Understanding Sri Lanka’s Business Tax Landscape
Sri Lanka’s Inland Revenue Act (2017, amended) governs corporate income tax, capital gains, and investment incentives. Recent changes & circulars make choosing the right structure—company, trust, partnership—especially important. (ird.gov.lk)
Key Incentives & Rates (Effective from June / FY 2026-27)
| Incentive / Rate | Applies to | Rate & Conditions |
|---|---|---|
| Capital Gains Tax (CGT) | Individuals & partnerships | 15% on gains from realization of investment assets. (ird.gov.lk) |
| CGT for trusts / unit trusts / NGOs | Trusts, mutual funds etc. | 30% rate. (ird.gov.lk) |
| Enhanced Capital Allowance (ECA) | New business undertaking investing in tangible depreciable assets (not intangible), with investment > USD 250,000 | 100% deduction in year of assessment. (ird.gov.lk) |
Structuring Your Entity for Benefits
- Company (Private Ltd) – usual choice; CGT & ECA apply; profits subject to corporate taxes; careful planning of capital gains events needed.
- Trust / Unit Trust / NGO – higher CGT rate (30%); avoid using trusts for pure investment income unless required; better for charitable or nonprofit purposes.
- Partnership / Sole Proprietorship equivalent – individuals/partnerships get lower CGT (15%); suitable for joint ventures or small enterprises.
Example Structures
- Example 1: Tech hardware startup invests USD 300,000 into plant & machinery—company structure allows full ECA in first year reducing taxable profit significantly.
- Example 2: An NGO wants to launch an income-generating activity. Being NGO means 30% CGT on disposal of funding instruments, possibly higher for income tax—if possible, separately set up a company arm for taxable operations.
Compliance & Other Tips
- File income / capital gains returns properly and on time. Circular SEC/PN/IT 2026/02 (Sri Lanka) outlines revised CGT rates and application from 3 June 2026. (ird.gov.lk)
- Investment thresholds and asset types matter—ensure eligible assets are depreciable, owned and used in the undertaking.
- For foreign investors, check withholding on dividends, profit repatriation, local substance requirements, transfer pricing rules.