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5.1. Tax Base for Resident Entities

Residents are assessed to tax on their worldwide income.

Dividends

Residents are assessed to tax on their worldwide income.

Dividends

Dividends paid by a resident company to another resident company are generally subject to tax in the hands of the recipient. However, dividends received are excluded from tax at the level of the recipient in the following cases:

  • Tax was withheld from such dividends;
  • The dividends are exempt from tax under specific rules (see below); or
  • The dividends consist of any part of the amount of dividends received by the payer from another resident company.

Effective 1 January 2020, dividends paid by a resident company which is engaged in any one or more of the following businesses and within the meaning of an agreement entered into with the Board of Investment of Sri Lanka are exempt from tax:

  • Entrepot trade involving import, minor processing, and re-export;
  • An offshore business where goods can be procured from one country or manufactured in one country and shipped to another country without bringing the same into Sri Lanka;
  • Providing front-end services to clients abroad;
  • Headquarter operations of leading buyers for management of financial supply chain and billing operations; and
  • Logistic services such as bonded warehouse or multi-country consolidation in Sri Lanka.

Effective 1 April 2021, tax payable on gains and profits from dividends by multi-national companies is to be reduced by 25% for year of assessment commencing from 1 April 2021, and reduced by 50% for 2 years for succeeding years of assessment (2022-23 and 2023-24), subject to fulfillment of either of the following conditions:

  • There is a 30% or more increase in exports (other than specified undertakings) in the assessment year in comparison to the immediately preceding assessment year; or
  • There is 50% or more increase in exports (other than specified undertakings) in the assessment year commencing from 1 April 2022 and maintains such status in the subsequent assessment year in comparison to the assessment year 2020-21.

Capital Gains

Capital gains are gains derived from the disposal of an investment asset. Investment asset means a capital asset held as part of investments. A capital asset includes land and building, membership interest in a company, partnership or trust, security or other financial assets, etc. but excludes trading stock and depreciable asset.

It is clarified that the consideration received for the purpose of capital gains must be based on the amount received or receivable or the assessed value at the time of realization of such asset, whichever is higher. Assessed value means the value at the time of realization, which should be certified by a professionally qualified valuer in a valuation report.

Capital gains are subject to capital gains tax with certain exemptions.