SRI LANKA Law and Practice Contributed by: Ayanthi Abeyawickrama, Varners
OECD’s Two-Pillar Solution As of mid-2026, Sri Lanka has not implemented Pillar Two of the OECD’s Two-Pillar Solution and has not introduced a Qualified Domestic Minimum Top-Up Tax (QDMTT). The country has not signed the OECD/ G20 Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, and is therefore not expected to qualify for safe harbour treatment under the OECD’s transi - tional rules. Companies operating in Sri Lanka that are part of multinational groups above the EUR750 million threshold should monitor developments, par - ticularly if the parent entity is in a Pillar Two-adopting jurisdiction, as top-up taxes may be triggered at the group level under the Income Inclusion Rule (IIR) or Undertaxed Profits Rule (UTPR). 5.3 Available Tax Credits/Incentives Sri Lanka offers a range of tax incentives and credits aimed at promoting investment, exports, innovation and sectoral development. These incentives are pri - marily made available under the Inland Revenue Act, No 24 of 2017, the Board of Investment of Sri Lanka Law, No 4 of 1978 (which continues to be applied on a transitional basis pending the operationalisation of the Economic Transformation Act, No 45 of 2024) and the Strategic Development Projects Act, No 14 of 2008. Under the Inland Revenue Act, eligible businesses may claim enhanced capital allowances for qualify - ing investments in plant, machinery and infrastruc - ture, particularly in priority sectors such as renewable energy, agriculture and manufacturing. Enterprises approved by the BOI may benefit from customs duty exemptions and simplified administra - tive procedures, depending on the scale of invest - ment, export orientation and employment genera - tion. These benefits are typically granted through an agreement entered into with the BOI and are subject to compliance with the policy guidelines. Projects recognised as Strategic Development Pro - jects (SDPs) under the Strategic Development Pro - jects Act, No 14 of 2008 may be granted significant tax concessions, including: • tax holidays of up to 25 years;
• exemptions from VAT, customs duty and PAL on imports of project-related goods and services; and • exemptions from income tax and other levies, subject to meeting prescribed thresholds in rela - tion to capital investment, job creation and national economic importance – approval is granted by the Cabinet of Ministers, based on a recommendation from the Minister of Finance. In the Colombo Port City Special Economic Zone, businesses that obtain Business of Strategic Impor - tance (BSI) status from the Cabinet of Ministers, based on a recommendation from the Colombo Port City Economic Commission, are eligible for full exemption from all taxes, duties and levies for a period of up to 25 years. This includes income tax, VAT, WHT and stamp duty. The Port City regime is designed to pro - mote international commercial and financial services, and applicants must satisfy criteria related to capital inflow, foreign exchange earnings and global business activity. 5.4 Tax Consolidation Sri Lanka does not permit tax consolidation under the Inland Revenue Act, No 24 of 2017 (as amended). There are no provisions for group relief, intra-group transfer of tax credits, or unified filing status under the law. Each company within a corporate group is treated as a separate legal and taxable entity, and there is no mechanism for filing a consolidated tax return or pooling taxable profits and losses across group com - panies. Accordingly: • each company must file its own tax return, com - pute its tax liability independently, and comply separately with all payment and reporting obliga - tions; and • losses incurred by one company cannot be trans - ferred or set off against the income of another company within the same group, even if 100% owned. However, a company may carry forward its own unre - lieved tax losses and offset them against future tax - able income for up to six consecutive years, subject to continuity of ownership and continuity of business activity requirements.
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