SRI LANKA Law and Practice Contributed by: Ayanthi Abeyawickrama, Varners
central role in dispute resolution and maintaining com - pliance across all sectors.
The standard corporate income tax rate is 30% appli - cable to most companies. However, a higher rate of 45% applies to businesses involved in gaming, bet - ting, liquor and tobacco. Withholding tax (WHT) in Sri Lanka applies to passive and cross-border pay - ments made to non-resident and resident persons. The applicable rates are as follows: • dividends – 15%; • interest – 10%; and • all other payments (excluding dividends) such as royalties, technical service fees, management fees, rent and contract payments – 14%. These rates may be reduced where a relevant double taxation avoidance agreement (DTAA) applies, pro - vided that the recipient furnishes a valid certificate of residence and other documentation to prove benefi - cial ownership and eligibility for treaty benefits. VAT and SSCL Value added tax (VAT) is levied at a standard rate of 18%. The simplified VAT (SVAT) scheme previously available to exporters and BOI companies has been abolished, with effect from October 2025, and VAT- registered entities now rely on a refund mechanism to recover input VAT. With effect from 1 July 2026, the VAT rate on financial services increases from 18% to 20.5%, and VAT applies to digital services supplied by non-resident providers to persons in Sri Lanka through electronic platforms, under the Value Added Tax (Amendment) Act, No 4 of 2025. A 2.5% Social Security Contribution Levy (SSCL) applies to businesses with quarterly turnover exceed - ing LKR15 million rupees or annual turnover exceed - ing LKR60 million, unless exempt. SSCL is calculated on turnover, not profit, and is separate from income tax. Other Taxes In addition to the foregoing, companies must pay stamp duty on specified instruments and customs and excise duties depending on the nature of the busi - ness.
5. Tax Law 5.1 Taxes Applicable to Employees/ Employers
The taxation of employment income is governed by the Inland Revenue Act, No 24 of 2017, (as amend - ed). Both employees and employers are subject to tax obligations arising from the employment relationship. Employees are liable to pay income tax through the Advance Personal Income Tax (APIT) system, under which the employer is required to deduct and remit tax at source on employment income. For the 2024/2025 year of assessment, tax applies to annual employ - ment income exceeding LKR1.2 million, and from 1 April 2025 the threshold has increased to LKR1.8 mil - lion per annum. Tax is imposed at progressive rates ranging from 6% to 36% based on the employee’s chargeable income. APIT applies to both residents and non-residents who derive income from employment in Sri Lanka. Residency for tax purposes is determined based on physical presence and other criteria under the Inland Revenue Act. Sri Lanka does not impose any separate social secu - rity taxes or national insurance-style contributions beyond the mandatory Employees’ Provident Fund (EPF) and Employees’ Trust Fund (ETF). Under the EPF scheme, employers are required to contribute 12% of the employee’s monthly salary, while employ - ees contribute 8%. In addition, employers must con - tribute 3% to the ETF. There are no other payroll taxes levied on employers in Sri Lanka. 5.2 Taxes Applicable to Businesses Income Tax Companies are subject to taxation if they are incor - porated in Sri Lanka, managed or controlled from Sri Lanka, or derive income from a source within Sri Lanka. The residency test under the Inland Revenue Act, No 24 of 2017 applies to both local and foreign entities, including permanent establishments.
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