leave pay, pension, shares of a company received through a share option scheme (see below), or similar compensation, as well as the value of any benefits given to an employee (or to his or her spouse, child or parent), directly or indirectly, in money or in kind. Taxable benefits and payments include travel and entertainment allowances, taxes borne by the employer on behalf of the employee, the personal use of a company- provided automobile, the value of housing provided by the employer and payments for medical expenses.

Effective from 1 April 2016, the maximum rate of income tax on the employment income of every employee is 16%. For all other individuals, the maximum rate is 24%.

The value of the benefit to the employee from the allotment or the grant of the shares (that is, the exercise of the option and transfer of ownership of the shares to the employee) is taxable as employ­ment income. The taxable amount equals the fair market value of the shares on the date of exercise of the option less the amount paid by the employee for the shares, if any.

Certain travel benefits, such as the value of benefit from a motor vehicle provided by the employer or an allowance not exceeding LKR50,000 instead of the provision of a motor vehicle are not tax­able. The cost of passage for non-citizens with respect to employ­ment duties is also not taxable.

Amounts received from approved or regulated provident funds as terminal benefits from employment are exempt from income tax.

The employment income of government-sector employees is tax­able, except for the following items:

  • Pensions or retirement benefits
  • Benefit from a motor vehicle provided by the employer or an allowance up to LKR50,000 per month instead of a motor vehicle
  • Rental value of an official residence provided by the government

Directors’ fees not included in payroll are subject to withholding tax at rates of 10% and 16% on payments less than LKR25,000 per month and exceeding LKR25,000, respectively.

Compensation derived by certain government employees, diplo­matic representatives and officials employed by international agencies such as the United Nations is exempt from tax.

Compensation earned by resident individuals in foreign currency for duties performed abroad is exempt from tax if the funds are remitted to Sri Lanka.

Income earned by individuals and partnerships for services ren­dered in or outside Sri Lanka, other than commissions or similar payments, to persons outside Sri Lanka is exempt from income tax if such income is remitted to Sri Lanka less reasonable expenses. If such exempt income is invested in treasury bonds denominated in foreign currency, a duty concession of up to 25% on the import of a vehicle by the professional is granted. This concession also applies to Sri Lankan professionals living over­seas who invest foreign currency in treasury bonds.

Emoluments earned by a resident individual from employment on a ship that is owned or chartered by an offshore-registered company or that is deemed to be a Sri Lankan ship under the Merchant Shipping Act is exempt from income tax.

Income earned in foreign currency by a resident individual from services rendered outside Sri Lanka in carrying out a construc­tion project is exempt from income tax if such income less any reasonable expenses are remitted to Sri Lanka through a bank.

Emoluments arising in Sri Lanka to a non-citizen expert who is employed a Board of Investment (BOI) undertaking with foreign direct investment exceeding USD50 million after 1 April 2013 is exempt from tax during specified tax-holiday periods, subject to conditions. The number of experts per undertaking is limited to five.

Payments made to government employees for emergency or pri­ority services or special tasks are exempt from income tax.

Employment income resulting from participation in an interna­tional event in Sri Lanka by a non-citizen is exempt from income tax.

Income of non-citizen artists and entertainers is subject to tax at a rate of 12%.

Self-employment and business income. Individuals deriving pro­fits from any source of self-employment or business income, other than profits of a casual and nonrecurring nature, are subject to income tax.

Self-employment or business income, which consists of income from a trade, business, profession or vocation, is subject to tax at the rates set forth in Rates. Taxable income consists of net income after deducting certain expenses.

Partnerships are taxable on their distributable profits and other income at a rate of 8%. The partnership tax is payable on the excess of LKR1 million of the divisible profits. The individual partners can claim a credit for their pro rata share (based on the profit-sharing ratio) of the income tax and Economic Service Charge (see Section B) paid by the partnership against their indi­vidual income tax liabilities.

Agriculture, including primary processing income, is taxed at a maximum rate of 10%. Income derived from manufacturing of animal feed, promotion of tourism, livestock and construction is taxed at a concessionary rate of 12%.

Income from the provision of educational services is taxed at a maximum rate of 10%.

