SRI LANKA Law and Practice Contributed by: Ayanthi Abeyawickrama, Varners
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 Stra - tegic Importance (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 promote international commercial and financial services, and applicants must satisfy criteria related to capital inflow, foreign exchange earnings, and 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 uni - fied filing status under the law. Each company within a corporate group is treated as a sep - arate legal and taxable entity, and there is no mechanism for filing a consolidated tax return or pooling taxable profits and losses across group companies. Accordingly: • each company must file its own tax return, compute its tax liability independently, and comply separately with all payment and reporting obligations; and • losses incurred by one company cannot be transferred or set off against the income of another company within the same group, even if 100% owned. global business activity. 5.4 Tax Consolidation However, a company may carry forward its own unrelieved tax losses and offset them against future taxable income for up to six consecutive
years, subject to continuity of ownership and continuity of business activity requirements. 5.5 Thin Capitalisation Rules and Other Limitations Sri Lanka applies thin capitalisation rules under the Inland Revenue Act, No 24 of 2017 (as amended), which place a cap on the amount of interest expense (financial cost) that a company may deduct for tax purposes. These rules are intended to discourage excessive debt financ - ing and erosion of the tax base through interest deductions. Under the current regime, companies must ensure that the level of debt is reasonable in relation to their capital structure (ie, the compa - ny’s share capital and reserves). The deductible financial cost is calculated based on: • the value of the financial instruments that gave rise to the cost; and • four times the company’s issued share capital and reserves at year-end (excluding any reval - uation reserves). If the company’s actual financial cost exceeds the amount computed under this rule, the excess is disallowed as a tax deduction for that year. However, the disallowed portion may be carried forward and deducted in subsequent years, sub - ject to the same limitation. The regime is purpose-built to counter base erosion and profit shifting (BEPS) in line with international best practice. These rules work in tandem with transfer pricing regulations, which require all related-party financing arrangements to reflect arm’s length terms and be properly documented.
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