Navigating Sri Lanka’s New Tax Landscape for Service Exporters

Are you a freelancer working with foreign clients or a company offering services internationally? If so, the Inland Revenue (Amendment) Act, 2025 brings significant changes that will impact how your income is taxed. Starting April 1, 2025, all income from services provided to foreign clients will be subject to a 15% tax.

Whether you are an individual earning foreign income or a business exporting services, understanding these tax changes is crucial for compliance and effective tax planning. This guide breaks down the new tax rules, explains their impact on individuals and corporations, and provides strategies to help service exporters navigate the new landscape efficiently.

Table of contents

Key Changes and Implications
For Individuals
For Corporates
Summary of New Tax Rates
Strategies for Service Exporters
Final Thoughts
FAQs

Key Changes and Implications

The government introduces new compliance and tax obligations for service exporters in Sri Lanka. Below is a detailed breakdown of how these changes impact different stakeholders.

For Individuals

1. 15% Tax on Foreign Service Income

• From April 1, 2025: All foreign service income remitted to Sri Lanka will be taxed at 15%, acting as a final tax rate for such earnings.
• If not remitted to a Sri Lankan bank: Income will be taxed at regular progressive tax rates, which could go up to 36% depending on total income.

2. Remittance Through a Bank in Sri Lanka

• To qualify for the 15% tax cap, foreign income must be remitted through a Sri Lankan bank.
• Earnings kept offshore and not transferred to Sri Lanka may be taxed under standard tax rates.

3. Foreign Tax Credit (FTC) for Individuals

• If you have already paid taxes in the foreign country where you earned the income, you can claim a Foreign Tax Credit (FTC) in Sri Lanka, reducing your tax liability.
• This applies even if there is no Double Taxation Agreement (DTA) between Sri Lanka and the foreign country.

Individuals who are offering services to foreign clients must now adhere to new tax rules that affect how their income is taxed.

For Corporates

For businesses engaged in service exports, the introduction of a 15% flat tax means a shift from previous tax-free earnings. Proper remittance planning and claiming foreign tax credits will be essential for maintaining tax efficiency.

1. 15% Flat Corporate Tax on Exported Services

• From April 1, 2025: Companies engaged in service exports will now be taxed at a flat 15% rate on their profits.
• This applies to all businesses that provide services to clients outside Sri Lanka and receive foreign income.

2. Offshore Earnings and Taxation

• If a company does not remit its foreign earnings through a Sri Lankan bank, those earnings might be taxed at the regular corporate tax rates, which can go up to 30%.
• To benefit from the 15% rate, businesses must ensure that their foreign earnings are channeled through the local banking system.

3. Foreign Tax Credit (FTC) for Corporates

• Companies that pay foreign taxes on exported services can claim a Foreign Tax Credit (FTC), reducing their total tax liability.
• Even if no Double Taxation Agreement (DTA) exists, Sri Lanka allows credit for foreign taxes paid to prevent double taxation.

Sri Lankan businesses that provide services to foreign clients must prepare for new tax obligations that affect how corporate profits are taxed.

Summary of New Tax Rates

The following table provides a comparison of tax rates before and after the implementation of the new tax regulations.

Understanding the new tax structure and ensuring proper compliance can help minimize financial burdens. With strategic planning and proper remittance practices, both individuals and businesses can optimize their tax positions.

Strategies for Service Exporters

To effectively manage their tax liabilities under the new rules, service exporters should consider the following strategies:

• Remittance Planning: Ensure that all foreign-sourced income is remitted to Sri Lanka through a bank to benefit from the 15% tax cap.
• Foreign Tax Credit Optimization: Explore opportunities to maximize FTC claims, especially for businesses operating in countries with DTAs with Sri Lanka.  
• Tax Advisory: Seek professional tax advice to understand the implications of the new rules and develop appropriate tax planning strategies.
• Financial Planning: Adjust financial plans and projections to account for the new tax liabilities and optimize profitability.

Planning ahead will help businesses and individuals navigate these changes with confidence.

Final Thoughts

By staying informed and implementing smart tax strategies, service exporters can continue to thrive while ensuring compliance with the new tax laws. The key takeaway is that remitting foreign earnings to Sri Lanka through a bank secures the lower 15% tax rate, preventing higher taxation.

At Simplebooks, we have developed a Tax Calculator to help service exporters quickly determine their tax liability on foreign income.

Need help navigating the new tax system? Our tax experts are here to assist you to ensure your service export business remains compliant and tax-efficient!

FAQs