Income from a business carried on for storage, software develop­ment and supply of labor is taxed at a maximum rate of 10%.

Fifty percent of profits and income derived from sales or any other transactions with respect to a book written by an individual is exempt from income tax for a one-year period beginning with the date of first publication.

Fifty percent of the profits and income derived from the produc­tion of an international award-winning drama is exempt from income for a one-year period beginning with the date of the first public performance.

Profits and income derived from a song or musical composition derived by the lyricist, the composer or the singer is exempt from income tax.

Fifty percent of the profits from the production of an interna­tional award-winning film or drama is exempt from income tax for five years from the year in which the award is received.

Profits and income of any person (other than a company) from the activities carried out in research and development are taxed at a rate of 12%.

Profits from locally manufactured hand-loom products are taxed at a rate of 12%.

Profits and income from health care services are taxed at a maximum rate of 12%.

Profits and income from the supply of goods manufactured in Sri Lanka or the provision of services to foreign ships for payment in foreign currency are taxed at a maximum rate of 12%.

Profits and income from the sale of any product manufactured in Sri Lanka for payment in foreign currency through a foreign exchange earning account authorized by the Central Bank of Sri Lanka are taxed at a maximum rate of 12%.

Profits and income from operating any mini hydropower project are taxed at a maximum rate of 12%.

A reduction of 10% of the income tax payable by a ship operator, ship builder or agent of a foreign ship is granted if such person provides skill development training for the shipping industry to trainees.

Profits and income from the administration of a sport ground, stadium or sport complex are exempt from tax.

Profits and income of a trainer of a sport who is a non-citizen and who is brought to Sri Lanka for such purpose are exempt from tax.

Profits and income earned in foreign currency by an individual who is a resident and citizen of Sri Lanka are exempt from income tax if the profits and income (less reasonable expenses) are remitted to Sri Lanka through a bank.

Profits and income from a business in which the goods are pur­chased or manufactured in one country and exported to another country other than Sri Lanka are exempt from income tax.

A five-year tax exemption is granted for profits and income from the business of manufacturing of articles (other than tobacco or liquor products) or rendering of services, if a Sri Lankan citizen who returned to Sri Lanka from foreign employment begins the business and invests his or her foreign employment earnings in such business.

Profits and income derived from outside Sri Lanka of an indi­vidual who has been a nonresident of Sri Lanka and who arrives and stays in Sri Lanka are exempt from income tax if the indi­vidual is a citizen of both Sri Lanka and another country or if he or she is a citizen of Sri Lanka and has permanent resident status in another country.

Individuals who provide professional services are liable to income tax at the following rates.

Taxable income

 

Exceeding Not exceeding Rate
LKR LKR %
0 25000000 12
25000000 35000000 14
35000000 __________________ 16

Investment income. Interest (if tax has not been withheld), royal­ties and rental income are included with other taxable income and are taxed at the rates set forth in Rates.

Rental income earned by an owner of a residential house with a floor area of at least 1,500 square feet (139.35 square meters) is exempt from income tax for five years, beginning with the year in which construction is completed, if the construction is com­pleted before 1 April 2008. If the floor area of the house is less than 1,500 square feet, the duration of the exemption is increased to seven years. For a residential house completed after 1 April 2008, rental income is exempt for five years if the floor area is less than 500 square feet.

Interest income accruing from money deposited in a Securities Investment Account is exempt from income tax.

Interest income accruing to nonresidents on loans granted to per­sons or partnerships in Sri Lanka is exempt from income tax.

Certain items of investment income are not included in an indi­vidual’s taxable income.

Dividends paid by a resident company to individuals are subject to a 10% withholding tax, which is considered a final tax.

The withholding tax rate on interest paid by banks and financial institutions to individuals, charitable institutions and partnerships is 2.5%. This is the final tax on such income.

A final withholding tax at a rate of 10% is imposed on interest income from corporate debt securities at the time of issuance of the security. The issuer must estimate the interest component that would accrue on the debt security and withhold the 10% tax up front at the time of issuance.

No withholding tax is imposed on interest income from listed corporate debt securities or approved municipal bonds.

Interest income of senior citizens from deposits made in banks is exempt from income tax.

