SRI LANKA Law and Practice Contributed by: Ayanthi Abeyawickrama, Varners
The Ministry of Labour and the Department of Labour are responsible for enforcing labour laws and for overseeing industrial relations. These institutions play a central role in dispute reso - lution and in maintaining compliance across all sectors. 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 amended). 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) sys - tem, under which the employer is required to deduct and remit tax at source on employment income. For the 2024/2025 year of assess - ment, tax applies to annual employment income exceeding LKR1.2 million, and from 1 April 2025, the threshold has increased to LKR1.8 million per annum. Tax is imposed at progressive rates ranging from 6% to 36% based on the employ - ee’s chargeable income. APIT applies to both residents and non-residents who derive income from employment in Sri Lan - ka. 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 security taxes or national insurance-style con - tributions beyond the mandatory Employees’ Provident Fund (EPF) and Employees’ Trust Fund (ETF). Under the EPF scheme, employers are required to contribute 12% of the employ -
ee’s monthly salary, while employees contribute 8%. In addition, employers must contribute 3% to the ETF. No other payroll taxes are levied on employers in Sri Lanka. 5.2 Taxes Applicable to Businesses Income Tax Companies are subject to taxation if they: • are incorporated in Sri Lanka; • are 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 establish - ments. The standard corporate income tax rate is 30%, applicable to most companies. However, a high - er rate of 45% applies to businesses involved in gaming, betting, liquor and tobacco. Withhold - ing tax (WHT) in Sri Lanka applies to passive and cross-border payments made to non-residents 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, manage - ment fees, rent and contract payments – 14%. These rates may be reduced where a relevant Double Taxation Avoidance Agreement (DTAA applies), provided that the recipient furnishes a valid certificate of residence and other docu - mentation to prove beneficial ownership and eligibility for treaty benefits.
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