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Germany + Sri Lanka

Hello, Our LTD company, registered in Germany, is going to sign the contract with LTD company registered in Sri Lanka, for the delivery of the Software and its regular annual Support services. We search for the information – what local taxes we should expect, to be paid by us? We understand witholding tax, this point is clear. Are there any other taxes to be paid? Can you help us? Thank you, Radek Bittner

Thank for you making an enquiry through our website. Accordingly, we give our opinion on the question raised as follows.

Income Tax
As you stated, since you are aware of the Withholding Tax (WHT), we are not focusing to the depth of the WHT matter. However, we give the implication of income tax as follows.

As there is a Double Tax Agreement (DTA) between Germany and Sri Lanka, in computing the income tax liability, the provisions of the DTA shall prevail. Accordingly, we give below implication each and every possible income which could arise from this transaction.

1. The profits and income from sale of software -This could arise in case where the software is sold outright (i.e transfer the exclusive right). In this connection no tax liability shall arise unless your company is carrying out business in Sri Lanka through a permanent establishment situated in Sri Lanka. Therefore, no WHT is applicable.

2. Profits and income from use or right to use of software - if your company is receiving consideration on use or right to use of software, this falls to the meaning of “Royalty” and as such, it is required to deduct tax at 10% (As per DTA). This covers license fee and renewal fee also.

3. Profits and income from maintenance of software- Maintenance charges will not be taxed in Sri Lanka unless the company carries out the business in Sri Lanka through a permanent establishment situated in Sri Lanka.


Value Added Tax (VAT)

Since the company does not carry out a taxable activity in Sri Lanka, such supply shall not be chargeable for VAT.

 

Nation Building Tax (NBT)

With regard to the NBT liability, as the company does not carry out a business in Sri Lanka, we are of the view that, the company is not liable to pay NBT as well.

Trust the above sufficient for your query.


NBT on rent income

When a person(individual/ company) receives a rent income, is it outside the scope of NBT since there is no BUSINESS?

In the case of provision of services, the NBT shall be charged only where such services are carrying out as a business and exceeded the liable threshold limit. However, in the case of rent, as the rent income is recurring nature, question arise as to how such income does not fall to the business.


Tax exemption on dividends

If a company is exempt from income tax under section 17A of the Act as per an agreement with the BOI, will the dividends declared after 01st April, 2018 be exempt from income tax under section 9 (3) of the New Act, since the exemption for dividends has been granted by the old Act, not by the BOI agreement.
Exemption on dividends under Sec. 10(1)(k) of Inland Revenue Act,No 10 of 2006 will not be applicable from 01.04.2018. hence, we are of the view that dividend declared after 01.04.2018 will be subject to WHT.

Rent Income of a Company

If a company is fully engaged in renting out of residential accommodation, will the rent income be a part of Business income where we can deduct the actual expenses incurred in the production of income OR Investment income where no deduction is allowed for a company. "Service fee" which is an inclusion of business income, specifically excludes rent. However, can we consider it as effectively connected to the business that would otherwise be included in investment income?

It is a business income.


Tax Rate applicable for Companies (SMEs) dealing with liquor

If a company in engaged in local buying and selling of liquor and of which the turnover is less than Rs. 500Mn per year and has satisfied the the other conditions to be a "Small and Medium Enterprise", what is the tax rate (14% or 40%) that the Company is taxed at?

Though it is not excluded from (SMEs) definition,we are of the view that the tax rate applicable to liquor business is 40%.


Dividend Tax Liability

Should a non resident shareholder of a grandfather company (formed in 1983) start paying tax on dividend?

As per the provision of section 84 of the Inland Revenue Act ,No 24 of 2017, the payment of dividend should be  subject to tax at the rate of 14%. However, in case where the following conditions are fulfilled, the payment of dividend to nonresident person shall be exempt from tax.

Conditions.

  1.  If the dividend paying company has incurred more than USD 1000 million on depreciable assets (other than intangible asset) in Sri Lanka, or,

  2. Entitled to an enhanced capital allowance under subparagraph (5) of paragraph 1 of second schedule, and ,

  3. Dividend is paid out of profits sheltered by enhance capital allowances under second schedule.



individual tax

what is the tax free allowance of non resident non citizen person?

No tax free allowance is available to non resident non citizens under New Inland Revenue Act.


Sale of land

If a company sale a land to their associated company the taxable gain will be consideration minus cost or market value minus cost?

You may please note that the transaction should be at arms length price.Accordingly since this transaction is entered in to between associate person,if the consideration is less than market value it appears that there is a transfer pricing issue.Therefore profit should be computed as market value less cost.In the case of investment asset ,if the sale is made after 01.04.2018 ,the cost of the land will be the market value as
 at 30th Sep 2017 (for an investment asset)


Leasing

If only the leasing interest will tax after 1.4.2018 what will happen to the facility granted before this date?

We are of the view that for the facilities granted prior to 01.04.2018 ,the provisions of Inland Revenue Act No 10,2006 shall continue to be applied.Accordingly lease rentals shall be taxed and allowance for depreciation shall be allowed on the cost of the asset acquired for the leasing business.


investment property of a financial institution

if financial institution sell a land which was categorized as investment property in their balance sheet can they pay tax at 10% according to the new law considering that its a investment asset

Since such land hold as an investment, there is no doubt that the gain on the same will be a realisation of investment asset, and it will be taxed at the rate of 10%.


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