TAXATION

This section is for general information only and contains comments of a general nature based on current tax legislation and practice of tax authorities. It relates only to certain limited aspects of the taxation position of potential investors and is not, nor intended to be, in any way
exhaustive. Potential investors should consult their advisors about the tax consequences of an investment in the Company before subscribing for any Shares.

                                                                         TAXATION IN SRI LANKA

Sri Lanka has a transparent, low-tax regime, and has signed double taxation relief agreements with 26 countries. These agreements provide for reduced tax rates on dividends, interest and royalties.
All Sri Lankan businesses, except for BOI (board of investment) companies (enterprises that qualify for BOI incentives under Sec. 17 of the BOI Act) and enterprises that qualify for special concessions under the Inland Revenue Law are liable to tax.
Under Section 17 of the BOI Act, the BOI is empowered to grant special concessions to companies satisfying specific eligibility criteria, which are designed to meet strategic economic objectives of the government. The mechanism through which such concessions are granted is the Agreement, which modifies exempts and waives identified laws in keeping with the BOI Regulations. These laws include Inland Revenue, Customs, Exchange Control and Import Control.

                                                                        CORPORATE INCOME TAX

Resident and Non-Resident companies are liable to a corporate income tax of 35%. These rates are in line with those in other fast developing Asian economies. Non-resident companies (companies whose head offices are located overseas, or are controlled From abroad) pay an additional tax of one-third of remittances abroad or one-ninth of taxable profits – whichever is less. Remittances exclude dividends for this purpose. BOI companies that meet specific criteria i.e. size of total investment, type of investment and location of investment, qualify for tax holidays ranging from 5-20 years. In addition, a concessionary rate of income tax of 15% up to a maximum period of 20 years is also extended to these companies. Companies engaged in export of non-traditional products, agricultural undertakings (other than
exempt), promotion of tourism, construction work and overseas management activities are eligible for 15% tax on profits and income. Companies with taxable income not exceeding Rs.5 million other than a holding, subsidiary or associate company of a group of companies are eligible for a tax rate of 15% on profits and income. Venture capital companies, Unit Trusts and Mutual Funds are eligible for 20% and 10% tax rates respectively on profits and income. Companies providing professional services to overseas clients paid in foreign currency are
eligible for a tax rate of 15% on profits and income. Specialized housing banks are eligible for a tax rate of 20% on profits and income.
However Dutch Bay Resorts is eligible for a 15 year Tax Holiday as per the agreement signed with BOI on the 13th December 2007.

                                                                                     DIVIDEND TAX

Dividends declared out of tax-exempt profits during the tax holiday period and one year thereafter, is tax free. A withholding tax of 10% on dividends applies to all companies other than quoted public companies. This can be credited against the individual income tax of the shareholders. Quoted public companies have to deduct the 15% withholding tax on dividends paid to non-resident shareholders. Resident companies pay an Advance Company Tax (A.C.T) of 27% of gross dividend. The A.C.T. can be offset against the tax liability of the company to a level of 50% of the income tax payable. Any excess can be carried forward to the following year.

                                                                                       VALUE ADDED TAX (VAT)

The value added tax (VAT) was introduced in 1st July 2002. The single unified VAT rate of 15% came into effect from 1st January, 2004. Currently, VAT has 3 rate bands:-

• Exempted Items
• Zero rated items
• 15%

                                                                               PERSONAL INCOME TAX

Resident individuals pay personal income tax on a sliding rate scale up to a maximum of 35% of their income. The first Rs.144,000 per annum is exempt from income tax. Non-citizens of Sri Lanka who are employed in qualifying BOI companies pay a concessionary
tax of 15% of their Sri Lankan source income. This benefit, with the exception of BOI approved “flagship” projects, is restricted to the expatriate’s first five years of employment.

                                                                               Basis of Liability

Income tax is charged for every year of assessment in respect of the profits and income of every person for that year of assessment. “Person” is defined to include the following:

1. An Individual
2. A Company
3. Body of Persons
4. Any Government

A “resident” person is liable to tax in Sri Lanka on that person’s income arising in Sri Lanka and income arising outside Sri Lanka. A ‘non-resident’ person is liable to tax in Sri Lanka only on that person’s income arising in Sri Lanka.

Resident or Non-resident – Whether an individual is ‘resident’ or ‘non-resident’ depends normally on the length of his stay in Sri Lanka. A company is deemed to be resident in Sri Lanka if its registered or principal office is in Sri Lanka or it is controlled and managed in Sri Lanka

Tax Implications in relation to purchase of Land & Buildings by non-citizens

The following Tax implications can be seen in relation to purchasing of Land & Building by individuals who are non – citizens or companies having more than twenty-five percent of issued capital owned by non-citizens.

All such purchases should be registered with the Registrar of Lands by submitting an instrument called the ‘Deed of Transfer’ attested by a Notary Public. Such instruments should be properly stamped as provided in the ‘Stamp Duty Law’. The stamp duty is payable by the purchaser on the market value of the property at the following rates:

Stamp Duty
First Rs. 100,000 – Every Rs.100 or part thereof – Rs.3.00, Balance -Every Rs. 100 or part
thereof – Rs.4.00, Additional duty – at 100% of the market value.

CAPITAL GAINS TAX

Capital Gains Tax was abolished in April 2002.
Transaction Tax of 0.5% on the sale and purchase of all share transaction is in effect.

TURNOVER TAX
Turnover tax is a sales tax, which is payable on the total amount received or receivable from business transactions at the provincial level. As per present law, proceeds from the sale of shares are exempt from turnover tax.

EXCHANGE CONTROL

In general, exchange control restrictions are imposed only where capital is sought to be remitted. Dividends to foreign shareholders can be remitted without restrictions. Proceeds from the sale of shares may also be remitted without restriction if the purchase of such shares were channeled through designated bank accounts namely a Share Investment External Rupees Account (“SIERA”) or if special approval has been granted. A SEIRA can be opened at any commercial bank in Sri Lanka. A custodian bank or stockbroker will, on behalf of the foreign investor, open a SIERA. Operation of a SIERA is governed by the rules and regulations of the Controller of Exchange.
All debits (i.e. funding a purchase, repatriation of sale proceeds, repatriation of dividend proceeds and other proceeds received via corporate actions) and credits (i.e. inward remittance, sale proceeds, dividend proceeds and proceeds received through other corporate actions) should be channeled through SIERA. Any remittance from SIERA out of Sri Lanka will be permitted on producing to the commercial bank at which the respective account is held documentary evidence of the transaction giving rise to the remittance (e.g. dividend warrant, contract note). Whilst tax clearance certificate from the Department of Inland Revenue is not required for remittances in respect of transactions related to listed companies, it is required in respect of unlisted companies confirming that all taxes attributable to the respective transactions have been duly discharged. This process is fairly routine in view of the deduction of withholding tax at source. Companies approved by the Board of Investment under section 17 of the Board of Investment Act are also entitled to several exemptions from exchange control. In most instances, prior to making the remittances out of Sri Lanka, the relevant taxes have to be paid and a tax clearance certificate obtained.