Interest or discounts arising or accruing to any nonresident citi­zen of Sri Lanka on the purchase of Motherland Development Bonds denominated in foreign currency issued by the govern­ment of Sri Lanka are exempt from income tax.

Interest or discounts on Sri Lanka Development Bonds denomi­nated in US dollars, which are issued by the Central Bank of Sri Lanka, are exempt from income tax.

Interest or discounts on sovereign bonds that are denominated in foreign currency and issued on or after 21 October 2008 by the government of Sri Lanka to nonresident persons are exempt from income tax.

Interest from investments made after 1 January 2013 in listed corporate debt securities or in approved municipal bonds issued by municipal councils is exempt from income tax.

Dividends and interest on investments made outside Sri Lanka are exempt from income tax if such income is remitted to Sri Lanka through a bank.

Royalties received from outside Sri Lanka are exempt from tax if they are remitted to Sri Lanka through a bank.

Royalties paid to nonresidents are subject to a 15% withholding tax. The withholding tax rate for interest generally ranges from 10% to 20%. These rates may be reduced by applicable tax trea­ties (see Section E).

Royalties, franchising fees or payments for designing received by a foreign collaborator from a BOI company during specified tax-holiday periods are exempt from income tax if foreign direct investment exceeds USD50 million.

Royalties earned by a resident individual from an internationally recognized intellectual property acquired by that person are exempt from income tax if received in foreign currency remitted to Sri Lanka through a bank.

Profits and income derived from the sale of sovereign bonds by nonresident persons are exempt from income tax.

Profits and income derived from the sale of Sri Lanka Develop­ment Bonds are exempt from income tax.

Profits and income from the redemption of a unit of a unit trust or mutual fund are exempt from income tax. Profits and income arising from investments made after 1 January 2013 in corporate debt securities quoted on a stock exchange licensed by the Securities and Exchange Commission or in approved municipal bonds issued by municipal councils are exempt from income tax.

Deductions

Deductible expenses. Deductible expenses are limited to bad debts, including unpaid salary.

Personal deductions and allowances. The total statutory income of an individual for a year of assessment consists of total profits and income from all sources, after deducting allowable expenses. In calculating taxable income, deductions from statutory income are permitted for annuities, rent, royalties and interest (restricted to interest on housing loans and business loans) and certain other amounts, including the following:

  • A tax-free allowance of LKR500,000 (applicable to resident individuals only).
  • Approved donation relief, limited to donations made to charities established for the provision of institutionalized care for the sick and needy.
  • Insurance premiums paid under special insurance policies cov­ering incurable diseases (excluding such premiums paid outside Sri Lanka for policies issued outside Sri Lanka).
  • The amount of principal repaid on an approved housing loan or expenditure from the taxpayer’s own funds to purchase or con­struct the taxpayer’s first house after 1 April 2001, subject to a limit of one-third of assessable income or LKR100,000, which­ever is lower. Excess amounts may be carried forward for nine years. The relief is limited to expenditure incurred before 1 April 2011.
  • Expenditure incurred in community development projects in “most difficult villages” identified and published in the Government Gazette. The relief is limited to maximum of LKR1 million.

Deductions of annuities, royalties and interest on housing loans are not allowed with respect to employment income.

Resident or nonresident individuals who earn employment income liable to income tax in Sri Lanka are entitled to claim a qualifying payment relief of up to LKR250,000 against employ­ment income. A qualifying payment relief is a deduction allowed against an individual’s assessable income.

Rates. The rates of income tax that apply to resident individuals for the income year of 1 April 2016 through 31 March 2017 are set forth in the following table.

Taxable income Tax rate Tax due Cumulative tax due
LKR % LKR LKR
First 500,000 4 20,000 20,000
Next 500,000 8 40,000 60,000
Next 500,000 12 60,000 120,000
Next 500,000 16 80,000 200,000
Next 500,000 20 100,000 300,000
Above 3,000,000 24

Employment income is taxed at the rates of 4%, 8%, 12% shown above, and the balance is taxed at a rate of 16%.

Non-citizens who are employed in Sri Lanka are treated as resi­dent individuals for income tax purposes. However, such indi­viduals are liable only for their income arising in Sri Lanka until the date of cessation of employment in Sri Lanka. The above rule also applies to non-citizens who are employed in Sri Lanka by undertakings that have entered into agreements with the BOI of Sri Lanka.

