Freelancing has become an attractive career option for many professionals in Sri Lanka, especially with the rise of remote work and international clients. However, with the latest tax regulations, freelancers must be aware of their tax obligations, registration requirements, and allowable deductions to remain compliant with Sri Lanka’s Inland Revenue Department (IRD).
Effective February 1, 2025, freelancers who earn in foreign currency and bring their income to Sri Lanka must pay a 15% tax on their profits. Until now, service providers working with foreign clients enjoyed a tax exemption on their foreign earnings, but with the latest changes, that exemption is no longer available.
If you are a freelancer, business process outsourcing (BPO) provider, knowledge process outsourcing (KPO) professional, or IT service provider working for overseas clients, this tax change directly impacts you.
Who Needs to Pay Tax?
If you provide services to international clients and receive payments in foreign currency, which you remit to Sri Lanka through a local bank, you must pay tax under the new rules.
However, tax only applies to profits—not your total earnings. This means you can deduct eligible expenses before calculating your taxable income.
How Much Tax Will You Pay?
For Individuals (Freelancers & Sole Proprietors) Freelancers and self-employed individuals will be taxed based on a progressive tax structure:
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The first LKR 1,800,000 per year (LKR 150,000 per month) is tax-free.
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The next LKR 1,000,000 is taxed at 6%.
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The remaining profit is taxed at 15%.
For example, if your annual profit is LKR 3,000,000, your tax will be calculated as follows:
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First LKR 1,800,000 → Tax-Free
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Next LKR 1,000,000 → 6% tax = LKR 60,000
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Remaining LKR 200,000 → 15% tax = LKR 30,000
Total tax payable: LKR 90,000 per year
Services Rendered Outside Sri Lanka Previously, income from services rendered in or outside Sri Lanka to a foreign client was fully tax-exempt if remitted to Sri Lanka. However, from April 1, 2025, such income will be:
- Taxed at a maximum rate of 15% if: The payment is received in foreign currency, and It is remitted to Sri Lanka through a bank in Sri Lanka.
- Taxed at regular progressive rates (up to 36%) if the income is not remitted via a bank in Sri Lanka.
Foreign Source Income Similarly, income earned from a foreign source (other than direct service exports) will now be:
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Taxed at a maximum of 15% if received in foreign currency and remitted to Sri Lanka through a bank in Sri Lanka.
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If not remitted via a bank in Sri Lanka, it could be subject to progressive individual tax rates, up to 36%.
Claiming Foreign Tax Credit Under Section 80
Under Section 80 of the Inland Revenue Act, a resident person (excluding partnerships and certain trusts) can claim a Foreign Tax Credit (FTC) for any foreign income tax paid, even if there is no Double Taxation Agreement (DTA) between Sri Lanka and the foreign country. Key Considerations:
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If the foreign country has already taxed the income at 15% or more, there will be minimal or no additional tax payable in Sri Lanka.
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If the foreign income is not taxed abroad, Sri Lanka will impose the full 15% tax on such income.
VAT and Other Tax Considerations for Freelancers
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VAT on Digital Services – An 18% VAT applies to digital services provided by non-resident companies to Sri Lankan consumers. While freelancers are not directly affected, this could impact digital tools and services used in your work.
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Replacement of the SVAT System – The Simplified VAT (SVAT) scheme will be replaced with a VAT refund system. If you are registered for VAT, you should be aware of this change.
How to Register for Tax as a Freelancer in Sri Lanka
If you have not already registered with the Inland Revenue Department (IRD), follow these steps:
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Step 1: Obtain a Taxpayer Identification Number (TIN)
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Visit the IRD website www.ird.gov.lk and download the TIN application form.
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Submit the required documents (NIC, business registration certificate, proof of income).
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You will receive a TIN number, which you must use when filing taxes.
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Step 2: File Your Tax Returns Accordingly
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Keep records of invoices, bank statements, and receipts for expense deductions.
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Step 3: Pay Your Taxes on Time
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Tax payments must be made in quarterly installments to avoid penalties.
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The IRD provides online payment options for convenience.
What Happens If You Don’t Pay Taxes?
Failing to declare and pay taxes can lead to:
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Late payment penalties
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Fines and legal consequences
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Issues with bank transactions and foreign currency remittances
To avoid penalties and ensure compliance, it’s best to register and pay taxes on time.
Conclusion
The new 15% tax rule for freelancers marks a significant change in Sri Lanka’s tax system. While this means additional tax payments, understanding deductible expenses, maintaining financial records, and filing tax returns properly can help freelancers manage their tax burden efficiently.
If you need help with tax registration, filing, or compliance, Talentspark Consulting is here to assist you!
Need tax guidance? Contact us today!
