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  • SRI LANKA

    World Wide Tax News Issue 55 - June 2020

Land of promising tax-friendly investment returns

The tax framework restructuring initiated by the country’s Executive has resulted in many tax exemptions and concessions to non-resident investors of Sri Lanka. A noteworthy point is that some of these changes have been effected on a retrospective basis, enabling non-resident investors to benefit from tax restructuring already undertaken.  

Measures to promote foreign investment

Since 1 April 2018, when the current Inland Revenue Act No. 24 of 2017 (IRA) was made effective, a stringent Tax framework has been in effect, with limited exemptions to non-residents. However, since November 2019, the Executive has been exploring means to ensure non-residents reap better rewards from investments made in Sri Lanka through exploiting the benefits of a relaxed Tax framework.

CEIC Data indicates that while the country’s Direct Investment Abroad has marked a proven expansion, its Foreign Direct Investment has also increased. In order to further the positive interest in Foreign Direct Investment, the Executive has taken a turnaround step of granting tax exemption on dividend income received by non-resident members from resident companies, from 1 January 2020. This is seen as a 14% additional return on investment as, had the exemption not been granted, such dividends would have been liable to Withholding Tax (WHT) at 14%, or the applicable DTA rate.

Sri Lanka, working on the country’s development needs, has attracted many contributors from across the world towards raising funds for its massive advancement projects. As a means of aiding contributors, interest income of any non-resident person on loans to the Government of Sri Lanka or any person in Sri Lanka has been made completely exempt from Income Tax retrospectively, with effect from 1 April 2018. Previously, interest paid to non-residents was subject to a WHT of 5% or the DTA rate, where applicable.

Another significant development in the tax law is the complete tax exemption on interest income accrued or derived on foreign currency accounts maintained at any commercial bank or in any specialised bank. This is a special exemption, as it was granted on an equal basis to both resident and non-resident individuals, with effect from 1 January 2020. Foreign currency interest income would otherwise have been subject to WHT at 5%, or the DTA rate where applicable in the case of non-residents.

Moreover, to enlarge the consumer market, introduce newer product categories, and provide a competitive edge to local producers and manufacturers, the Executive has undertaken to provide tax incentives to non-residents who provide laboratory services and standard certification services. This is achieved by providing an additional 14% income to such service providers. This additional benefit is derived as WHT on such fees was made exempt from income tax by the latest Executive instructions.

Further, with effect from 1 April 2018, any income earned by non-resident persons (other than a Sri Lankan permanent establishment) by way of interest, discount or realisation of any gain on any sovereign bond denominated in local or foreign currency has been made exempt from Tax in Sri Lanka. This includes Sri Lanka Development Bonds issued by or on behalf of the Government of Sri Lanka.

COVID-19 special exemption

As a special measure, the Executive has decided to suspend all restrictions on foreign currency inflows into Sri Lanka. The Central Bank of Sri Lanka (CBSL) has therefore invited all Sri Lankans and well-wishers living in Sri Lanka and abroad to consider depositing their savings and other funds in foreign currency within the Sri Lankan banking system during the three month period commencing from 2 April 2020. The CBSL guaranteed that there will be no hindrance from the Government regarding acceptance of such foreign currency deposits, and ensured flexibility in converting deposited funds into foreign currency as and when required. These forex remittances have been made exempt from the exchange control regulations and taxes, and will be protected under banking secrecy provisions.

Conclusion

Despite the challenges faced, Sri Lanka has fought strongly against terrorism, and is currently moving strongly against COVID-19. During this journey, it has implemented many financially viable economic decisions, while also creating an atmosphere for investor-friendly portfolios in Sri Lanka.

Bearing in mind that the above-mentioned exemptions are proposals to the IRA, pending the expected formal amendments being made to the Act, Sri Lanka is seen as primed to grow economically over time.

Sarah Afker
[email protected]

Dinusha Rajapakse
[email protected]