The following are exceptions to the above rule regarding non­citizens:

  • Non-citizens employed by undertakings that entered into an agreement with the BOI before 31 December 1994 and that are currently enjoying a tax holiday are exempt from income tax until the end of the tax holiday of the employer.
  • Non-citizen employees who are employed by undertakings that have entered into agreements with the government of Sri Lanka providing for the exemption of emoluments or by Strategic Development Projects gazetted by the BOI are exempt from income tax.

The following special rules apply to certain types of income:

  • Fifty percent of the profits and income derived from the sale of books written by an individual is exempt from tax for one year from the date of first publication.
  • Fifty percent of the profits and income derived from the pro­duction of a drama is exempt from tax for one year from the date of first public performance.

Non-citizens employed by undertakings that entered into an agreement with the BOI before 31 December 1994 and that are currently enjoying a tax holiday are exempt from income tax until the end of the tax holiday of the employer.

Non-citizen experts who are employed by undertakings that have entered into agreements with the government of Sri Lanka providing for the exemption of emoluments and nonresident experts employed by Strategic Development Projects gazetted by the BOI are exempt from income tax.

Relief for losses. Losses from a trade, profession or vocation (other than a loss carryforward) may be deducted from statutory in come. A business may set off loss carryforwards and losses in curred during the current year, against the total statutory in­come, subject to a limitation of 35% of the total statutory income in that year, and the balance may be carried forward indefinitely.

Capital losses were abolished, effective from 1 April 2004.

Losses generated through intragroup transactions that have no economic substance are disallowed.

Qualifying payment relief. Qualifying payment relief in the form of a deduction from taxable income is granted for capital repay­ments on a loan obtained by a specified professional to construct a house or purchase a house or unit of a residential apartment complex, up to a maximum of LKR600,000 per year.

Other taxes

Transfer tax on immovable property. The tax charged at 100% of the value of immovable properties in Sri Lanka transferred to foreigners was repealed, effective from 1 January 2013.

The transfer of land to foreign nationals, foreign companies or companies incorporated in Sri Lanka with a 50% or more share­holding held by foreign nationals or foreign companies are pro­hibited, subject to certain exemptions. The exemptions include, among others, the following:

  • Transfers of land to diplomatic missions
  • Transfers of condominiums located on the fourth floor or above
  • Transfers of land to dual citizens of Sri Lanka (within the meaning of the Citizenship Act)

Economic service charge. The Economic Service Charge (ESC), which is computed based on relevant turnover, is payable by every person who carries out a trade, business, profession or vocation in Sri Lanka. The ESC is imposed at a rate of 0.5% of turnover. Turnover for a quarter exceeding LKR50 million is subject to the ESC.

Nation Building Tax. Nation Building Tax (NBT) is payable by persons who carry on the business of manufacturing or import­ing, who provide services or who engage in the wholesale or re­tail sale of any article. Certain specific exemptions are provided. The tax rate is 2%, which is applied to total turnover if the turn­over exceeds LKR3,750,000 per quarter. For turnover from cer­tain specified goods and services, NBT liability results from turnover exceeding LKR25 million per quarter.

Value-added tax. The standard rate for value-added tax (VAT) is 11%. A 0% rate applies to exports of goods and services. Certain goods and services are exempt from VAT. The turnover threshold applicable to registration for VAT is LKR15 million per year or LKR3,750,000 per quarter.

Stamp duty. Stamp duty is imposed on the following:

  • Specified instruments executed, drawn or presented in Sri Lanka
  • Specified instruments executed outside Sri Lanka with respect to property in Sri Lanka and presented in Sri Lanka

It does not apply to the following:

  • Instruments and documents already subject to debits tax
  • Letters of credit that are subject to Ports and Airport Develop­ment Levy
  • Specified instruments exempted by gazette notifications
  • Share certificates
  • Credit card usage (locally; for foreign purchases, the rate is 2.5%)

The stamp duty on the transfer of immovable property continues to apply.

