A company is treated as resident for tax purposes in Sri Lanka for a year of assessment if it is incorporated or formed under the laws of Sri Lanka, registered or the principal office is in Sri Lanka, or at any time during the year the management and control of the affairs of the company are exercised in Sri Lanka.
Permanent establishment (PE)
PE is a treaty concept in Sri Lanka. If a non-resident company creates a PE in Sri Lanka in terms of a double tax treaty (DTT), then such company is liable to Sri Lanka CIT. In the absence of a DTT, the domestic tax laws will apply. However, the New Inland Revenue Act, No. 24 of 2017 incorporates the concept of a ‘permanent establishment’, which is defined to mean a place in Sri Lanka where a non-resident person carries on business or that is at the disposal of the person for that purpose and includes:
- a place in Sri Lanka where a person has, is using, or is installing substantial equipment or substantial machinery
- a place in Sri Lanka where a person is engaged in a construction, assembly, or installation project for 90 days or more, including a place where a person is conducting supervisory activities in relation to such a project
- the provision of services in Sri Lanka, but only if activities of that nature continue (for the same or a connected project) for a period of 183 days or more in any 12-month period, and
- a place in Sri Lanka where an agent performs any function on behalf of the business of a non-resident person:
- including, in the case of an insurance business, the collection of premiums or the insurance of risks situated in Sri Lanka, but
- excluding a case involving a general agent of independent status acting in the ordinary course of business as such.
Further, under the transfer pricing provisions of the New Act, ‘permanent establishment’ is defined:
- in relation to a country with which an agreement has been entered into on avoidance of double taxation means, a permanent establishment defined in an agreement for the relief of double taxation where an agreement is in force between the government of Sri Lanka and the government of any territory in which any person and their agencies, branches, or establishments in Sri Lanka is resident, or
- in relation to a country with which an agreement has not been entered into on avoidance of double taxation, includes any business connection or a fixed place of business through which the business of the enterprise is wholly or partly carried out irrespective of the number of days of such business carried out in Sri Lanka.