Sri Lanka Corporate Tax Guide 2026

Overview — Corporate Tax in Sri Lanka

Corporate income tax in Sri Lanka is governed by the Inland Revenue Act No. 24 of 2017 (as amended). The Inland Revenue Department (IRD) administers corporate tax. Resident companies are taxed on worldwide income; non-resident companies are taxed only on Sri Lankan-source income. A company is resident if it is incorporated in Sri Lanka or has its place of effective management in Sri Lanka. The tax year runs from 1 April to 31 March, though companies may adopt a different financial year with IRD approval.

Standard Corporate Rate — 30%

The standard corporate income tax rate is 30%, applicable to all companies that do not qualify for any reduced rate. This applies broadly to domestic trading and service companies, manufacturing companies not meeting SME or export criteria, and non-resident companies with a permanent establishment in Sri Lanka. There is no surcharge or alternative minimum tax on the standard rate.

SME Rate — 24%

Small and medium enterprises (SMEs) may qualify for a reduced corporate tax rate of 24%. Eligibility criteria:

• Annual turnover less than LKR 750 million
• Number of employees fewer than 50
• The company must be engaged in manufacturing, services, or other qualifying business activities

The SME rate applies to the first LKR 750 million of taxable income; income above this threshold is taxed at the standard 30% rate. The SME rate aims to support small businesses and encourage formalisation of the economy.

Export Rate — 14% (BOI Companies)

Companies approved by the Board of Investment (BOI) of Sri Lanka that export goods or services may qualify for a reduced tax rate of 14%. Qualifying conditions:

• BOI-approved company with an export-oriented enterprise
• Export of goods manufactured in Sri Lanka or services provided from Sri Lanka
• Compliance with BOI agreement terms and applicable regulations

The 14% rate may also apply to other BOI-approved enterprises depending on their sector and agreement terms. Some strategic BOI projects may qualify for even lower rates or tax holidays under specific agreements.

Strategic Development Rate — 10%

A reduced corporate tax rate of 10% is available for businesses engaged in strategic development projects approved by the government. Qualifying sectors may include renewable energy, infrastructure development, high-tech manufacturing, tourism, and agriculture. The rate is granted under specific agreements and typically for a limited period. Additionally, certain manufacturing and service companies operating in specified economic zones or development regions may qualify for a 17% rate.

Capital Allowances (Depreciation)

Capital allowances (tax depreciation) are available on qualifying fixed assets. The rates are prescribed by the IRD under the Inland Revenue Act:

• Buildings: 5–10% per annum (straight line or reducing balance)
• Plant and machinery: 15–33.33% per annum depending on the asset class
• Motor vehicles: 25% per annum (limited to LKR 6 million cost for passenger vehicles)
• Computer equipment and software: 33.33% per annum
• Furniture and fittings: 20% per annum

First-year allowances or accelerated depreciation may be available for certain qualifying investments, particularly in strategic sectors. Capital allowances are calculated on the cost of the asset reduced by any previous capital allowances claimed (reducing balance method for most assets).

Thin Capitalisation Rules

Sri Lanka has thin capitalisation rules that limit interest deductibility for companies with excessive debt. The rules apply to both resident and non-resident related-party debt. The key provisions:

• The debt-to-equity ratio must not exceed 2:1 (or higher in certain prescribed circumstances)
• Interest on excess debt (above the permitted ratio) is treated as a dividend and subject to withholding tax
• The rules target related-party financing; third-party debt is generally not subject to thin capitalisation limits
• Specific industries (e.g., banking, finance, insurance) may have tailored thin capitalisation rules

FAQs

What is the withholding tax rate on dividends?

Dividends paid by a Sri Lankan company are subject to withholding tax at 15% for both resident and non-resident shareholders.

Can losses be carried forward?

Yes, tax losses can be carried forward for up to 6 years from the year of assessment in which the loss was incurred. Losses cannot be carried back.

Are there transfer pricing rules in Sri Lanka?

Yes, Sri Lanka has transfer pricing rules aligned with OECD guidelines, requiring arm's length pricing for related-party transactions with documentation for transactions above prescribed thresholds.

Disclaimer

This guide provides general information about Sri Lankan corporate tax for the 2026 tax year. Tax laws and rates may change. Always consult with a qualified Sri Lankan tax advisor or the Inland Revenue Department directly for advice specific to your business. InvestmentKit does not provide tax advice.