Social security

Sri Lanka’s social security contribution rates rarely change. Most employees are covered by the Employees’ Provident Fund (EPF) Act of 1958. The act requires employees to contribute 8% of total earnings and employers to contribute 12% of employees’ earn­ings.

In addition, employers must contribute an amount equal to 3% of each employee’s total earnings to the Employees’ Trust Fund (ETF). This contribution is not deducted from the employee’s earnings.

When employment ends, a gratuity is payable to employees under the Payment of Gratuity Act of 1983, which equals half of one month’s salary for each year of service. To qualify, an employee must have worked for the employer for more than five years.

ETF benefits, and gratuity benefits paid under a uniform scheme, that exceed the exemption limit of LKR5 million (if the period of contributions exceeds 20 years) or LKR2 million (in other cases) are taxed at a maximum rate of 10%. However, gratuity payments for retirement in excess of a certain amount are taxed at normal tax rates. This amount is equal to the greater of LKR1,800,000 or the average salary for the last three years of employment, multiplied by the number of years of service.

Compensation received under approved voluntary retirement schemes or retrenchment schemes is exempt up to LKR2 million if the relevant approval is granted by the Commissioner General of Inland Revenue or the Commissioner of Labor, respectively. Any balance is taxed at concessionary rates.

Compensation under a non-uniform scheme for loss of employ­ment is taxed at a rate of 16%.

Tax filing and payment procedures

The income tax year in Sri Lanka is from 1 April to 31 March. Indi viduals must obtain special permission to use an alternative period.

Income tax returns must be filed on or before 30 November fol­lowing the end of the year of assessment.

Tax is withheld from employees under the Pay-As-You-Earn (PAYE) system.

Employees who have no other income, other than dividend and interest income from which withholding tax has been deducted, are not required to file an income tax return.

Existing files for individuals in cases subject to the above rule will be closed.

Tax deducted under the PAYE scheme is considered the final tax on employment income.

Income taxes of self-employed persons are payable in advance based on self-assessment of the current year’s income. They are pay able in four quarterly installments, which are due one and a half months after the end of each quarter. A tax return normally must be filed by self-employed persons by 30 September following the tax year. Penalties are levied on late or insufficient payments.

If an employer makes an excess deduction of PAYE tax from the remuneration of an employee, an adjustment to rectify the deduc­tion is allowed to be made in the next pay period. If such adjust­ment is made, it must be notified to the Inland Revenue Department within two weeks.

The following concessions and incentives are provided to good taxpayers:

  • 10% reduction in tax payable for quarterly tax payments made one month before the due date
  • Acceptance of return as final if compliance requirements have been met for 3 preceding years of assessment and if more than 120% of the tax or 125% of assessable income of the preceding year have been paid and declared, respectively
  • Duty concessions on imports of vehicles if more than LKR250,000 has been paid as income tax for the preceding 10 consecutive years

Conditional amnesty. If a person who had annual turnover not exceeding LKR300 million from a trade or business for any period ending before 1 April 2011 and who did not comply with tax laws administered by the Commissioner General of Inland Revenue invests both past and current earnings in a trade or busi­ness and furnishes an income tax return for any year of assess­ment before 1 April 2014, together with an assurance in writing of future compliance, the return will be accepted and no assess­ment or additional assessment will be issued. This concession of not issuing an assessment or additional assessment will also be given for the five subsequent years of assessment.

Double tax relief and tax treaties

Sri Lanka has entered into double tax treaties with the following jurisdictions.

Australia                           Italy                            Romania

Bangladesh                       Japan                          Russian

Belgium                            Korea (South)             Federation

Canada                              Kuwait                        Saudi Arabia*

China                                Luxembourg               Singapore

Denmark                           Malaysia                     Sweden

Finland                              Mauritius                    Switzerland

France                               Nepal                          Thailand

Germany                           Netherlands                United Arab

Hong Kong SAR*            Norway                      Emirates*

India                                  Oman*                       United Kingdom

Indonesia                          Pakistan                      United States

Iran                                   Poland                        Vietnam

* These treaties cover international air transport only.

 

In general, these treaties provide for the elimination of double taxation if both Sri Lankan tax and foreign tax are due on the same income.

