If you are hiring in Sri Lanka for the first time, tax is usually the part of the process that slows everyone down. Between APIT withholding on salaries, corporate income tax on the entity, and withholding tax on cross-border payments, it is easy to either overpay, underpay, or miss a filing deadline in the first year. This guide walks through how Sri Lanka taxes employment income, what an employer is required to withhold and remit, and what changes for an expatriate employee versus a local hire. Where a specific number matters for a hiring decision, we work it using the same LKR 350,000/month software developer used throughout this guide series, so the numbers stay comparable across articles.
Note on rates: Sri Lankan tax bands and reliefs are set by the Inland Revenue Department (IRD) and are revised periodically. The figures below reflect the rates effective from 1 April 2025 (Year of Assessment 2025/2026). Always confirm current bands with the IRD or a licensed tax agent before running payroll, since thresholds have moved more than once in recent years.
How Sri Lanka Taxes Employment Income
Sri Lanka’s tax year runs from 1 April to 31 March. Liability depends first on residency, not nationality.
An individual is treated as a tax resident if present in Sri Lanka for 183 days or more in aggregate within any 12-month period that starts or ends in the relevant year. Sri Lankan citizens are, with limited exceptions, treated as resident-equivalent for tax purposes even if working abroad for part of the year.
Residents are taxed on worldwide income – salary, foreign-source income, investment income, the lot.
Non-residents are taxed only on Sri Lanka-sourced income, which includes any employment physically carried out in Sri Lanka regardless of where the employer or the payroll sits.
This residency test is the hinge for almost everything else in this article: it decides whether foreign income gets swept into the Sri Lankan tax base, whether a double tax treaty needs to be invoked, and whether APIT withholding even applies.
APIT (Advance Personal Income Tax) – the PAYE Mechanism and Current Bands
APIT is Sri Lanka’s pay-as-you-earn system. It has been mandatory for all employees since January 2023 – there is no longer an opt-out where the employee self-files instead. The employer calculates and deducts APIT from salary every month and remits it to the IRD.
Current structure (effective 1 April 2025, per IRD Notice PN/IT/2025-01):
- Monthly personal relief: LKR 150,000 (LKR 1,800,000 annually) – increased from LKR 1,200,000
- Tax applies only to income above this threshold
- Progressive rates from 6% to 36%, in five bands, with the former 12% band removed
- Annual bands on taxable income after relief: first LKR 1,000,000 at 6%, next LKR 500,000 at 18%, next LKR 500,000 at 24%, next LKR 500,000 at 30%, balance above LKR 2,500,000 at 36%
Employers remit deducted APIT to the IRD via the RAMIS portal by the 15th of the following month. The IRD publishes separate APIT tables for different situations – primary employment, secondary employment, non-resident employees, and one-off payments like bonuses and arrears – so the correct table depends on the nature of the payment, not just the amount.
Worked APIT Calculation – LKR 350,000/month Developer
- Monthly gross salary: LKR 350,000
- Less monthly personal relief: LKR 150,000
- Monthly taxable income: LKR 200,000
Applying the bands (monthly equivalents of the annual bands above):
- First LKR 83,333 at 6% = LKR 5,000
- Next LKR 41,667 at 18% = LKR 7,500
- Next LKR 41,667 at 24% = LKR 10,000
- Remaining LKR 33,333 at 30% = LKR 10,000
Total monthly APIT: LKR 32,500 (equivalent to LKR 390,000 for the year)
Personal Income Tax Rates & Reliefs
The bands above are the same bands used to compute APIT, since APIT is simply the monthly withholding mechanism for the annual personal income tax liability. A few things to keep in mind:
- The LKR 1,800,000 annual relief is a flat, universal threshold – it is not means-tested and applies regardless of marital status or dependents in the way some other jurisdictions structure reliefs.
- Employees whose only income is employment income and whose employer correctly applies APIT generally do not need to file a separate annual return, though the IRD does require registered taxpayers above certain thresholds to file.
- One-off payments – bonuses, gratuities, terminal benefits – are taxed under separate APIT tables and can push an employee into a higher effective rate for that pay cycle even if their regular monthly salary sits in a lower band.
Net-Pay Waterfall (LKR 350,000/month Developer)
This is the same waterfall used in the Payroll and EPF/ETF articles in this series, so the numbers are directly comparable.
