Sri Lanka

Corporate - Tax credits and incentives

Last reviewed - 17 February 2020

The following exemptions and incentives granted under the provision in another law or an agreement that is in force on date of commencement (1 April 2018) of the New Inland Revenue Act, No. 24 of 2017 will continue to be in force:

  • Any unexpired part of the exemptions as at 31 March 2018 granted under sections 16C, 16D, 16E, 17, 17A, 18, 20, 24A of the Inland Revenue act No. 6 of 2010 will continue to be exempt under the new Inland Revenue Act No. 24 of 2017.
  • Fully or partly exempt profits or profits taxed at reduced rate of income tax under the provisions of previous Inland Revenue Acts of an enterprise/company that has entered into an agreement with the Board of Investment of Sri Lanka under section 17 of the Board of Investment of Sri Lanka Law will continue to be exempt or be liable to tax at the rate provided in the agreement under the new Inland Revenue Act No. 24 of 2017 as well. Apart from this exemption, the distribution of divident is also exempted if it is provided in such agreement.

    Any unexpired part of the profits and income liable for concessionary rates under 59D, 59I, 59J, 59K, 59L, 59M of the Inland Revenue Act, No. 10 of 2006 as at 31 March 2018 will continue as specified in those provisions under the new Inland Revenue Act No. 24 of 2017 as well.

Further, the carried forward notional tax credit relating to treasury bills and treasury bonds, as per the Inland Revenue Act, No. 10 of 2006, can be carried forward to be set off against the income tax liability within three consecutive years from the year of assessment 2018/19.

Enhanced depreciation allowance

A person who invests in Sri Lanka (other than the expansion of an existing business) during a year of assessment shall be granted enhanced depreciation allowances in addition to the depreciation allowances, computed on the expenses incurred during the year of assessment on depreciation assets, other than intangibles assets.

Investment amount during the year of assessment Place of investment Rate of depreciation (%)
Exceeds 3 million United States dollars (USD) but does not exceed USD 100 million Any part of Sri Lanka other than Northern Province 100
Exceeds USD 100 million Any part of Sri Lanka other than Northern Province 150
Exceeds USD 250 million by a state-owned company On the assets and liabilities of a state-owned company in any part of Sri Lanka 150
Exceeds USD 3 million Northern Province 200

Exemption of certain dividends from WHT

If a company has incurred more than USD 1,000 on depreciable assets (other than intangible assets) in Sri Lanka, the dividends paid by such company to a non-resident member does not attract WHT in Sri Lanka. Effective from 1 April 2020 all the dividends paid to non resident persons will be exempt from income tax. 

Exemption of employment income from WHT

If a company that pays dividends has incurred more than USD 1,000 on depreciable assets (other than intangible assets) in Sri Lanka, where the number of expatriate employees is not exceeding 20, the rate of tax to be withheld from a payment made by that company (employer) to an expatriate employee shall be zero.

Foreign tax credit

A foreign tax credit is to be granted in respect of any foreign income tax paid or payable in respect of foreign income, which should be calculated separately for each year of assessment, separately for assessable foreign income from each employment, business, investment, or other source, and further separately for each gain from the realisation of an investment asset. Such credit should not exceed the average rate of Sri Lankan income tax of the person for the year, applied to the person’s assessable foreign income.

A foreign tax credit shall be allowed only if the foreign income tax is paid within two years after the end of the year in which the foreign income to which the tax relates was derived by the resident person or within such further time as the CGIR may allow.