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  • Service: Tax
  • Type: Business and industry issue
  • Date: 10/18/2013

Sri Lanka – Tax system targets foreign investment 

Sri Lanka has introduced a number of tax changes as it seeks to create a business-friendly environment to improve the country’s ability to compete for foreign Investment. Below KPMG in Sri Lanka describes existing and new features of Sri Lanka’s tax system of interest to potential investors.

What foreign investments are allowed?


Sri Lanka permits non-residents to invest in:


  • shares in companies and units in unit trusts
  • treasury bonds
  • treasury bills
  • debentures
  • establishment of businesses by foreign companies
  • Sri Lanka development bonds
  • deposits – Special Foreign Investment Deposit Accounts.

Incentives for foreign investment – Income tax exceptions


Sri Lanka offers income tax holidays ranging from four to 12 years. Qualifying activities include agriculture, manufacture of any article, information technology services, healthcare services, and tourism. The quantum of investment must be from 25 million to upwards of 2,500 million Sri Lankan rupees (LKR).


Key tax benefits of investing in Sri Lanka


Foreign investors in Sri Lanka may enjoy these positive attributes of the country’s tax system:


  • income tax exemption on interest on foreign loans is exempt from income tax (w.e.f. 01.04.2012)
  • absence of controlled foreign corporation (CFC) rules
  • investor-friendly transfer pricing rules
  • liberalization of exchange controls regulations
  • sweeping tax holidays under the “Strategic Development Projects” regime
  • expanding treaty network, as shown in the table below.

Double Tax Treaties – MESA countries
Country Treaty available? Limited or comprehensive?
Afghanistan ¯ ¯
Bahrain ¯ Approved – awaiting ratification
Bangladesh Comprehensive
Egypt ¯ Approved – awaiting ratification
Jordan ¯ ¯
Kuwait Comprehensive
Lebanon ¯ ¯
Oman Limited
Pakistan Comprehensive
Qatar Comprehensive
Kingdom of Saudi Arabia Comprehensive
United Arab Emirates Comprehensive
Yemen ¯ ¯

Source: KPMG in Sri Lanka 2013.


Other recent tax changes


Small and medium enterprises (SME) – A concessionary income tax rate of 10 percent is available to manufacturing/service companies with turnover of less than LKR500 million for a financial year, provided the SME does not form part of a group of companies.


Research and development – A triple tax deduction is allowed on research that aims to upgrade a trade or business carried on by the taxpayer, where such research is carried out through an institution in Sri Lanka.


Royalty income and franchise and design fees – Income tax exemptions are available on royalty, franchise fees or any payment for design made to a foreign collaborator by a Board of Investment-registered company that enjoys a tax holiday (under Section 17A or Section 16D of the Inland Revenue Act), where the following conditions are met:


  • foreign investment exceeds 50 million US dollars (USD)
  • services are essential to carry out activities in Sri Lanka
  • services are not obtainable in Sri Lanka.

Large-scale investments – Tax holidays of 6to 12 years are available for new undertakings that involve investments in fixed assets acquired from 1 April 2011 to 1 April 2015. This incentive is not available to a new company that was formed by splitting, reorganizing or acquiring of any pre-existing business.


Ruling requests – Requests for administrative rulings on interpretations are required to be dealt within 6months.


Listed debt securities – Interest income and withholding tax on corporate debt on listed corporate debt securities are exempt from income tax.


Value-added Tax (VAT) – The threshold for chargeability is LKR12 million annually. For wholesalers and retailers, the threshold is LKR500 million quarterly.


Unit trusts – A concessionary income tax rate of 10 percent is applicable to unit trust management companies. VAT on the supply of services to unit trusts by unit trust management companies is exempt.


Easing of exchange controls:


To encourage investments in immovable property, non-residents are permitted to repatriate both capital and capital gains on sale of immovable property owned and/or developed by the non-resident, provided the property was originally acquired and/or developed by its owner through funds transferred into Sri Lanka through international banking channels.


To facilitate remittances into Sri Lanka for investment purposes, Securities Investment Account (SIA) holders have more flexibility in how they may receive or repatriate funds into or out of an SIA.


Strategic Development Projects


The Strategic Development Project Act No. 14 of 2008 identifies projects that have status as “Strategic Development Projects” (SDP). Once approved by Cabinet, these projects enjoy tax exemptions for up to 25 years.


Potential benefits that may be negotiated for SDPs include:


  • a corporate income tax holiday, including exemption on distributed dividends
  • tax exemption (for a particular period) for expatriate personnel, up to a maximum number of personnel
  • exemption from withholding tax on interest from foreign loans for capital expenditure, technical fees for consultants, management fees, royalty payments and marketing fees (subject to conditions)
  • exemptions from VAT
  • exemption from Port and Airport Development Levy
  • customs duty exemptions for capital goods imported for project implementation purposes.
 

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  • KPMG’s TaxNewsFlash series provides a summary of the latest tax developments being reported by KPMG firms from around the globe including the MESA region.
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