If remuneration is received by a resident of a foreign state for employment exercised in Sri Lanka, the remuneration is taxable only in the foreign state if, in general, all of the following condi­tions apply:

  • The recipient is in Sri Lanka for a period not exceeding 183 days in the relevant fiscal year.
  • The remuneration is paid by a nonresident employer.
  • The remuneration is not borne by a permanent establishment or a fixed base maintained by the employer in Sri Lanka.

Entry visas

All foreign nationals must obtain visas (on-arrival visas or visas obtained prior to arrival) to enter Sri Lanka. Foreign nationals intending to work in Sri Lanka should obtain residence visas and work permits.

Single-entry visit visas. Visitors to Sri Lanka on visits of up to 30 days must obtain an Electronic Travel Authorization (ETA), which can be obtained online. ETA holders are issued a 30-day visit visa at a port of entry into Sri Lanka.

Nationals of specified jurisdictions are exempt from the requirement of obtaining an ETA for a period of stay up to 30 days.

On application, an extension of stay up to 90 days from the date of arrival in Sri Lanka in the first instance and a further 90 days in the second instance may be obtained.

The fees for an ETA range from USD15 to USD30, depending on the characteristics of the visa (for example, single or multi­ple entry).

Multiple-entry visas. Investors and businesspersons may obtain multiple-entry visas, which are valid for 3 or 12 months. To receive a multiple-entry visa, a foreign national must supply proof of his or her activities in Sri Lanka. These visas may be obtained from the Controller of Immigration and Emigration or from a Sri Lanka diplomatic mission abroad. For a three-month, multiple-entry visa, the fee is three times the fee for the single-entry, three-month visit visa. For the 12-month, multiple-entry visa, the fee is the same as for a three-month, multiple-entry visa plus a tax of LKR10,000.

Residence visas

Residence visas must be obtained by all foreign nationals intend­ing to work in Sri Lanka. This type of visa is normally issued for one year and is renewable annually on the payment of LKR20,000.

Applicants for residence visas should obtain entry permits from Sri Lankan missions in their home countries. They must submit applications for residence visas within one month after their arrival in Sri Lanka under entry visas.

The approval of the relevant ministry that governs a particular activity or the BOI, as applicable, is critical in obtaining a resi­dence visa. For example, if a foreign national wishes to pursue activities in Sri Lanka connected with the power and energy sector, the Sri Lanka Ministry of Power and Energy must approve the visa. The Department of Immigration and Emigration normally abides by the recommendations of the relevant ministry in deciding whether to grant a residence visa.

With respect to employment in companies approved by the BOI, the BOI must recommend a residence visa for it to be issued. The BOI refers the application with comments to the Ministry of Defence and then to the Department of Immigration and Emigration, which issues a visa. Employers are responsible for applying for residence visas for expatriate staff.

The Resident Guest Scheme is open to any foreign investor or foreign professional who wishes to contribute to the economic and sociocultural enrichment of Sri Lanka. Five-year visas are issued to individuals qualifying under the scheme.

Application forms are available from the BOI and from any of the Sri Lankan missions abroad.

Individuals applying for visas under the Resident Guest Scheme must undergo a medical examination prior to the visas’ confirmation.

Foreign residents in Sri Lanka are subject to a resident visa tax of LKR20,000, except for diplomatic staff.

All visa fees for all categories change regularly.

Family and personal considerations

Family members. Spouses and dependents of visa holders are not permitted to undertake paid or unpaid work in Sri Lanka. A spouse or child seeking to work in Sri Lanka must file an applica­tion for a work permit and residence visa independently of the principal visa holder.

Driver’s permits. Foreign nationals may not drive legally in Sri Lanka with their home country driver’s licenses but they may drive with valid international driver’s licenses issued in their home countries.

A temporary driver’s license may be obtained by presenting a foreign license and paying LKR300 to the Department of Motor Traffic. To obtain a permanent driver’s license, the applicant must submit a medical certificate from a registered medical practi­tioner in Sri Lanka, the foreign driver’s license and LKR765 to the Department of Motor Traffic. A temporary license may be ob tained immediately after the receipt of the requisite docu­ments; a permanent license takes approximately 10 days.

Sri Lanka does not have driver’s license reciprocity with any other country.