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9.1. Unilateral and Treaty Based Methods Available for the Elimination or Mitigation of Double Taxation

In general, a foreign tax credit may be claimed for a year of assessment for any foreign income tax paid and to the extent to which the foreign income tax is paid with respect to the assessable foreign income for the year. Foreign tax credits claimed:

  • Must be calculated separately for each year of assessment and separately for assessable foreign income from business, investment, or other source and further separately for each gain from the realization of an investment asset; and
  • With respect to each calculation, may not exceed the average rate of Sri Lankan income tax for the year applied to the person’s assessable foreign income.

Further, a foreign tax credit will only be allowed 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. Foreign tax credit carry-forward or carry-backs do not exist, and any unused credit will not be refunded.

Where a relevant tax treaty is effective, the treaty provisions for the relief of double taxation will apply.

Below is a summary of the available methods for various income tax streams based on domestic law.

Royalty Copyright NC
Capital Gains NC
Dividends NC
Interest NC
Royalty Patent NC
Sales NC
Service Management NC
Service Technical NC
Royalty Trademark NC

The credit column shows the type of foreign tax credit granted when the receiving country receives a payment.  Four abbreviations are used for the type of foreign tax credit available:

  • NC means no credit but foreign withholding taxes can be deducted.
  • OC means ordinary credit, i.e., credit for foreign withholding taxes (e.g., withholding taxes).
  • IC means indirect credit, i.e., credit for underlying corporate taxes as well as foreign withholding taxes.
  • ND means no credit and no deduction for any foreign withholding taxes incurred.