How taxes will affect Service Exporters in Sri Lanka

With the Inland Revenue (Amendment) Act, 2025 taking effect from April 1, 2025, Sri Lanka’s service exporters—both individuals and corporates—will experience significant tax changes. The new amendments remove previous tax exemptions on foreign-sourced income and service exports, making such income taxable at 15%, provided the earnings are remitted through a bank in Sri Lanka.

This article explores the tax implications, key changes, and how Foreign Tax Credits (FTC) can help mitigate the impact for those already taxed in a foreign country—even in the absence of a Double Taxation Agreement (DTA).

1. Impact on Individuals Engaged in Service Exports

a) Services Rendered Outside Sri Lanka

Previously, income from services rendered in or outside Sri Lanka to a foreign client was fully tax-exempt if remitted to Sri Lanka. However, from April 1, 2025, such income will be:

  • Taxed at a maximum rate of 15% if:
    • The payment is received in foreign currency, and
    • It is remitted to Sri Lanka through a bank in Sri Lanka.
  • Taxed at regular progressive rates (up to 36%) if the income is not remitted via a bank in Sri Lanka.

b) Foreign Source Income

Similarly, income earned from a foreign source (other than direct service exports) will now be:

  • Taxed at a maximum of 15% if received in foreign currency and remitted to Sri Lanka through a bank in Sri Lanka.
  • If not remitted via a bank in Sri Lanka, it could be subject to progressive individual tax rates, up to 36%.

c) Claiming Foreign Tax Credit Under Section 80

  • As per Section 80 of the Inland Revenue Act, a resident person (other than a partnership under Section 53(1) or a trust under Section 57(2)) can claim a Foreign Tax Credit (FTC) for any foreign income tax paid, provided the tax was paid on the person's assessable foreign income for the year.
  • This means that a taxpayer can claim a tax credit even if there is no Double Taxation Agreement (DTA) between Sri Lanka and the foreign country.
  • Accordingly:
    • If the foreign country has already taxed the income at 15% or more, there will be minimal or no additional tax payable in Sri Lanka.
    • However, if the foreign income is not taxed abroad, Sri Lanka will impose the full 15% tax on such income.

d) Examples for Individuals

Scenario Tax Treatment Before April 1, 2025 New Tax Treatment From April 1, 2025 Foreign Tax Credit Applicability
A Sri Lankan freelancer providing IT services to a US client, paid in USD, and remitted via a bank in Sri Lanka. Fully tax-exempt Maximum 15% tax Can claim FTC if taxed in the US
A Sri Lankan architect providing design consultancy to an Australian company, income kept in an offshore account. Fully tax-exempt Likely taxed at progressive rates (up to 36%) No FTC if income is not taxed abroad
A Sri Lankan doctor providing telemedicine services to foreign patients and getting paid in GBP, with tax deducted at source in the UK. Fully tax-exempt Maximum 15% tax Can claim FTC if UK tax is deducted

2. Impact on Corporates Engaged in Service Exports

a) Services Rendered Outside Sri Lanka

  • New Corporate Tax Treatment:
    • Previously, service export income was fully tax-exempt.
    • From April 1, 2025, companies that export services and receive payments in foreign currency will now be taxed at a flat 15%.

b) Foreign Source Income for Corporates

  • Any foreign-source income earned and remitted via a bank in Sri Lanka will also be taxed at a flat 15%.
  • If earnings are kept offshore, they might be taxed at regular corporate tax rates (up to 30%).

c) Foreign Tax Credit for Corporates

  • If the company’s foreign earnings are taxed abroad, they can claim a Foreign Tax Credit under Section 80, even if there is no Double Taxation Agreement.
  • If the income is not taxed abroad, Sri Lanka will impose the full 15% tax.
  • Since many countries impose a 15% tax on service exports, the impact may be minimal for businesses operating in jurisdictions with tax treaties.

d) Examples for Corporates

Scenario Tax Treatment Before April 1, 2025 New Tax Treatment From April 1, 2025 Foreign Tax Credit Applicability
A Sri Lankan software company providing services to a US client, paid in USD, and remitted via a bank in Sri Lanka. Fully tax-exempt Flat 15% corporate tax Can claim FTC if taxed in the US
A Sri Lankan BPO company providing data processing services to EU clients, with payments received in EUR. Fully tax-exempt Flat 15% corporate tax Can claim FTC if taxed in the EU
A Sri Lankan marketing agency earning income from foreign customers but keeping funds in an offshore account. Fully tax-exempt Likely taxed at regular corporate tax rates (up to 30%) No FTC if not taxed abroad

3. Key Differences Between Individual and Corporate Taxation

Category Individual Taxation Corporate Taxation
Tax Rate Maximum 15% (if remitted via a bank in Sri Lanka) Flat 15%
Applicable Conditions Foreign service income or foreign source income must be remitted via a bank in Sri Lanka Foreign earnings must be remitted via a bank in Sri Lanka
If Not Remitted via Bank Progressive tax rates (up to 36%) may apply Standard corporate tax rates (up to 30%) may apply
Foreign Tax Credit Can claim FTC under Section 80, even without a Double Taxation Agreement (DTA) Can claim FTC under Section 80, even without a Double Taxation Agreement (DTA)

4. Key Takeaways for Service Exporters

  1. Foreign service income and foreign source income will now be taxed.

    • Individuals: Maximum 15% tax rate (progressive tax if not remitted).
    • Corporates: Flat 15% tax rate.

  2. Foreign Tax Credits (FTCs) can reduce tax liability.

    • As per Section 80, an FTC can be claimed even if there is no Double Tax Agreement (DTA).
    • If the income is taxed abroad, taxpayers can claim a credit against Sri Lankan taxes.
    • If no foreign tax is paid, Sri Lanka imposes the full 15% tax.

  3. Foreign earnings should be remitted through a bank in Sri Lanka to benefit from the 15% tax cap.

    • If not remitted, higher tax rates (up to 36% for individuals and 30% for corporates) may apply.

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