Thank for you making an enquiry through our website. Accordingly, we give our opinion on the question raised as follows.
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.
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.
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.
It is a business income.
Though it is not excluded from (SMEs) definition,we are of the view that the tax rate applicable to liquor business is 40%.
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.
If the dividend paying company has incurred more than USD 1000 million on depreciable assets (other than intangible asset) in Sri Lanka, or,
Entitled to an enhanced capital allowance under subparagraph (5) of paragraph 1 of second schedule, and ,
Dividend is paid out of profits sheltered by enhance capital allowances under second schedule.
No tax free allowance is available to non resident non citizens under New Inland Revenue Act.
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)
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.
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%.