How Foreign Service providers taxed in Sri Lanka

From 1 April 2025, foreign income earned by Sri Lankan residents is no longer fully exempt.
This applies to:

• Foreign service income – services provided to a person outside Sri Lanka and utilized outside Sri Lanka

• Foreign source income – income arising outside Sri Lanka (e.g., overseas business, digital income)

If the income is properly routed, individuals can still enjoy concessionary tax treatment.

Who Qualifies for the Concessionary Method?

To qualify, ALL of the following must apply:

1. You are a resident individual in Sri Lanka

2. Income is earned in foreign currency

3. Income is either:

   • Foreign service income
     OR

   • Foreign source income

4. The income is remitted through a Sri Lankan bank
   (Bank inward remittance is compulsory to get this benefit)

If these conditions are met → your foreign income will be taxed under the special individual rate structure.

How the Tax Is Calculated

For individuals who qualify:

1. First Rs. 1,800,000 → Tax Free (Personal Relief)

2. Next Rs. 1,000,000 → Taxed at 6%

3. Balance foreign income → Taxed at 15%

This means the maximum tax rate is capped at 15% — even though normal tax rates apply up to 36% for other income.

Example

A freelancer earns USD 1,000 per month from a UK client.
Assume USD = Rs. 300.

• Monthly income = 1,000 × 300 = Rs. 300,000

• Annual income = Rs. 3,600,000

Step 1 – Personal Relief
3,600,000 – 1,800,000 = 1,800,000 taxable

Step 2 – Apply Special Foreign Income Rates
First Rs. 1,000,000 @ 6% → Rs. 60,000
Remaining Rs. 800,000 @ 15% → Rs. 120,000

Total Tax Payable = Rs. 180,000

If You Don’t Remit Through a Bank

Then you lose the concession. Your income will be taxed under the normal tax slabs — which can go up to 36%.

Foreign Tax Credit (FTC)

If tax was paid abroad, you may deduct it in Sri Lanka under Section 80.

In Summary

• Foreign service income and foreign source income are now taxable

• Tax remains low if remitted through a Sri Lankan bank

• Individuals benefit from:
  ✔ Rs. 1.8M tax-free
  ✔ Rs. 1M @ 6%
  ✔ Balance @ 15% (ceiling)

• Proper routing and documentation are essential

This is an opportunity for freelancers, consultants, and remote earners to bring foreign income into Sri Lanka with a controlled tax burden.