Entity Setup
Setting up an Entity in Sri Lanka: How to Maximize Tax Incentives (ECA, CGT & Structure)
Sri Lanka offers generous incentives like Enhanced Capital Allowances and varied capital gains tax rates—this guide shows how to structure your business entity to benefit most.
By NomadicTax Research Team • 5-8 min read • September 15, 2026
## 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](https://www.ird.gov.lk/en/Lists/Latest%20News%20%20Notices/Attachments/793/SEC_PN_IT_2026-02_E.pdf?utm_source=openai))
## 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](https://www.ird.gov.lk/en/Lists/Latest%20News%20%20Notices/Attachments/793/SEC_PN_IT_2026-02_E.pdf?utm_source=openai)) |
| CGT for trusts / unit trusts / NGOs | Trusts, mutual funds etc. | **30%** rate. ([ird.gov.lk](https://www.ird.gov.lk/en/Lists/Latest%20News%20%20Notices/Attachments/793/SEC_PN_IT_2026-02_E.pdf?utm_source=openai)) |
| **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](https://www.ird.gov.lk/en/Lists/Latest%20News%20%20Notices/Attachments/793/SEC_PN_IT_2026-02_E.pdf?utm_source=openai)) |
## 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](https://www.ird.gov.lk/en/Lists/Latest%20News%20%20Notices/Attachments/793/SEC_PN_IT_2026-02_E.pdf?utm_source=openai))
- 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.