- Gross monthly salary: LKR 350,000
- Less APIT: LKR 32,500
- Less employee EPF contribution (8%): LKR 28,000
- Net take-home pay: LKR 289,500
On the employer side, this same salary also carries:
- Employer EPF contribution (12%): LKR 42,000
- Employer ETF contribution (3%): LKR 10,500
- Total monthly cost of employment: LKR 402,500
For the fuller build-out of employer-side cost of employment, including leave accrual and statutory extras, see the True Cost of Hiring in Sri Lanka guide.
Withholding Tax (Dividends, Interest, Royalties, Service Fees)
Separate from payroll, any Sri Lankan entity making certain payments – to residents or non-residents – has a withholding tax obligation. This is where foreign employers most often get caught out, because it applies to intercompany payments, service fees, and distributions, not just to salaries.
Employer/Payer Withholding Obligations Table
- Dividends (paid to any shareholder): 15% final withholding tax
- Interest or discount paid: 10% (raised from 5% effective 1 April 2025)
- Rent paid to a resident, where rent exceeds LKR 100,000/month: 10%
- Service fees paid to a resident individual/professional, where fees exceed LKR 100,000/month: 5%
- Royalties: 14%
- Payments to non-residents – service fees, rent, insurance premiums, royalties: 14%, subject to reduction under an applicable double tax treaty
- Specified payments to non-residents (certain categories): 2%
- Gem sales by auction: 2.5%
Withholding tax deducted must be remitted to the IRD, generally by the 15th of the following month, alongside the WHT return. Dividend withholding is a final tax – a resident shareholder does not need to include the dividend again in their personal return. For payments to non-residents, the 14% default rate can often be reduced (in some cases to 0% for royalties) where a double tax agreement applies and the recipient provides the correct residency documentation – this is covered further in the expat section below.
Corporate Income Tax in Brief
For employers using the direct-entity route (rather than an Employer of Record), corporate income tax sits alongside payroll and withholding obligations.
- Standard rate: 30% on taxable profits for most resident companies, administered by the IRD
- Concessional rate: 14% for qualifying export-oriented businesses, agriculture, and IT/BPO services
- Concessional rate: 18% for manufacturing and tourism sectors
- Non-resident companies with Sri Lanka-sourced income: 30%, generally collected via withholding at source rather than a filed return
- Capital gains tax: 10% on gains from the realisation of investment assets, such as real estate and shares
- Quarterly advance tax installments are required under Section 90 of the Inland Revenue Act, based on prior-year liability or current-year estimates
All resident companies – meaning any company incorporated in Sri Lanka, or with control and management exercised there – are taxed on worldwide income. This is the same worldwide-income principle that applies to resident individuals, and it is one of the reasons employers weighing entity setup versus an EOR arrangement need to think about tax exposure, not just registration cost – see the International PEO overview for how that trade-off plays out.
Tax for Expatriate Employees
This is the section that trips up foreign HR teams most often, because Sri Lanka’s rules interact with the home-country rules of wherever the expat is coming from.
Residency first. An expat present in Sri Lanka for 183 days or more in a rolling 12-month period becomes a Sri Lankan tax resident and is taxed on worldwide income from that point – not just Sri Lanka-sourced salary. Below that threshold, only Sri Lanka-sourced income is taxable.
Double tax treaties. Sri Lanka has double tax agreements with a range of countries, including a long-standing convention with the United Kingdom, signed in 1979 and in force since 1980. Treaties like this exist to prevent the same income being taxed twice, generally through one of two mechanisms: an exemption in one country, or a foreign tax credit in the country of residence for tax already paid in Sri Lanka. For a UK national posted to Sri Lanka, the practical question is usually: which country do they remain tax-resident in under the treaty’s tie-breaker rules, and does UK PAYE need to stop once Sri Lankan APIT starts, to avoid paying twice on the same salary. This requires a residency determination on both sides, not just a headcount of days in one country – it is not something payroll should assume without checking the specific treaty and the employee’s full-year facts.
Permanent establishment (PE) risk. This is where expat tax and corporate tax collide. Under Sri Lankan domestic law, the provision of services in Sri Lanka – including through employees or contracted personnel – can itself constitute a permanent establishment if that activity continues for 183 days or more within a 12-month period, even without a fixed office. If a foreign company’s employee or “contractor” is effectively running the business in Sri Lanka for an extended period, the company can be found to have a taxable presence there, exposing it to Sri Lankan corporate tax on profits attributable to that activity – separate from, and in addition to, the individual’s personal tax position. This is the same PE exposure that shows up when a company misclassifies a long-term hire as an independent contractor rather than an employee: the individual tax question and the corporate nexus question are really one risk, viewed from two angles.
