• Service: Tax
  • Type: Business and industry issue
  • Date: 5/15/2014

Sri Lanka – new treaty with Bahrain, 2014 tax reforms 

Recent tax developments in Sri Lanka include a new tax treaty with Bahrain and proposals announced in the country’s 2014 budget.

New treaty with Bahrain

Sri Lanka has entered into a new tax treaty with Bahrain, although details of the treaty’s provisions are not yet available1. See the article in the October 2013 MESA Tax Update for details about Sri Lanka’s expanding tax treaty network.

2014 tax reforms

In a second previous article, KPMG in Sri Lanka presented highlights of the government’s 2014 budget proposals of importance for foreign investors. The proposals are expected to be signed into law in April 2014. This article takes a closer look at these legal effects of the proposals.

Direct tax exemptions

Redistribution of offshore dividend income – The Inland Revenue Amendment Bill (IRAB) exempts the redistribution of offshore dividend income from dividend tax, provided the company makes the redistribution within three months from its receipt.

Foreign source royalty income – The IRAB exempts foreign royalty income of residents from internationally recognized intellectual property (as of 1 April 2014), provided such royalties are earned in foreign currency and remitted to Sri Lanka through a bank. The cost of acquiring intellectual property related to international brands is tax-deductible.

Revisions to exemptions

Time limit on new investments – The law confers a range of tax holidays depending on the value of the investment and the sectors in which the investment is made. The IRAB has set the following time limits for obtaining these tax holidays:

  • investments must made before 1 April 2015
  • commercial operations must start before 1 April 2016.

Time limit on qualifying payment relief – For investments made to expand an existing business, the time limit for qualifying payment relief has been advanced to April 2014. However, for investments in plant and machinery acquired to improve energy efficiency, upgrade technology, introduce a new technology or generate power using renewable energy resources, the time limit for investment in expansion is 1 April 2015.

Exemption for research and development (R&D) activities – As of 1 April 2014, the exemption for investments in companies engaged in R&D activities has been withdrawn.


The 2014 budget grants professionals tax concessions with a maximum tax rate of 16 percent of their employment or professional income (compared to the general 24 percent maximum), as our previous article notes. The IRAB has now defined a “professional” in this context to mean “a doctor registered under the Medical Ordinance (Chapter 105), a chartered engineer, a software engineer, a chartered architect, a chartered accountant and an attorney at law, and includes a pilot licensed under the Air Navigation Act (Chapter 365), a navigation officer and a researcher or senior academic recognized as an accredited professional.”

1See Gazette Order on the 31 January 2014.


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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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