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  • Service: Tax
  • Type: Business and industry issue
  • Date: 1/23/2014

Sri Lanka – Highlights of budget 2014 

The Sri Lankan government presented its 2014 budget in Parliament on 21 November 2013. Budget measures of interest to foreign investors are summarized below.

Direct tax exemptions

  • Redistribution of offshore dividend income – The budget proposes to exempt from tax the redistribution of offshore dividend income, provided the company makes the redistribution within one month from the dividend’s receipt. Currently, this exemption is restricted to dividend income received from a resident company.
  • International headquarters and regional head offices – The budget grants an income tax holiday to companies that relocate any international or regional headquarters into Sri Lanka. Expenses for the headquarters’ incorporation will be tax-deductible. The budget further proposes to grant relief from Value Added Tax (VAT) and Nation Building Tax (NBT) on foreign receipts of the relocated entity.

Concessionary tax rates

  • Personal tax on employment and professional income – Employment income received by a professional will be taxed at a maximum rate of 16 percent. For this purpose professional means a medical doctor, engineer, architect, lawyer, pilot, navigation officer, software engineer, accountant recognized as a member of a recognized professional body, and a researcher or a senior academic recognized as an accredited professional. Professionals would be entitled to the following concessionary tax rates on their professional business income :

Professional income Sri Lankan rupees (LKR) Maximum tax rate
< LKR 25,000,000 12 percent
LKR 25,000,000 – LKR 35,000,000 14 percent
< LKR 35,000,000 16 percent

  • Export-related services – The budget proposes to extend a concessionary rate of 12 percent to profits derived on the supply of certain services to exporters of goods or services and foreign principals, provided:
    • The service essentially relates to the manufacture of goods or provision of service
    • Payments for the service were made in a foreign currency in Sri Lanka.
  • Colombo Stock Exchange listings – To encourage companies to list their shares on the Colombo Stock Exchange, last year’s budget proposed a concessionary tax rate for shares listed on the exchange before 1 April 2014. Budget 2014 extends the cut-off date to April 1, 2017.
  • Services to shipping industry – Services related to the shipping industry will be taxed at par with export income at 12 percent.

Revisions to exemptions

  • Time limit on qualifying payment relief – For investments made to expand an existing business, the time limit for qualifying payment relief is accelerated to April 2014 (from April 2015). The current provisions enable investors to deduct such investment cost over four years when determining taxable profits.
  • Exemption for research and development (R&D) activities – The budget proposes to restrict the three-year exemption for companies engaged in R&D activities to investments made before April 2014.

Deductions

  • Cost of skills development – For trainees in the shipping industry, a deduction is proposed for costs incurred for skills development, to a limit of 10 percent of income tax payable.
  • International brands – Deduction is also proposed for the cost of acquiring of intellectual property related to international brands.
  • Personal tax on dividends – Dividends received by a shareholder representing a redistribution of offshore dividend income will be exempt from tax, provided:
    • Redistribution is made within one month of receipt of offshore dividend
    • The amount of the dividend is remitted to Sri Lanka through a bank.
  • Property Transfer Tax – The leasing of land by a foreign investor is to be made liable to a 15 percent upfront tax. This measure was proposed in the 2013 budget, and this year’s proposal suggested that the proposal is to be enacted with effect from this year. Presumably there will be exceptions to the general rule.
 

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