Reduced-rate provisions. Older treaty and domestic provisions have, at various points, offered reduced rates or deferred residency status for foreign nationals in their first few years of Sri Lankan employment. These provisions change with legislative amendments, so they should be verified against the current Inland Revenue Act and any applicable treaty rather than assumed to still be in force.
How EPF/ETF and Tax Interact in the Payslip
APIT and the EPF/ETF contributions are calculated independently, not stacked on top of each other in a single formula – which is a common point of confusion for employers new to Sri Lankan payroll.
- APIT is calculated on gross salary less the monthly personal relief, following the progressive bands above.
- EPF is 8% employee-side and 12% employer-side, calculated on gross earnings (basic pay plus certain allowances, excluding overtime and one-off bonuses), and is mandatory from day one of employment.
- ETF is a further 3%, employer-funded only, with no employee-side contribution.
For the full mechanics of EPF/ETF registration, contribution timing, and how it differs from a provident-fund system elsewhere, see the EPF/ETF guide, and for how these line items flow through an actual monthly payslip run, see the Payroll guide.
Registration, Filing & Penalties
Before running payroll or making any withholding-taxable payment, an employer needs:
- A Tax Identification Number (TIN) from the IRD for the company
- APIT registration to remit monthly employee withholding
- WHT registration if the company makes payments subject to withholding (dividends, interest, royalties, service fees, rent, or non-resident payments)
- RAMIS portal access for filing and remittance
Key deadlines and penalties:
- APIT and WHT remittance: due by the 15th of the month following the payment
- Annual corporate/personal tax return: due 30 November following the end of the tax year
- Late filing penalty: the higher of LKR 50,000 or 5% of tax payable plus 1% per month of delay
- Late payment: 2% per month interest on unpaid tax
- Negligent or fraudulent underpayment: additional penalties apply where underpayment exceeds specified thresholds
Missing a WHT remittance on an intercompany service fee or a dividend distribution is one of the more common first-year mistakes for foreign employers setting up a subsidiary, precisely because it is easy to focus entirely on payroll compliance and overlook that the entity itself has separate, parallel withholding obligations.
FAQ
What is the income tax rate in Sri Lanka?
Personal income tax is progressive, from 6% to 36%, applied to income above a tax-free personal relief of LKR 1,800,000 per year (LKR 150,000 per month). Corporate income tax is a standard 30%, with concessional rates of 14% or 18% for certain sectors.
What is APIT in Sri Lanka?
APIT (Advance Personal Income Tax) is the mandatory monthly payroll withholding system through which employers deduct income tax from employee salaries and remit it to the IRD, similar to a PAYE system.
What is withholding tax in Sri Lanka?
Withholding tax (WHT) applies to specific payments made by Sri Lankan entities, including dividends (15%), interest (10%), royalties (14%), and service fees or rent above set thresholds (5-10% for residents, 14% for non-residents), and must be remitted to the IRD monthly.
How is an expat taxed in Sri Lanka?
An expat becomes a Sri Lankan tax resident, and is taxed on worldwide income, once present in the country for 183 days or more within a rolling 12-month period. Below that, only Sri Lanka-sourced income is taxable, and applicable double tax treaties may reduce or eliminate double taxation.
Does Sri Lanka have a double tax treaty with the UK?
Yes. The UK-Sri Lanka double taxation convention, signed in 1979 and in force since 1980, sets out residency tie-breaker rules and relief mechanisms to prevent UK nationals working in Sri Lanka from being taxed twice on the same income.
What triggers a permanent establishment in Sri Lanka?
Under Sri Lankan domestic law, providing services in Sri Lanka – including through employees or engaged personnel – for 183 days or more within a 12-month period can constitute a permanent establishment, exposing the foreign company to Sri Lankan corporate tax on the related profits.
Do employers need to register separately for APIT and withholding tax?
Yes. A company needs a TIN, APIT registration for payroll withholding, and separate WHT registration if it makes payments – dividends, interest, royalties, service fees, or non-resident payments – that fall under the withholding tax rules.
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