Strike it rich with tax-free investments!
Sri Lanka’s Act. No. 10 of 2021, published in the Official Gazette on May 13, amends the Inland Revenue Act No 24 of 2017 to introduce a number of opportunities for foreign investment in Sri Lanka. Act. No. 10 provides new exemptions and concessionary rates for residents and nonresidents.
Exemptions on individuals
The amended Act provides several exemptions on interest income earned on any foreign currency holdings. The interest income derived from any foreign currency account in any commercial bank or in any specialized bank with the approval of the Central Bank of Sri Lanka and the interest earned from a ‘Special Deposit account’ opened maintained with an authorized dealer in foreign currency or Sri Lankan rupees is exempt. Furthermore, any foreign-source income in a foreign currency that is remitted through a bank to Sri Lanka is also exempt.
Any income earned by nonresidents by way of interest, discount, or gain on sovereign bonds in local or foreign currency is exempt. This includes the gain from the realization of Sri Lanka international sovereign bonds issued by or on behalf of the government of Sri Lanka. Further, interest on a loan granted by a nonresident to a resident individual or the government of Sri Lanka is also exempt. Dividends paid to nonresidents are also tax free from 1 January 2020.
Exemptions for industries
In addition to the source-based exemptions, the government introduced a relaxed tax framework to encourage foreign investment by extending exemptions to various industries. In a bid to promote real estate investment trusts (REITSs), tax concessions have been granted for gains made through a Sri Lanka REIT.
A nonresident person who carries on a business in Sri Lanka through a permanent establishment is subject to profit remittance tax at the rate of 14%; however, the applicable tax rate will be 0% if the total income earned is retained in Sri Lanka for three years and that income is reinvested in Sri Lanka. Any amount derived by a nonresident person from laboratory services or standards certification services on or after January 1, 2020, is also exempt.
As the IT industry is in an upswing, the Act exempts the income earned by any person providing information technology and enabled services.
A key feature of the new Act is the introduction of tax holidays for certain sectors of the economy. For instance, the income earned by any Vocational Education Institution that is standardized under the Technical and Vocational Education and Training (TVET) concept is exempt for a period of five years. A seven-year tax exemption period is provided for any ‘renewable energy project,’ and a five-year tax exemption period for any business commenced on or after 1 April 2021 by taxpayers who sell construction materials recycled at a site established in Sri Lanka, if certain conditions are satisfied. Similarly, the income earned by any person engaging in agro farming is exempt for a period of five years.
To encourage the listing of companies in the Colombo Stock Exchange, the aggregate income tax payable by any company is halved if it’s listed in the Exchange prior to December 31, 2021.
In spite of the heavy toll of the COVID-19 pandemic on Sri Lanka’s economy and its people, the country is striving to nurture a prosperous, resilient and sustainable economy by encouraging foreign direct investment.