United States-Sri Lanka Tax Treaty

Sri Lanka’s International Tax Compliance Rules

Quick Summary.  A South Asian island nation, Sri Lanka is a constitutional republic located in the Indian Ocean and bordered by the Bay of Bengal and the Arabian Sea.

The Sri Lankan legal system is a product of diverse cultural influences. Criminal law is fundamentally British. Basic civil law is Roman-Dutch. Laws pertaining to marriage, divorce, and inheritance can vary based on religious affiliation. Sri Lankan commercial law is almost entirely statutory. Rule-making authority lies with Parliament. Laws are published in Acts of Parliament.

Several important legislative enactments regulate commercial matters: the Board of Investment Law; the Intellectual Property Act; the Companies Act; the Securities and Exchange Commission Act; the Banking Act; the Inland Revenue Act; the Industrial Promotion Act; and the Consumer Affairs Authority Act. The Sri Lankan court system consists of the Supreme Court, the Court of Appeal, provincial high courts and the Courts of First Instance (district courts with general civil jurisdiction) and magistrate courts (with criminal jurisdiction). 

The government’s economic policies contained in Vision 2025, published in September 2017, aim to position Sri Lanka as an export-oriented economic hub at the center of the Indian Ocean.  The United States is the largest single market for Sri Lankan exports.

Foreign ownership is allowed in most sectors, although the land ownership law prohibits foreigners from owning land with some exceptions.

Sri Lanka taxes residents on their global income while non-residents are taxed on income arising in or derived from Sri Lanka.  Sri Lanka has a self-assessment regime for income tax payments.

Sri Lanka passed a new Inland Revenue Act in 2017. The new law, which came into force on April 1, 2018 aims to provide a tax framework that gives more certainty to investors and taxpayers; modernize rules related to cross-border transactions to address tax avoidance; broaden the tax base and expand income tax sources. A three-tier corporate tax structure has also been introduced. The standard rate of tax is 28 percent while a 14 percent rate applies to certain identified industries. The law also contains a new investment incentive regime. It has introduced capital gains tax on capital gains and fines and/or imprisonment for tax evasion. The tax law imposes personal liability on company directors.

Sri Lanka signed a bilateral taxation treaty with the United States in 1985, which was amended in 2002.

The government has signed investment protection agreements with the United States, as well as with the following countries: Australia, Belgium-Luxembourg, China, Czech Republic, Denmark, Egypt, Finland, France, Germany, Indonesia, India, Iran (not in force), Italy, Japan, Korea, Kuwait (not in force), Malaysia, the Netherlands, Norway, Pakistan, Romania, Singapore, Sweden, Switzerland, Thailand, the United Kingdom and Vietnam (not in force.) Under Article 157 of the Sri Lankan Constitution, investment protection agreements enjoy the force of law and no legislative, executive, or administrative action can contravene them.

Corporate financial reporting requirements in Sri Lanka are outlined in several laws, which include the Companies Act No. 7 of 2007, Securities and Exchange Commission Act No. 36 of 1987, Banking Act No. 30 of 1988, Finance Business Act of 2012, Regulation of Insurance Industry Act No. 27 of 2011, Inland Revenue Act 24 of 2017, Microfinance Act No. 6 of 2016, Finance Act No. 38 of 1971, and Accounting and Auditing Standards Act No. 15 of 1995.

Income Tax Treaty between the United States and Sri Lanka

Sri Lanka is a member of the World Trade Organization (WTO) and the United Nations (UN).  

Treaty Documents.  

• PROTOCOL AMENDING THE CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME SIGNED AT COLOMBO MARCH 14, 1985
• Technical Explanation of the Convention between the Government of the United States of America and the Government of the Democratic Socialist Republic of Sri Lanka for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income Signed at Colombo March 14, 1985

Currency.  SLR—Sri Lankan Rupee (LKR)

Common Legal Entities.  Sri Lanka limited liability company, public limited company, branches.  

Tax Authorities.  Department of Inland Revenue

Tax Treaties.  Sri Lanka is a member of the South Asian Association for Regional Cooperation (SAARC) Multilateral Treaty, as well as more than 40 bilateral tax treaties. Sri Lanka has also signed bilateral agreements with Australia, Bangladesh, Bahrain, Belgium, Canada, China, Czech Republic, Denmark, France, Finland, Germany, Hong Kong, India, Indonesia, Iran, Italy, Japan, Korea, Kuwait, Malaysia, Mauritius, Nepal, Netherlands, Norway, Oman, Pakistan, Philippines, Poland, Qatar, Romania, Russia, Saudi Arabia, Singapore, Sweden, Switzerland, Thailand, UAE, U.K., Vietnam, Seychelles, Belarus, Palestine, and Luxembourg.

In addition, Sri Lanka is a signatory to Foreign Account Tax Compliance Act provisions (FATCA).

Corporate Income Tax Rate.  28%

Individual Tax Rate. 18%

Corporate Capital Gains Tax Rate.  10%

Individual Capital Gains Tax Rate.  10%

Residence.  Individual tax residence is established where a taxpayer is present in Sri Lanka for 183 day during any 12-month period or where other context-specific criteria may be applicable.  

Withholding Tax.

            Dividends. 14%

            Interest. 5%

            Royalties. 14%

Transfer Pricing.  Arm’s length principle.  Subject to statutory reporting and document maintenance requirements.  

CFC Rules.  No.  

Hybrid Treatment.

Inheritance/estate tax.  No.  

Tax Treaty Network – International Tax Attorneys

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