Plan contractor hiring in Sri Lanka

Engage a Sri Lanka-resident contractor through a written services agreement that leaves the contractor operating a real business on their own account. Define deliverables, acceptance, fees, intellectual-property terms, confidentiality, and the contractor's responsibility for income tax and business administration. Avoid controlling daily attendance, working hours, supervision, equipment, or leave as an employer would. The resident contractor reports business income from Sri Lankan and foreign sources and handles self-assessment, instalments, and the annual return. An individual contractor's qualifying service-export profits may be taxed at a maximum 15% when the service is used outside Sri Lanka and foreign-currency earnings are remitted through a Sri Lankan bank.

Sources: Inland Revenue Act, consolidated through 2025, Inland Revenue income tax filing guidance, Supreme Court judgment in A.C.R. Wijesurendra v Sri Lanka Insurance Corporation

If the line is crossed

If the arrangement is employment in substance, stop treating the worker as an independent supplier and assess the employment obligations from the start of the relationship. A worker may seek Labour Tribunal relief, and the Supreme Court has upheld a compensation award equal to 24 months' salary on one case's facts. An employment finding can also bring EPF and ETF into scope: 12% employer EPF, 8% employee EPF, and 3% employer-funded ETF. The no-presence foreign buyer should obtain Sri Lankan advice on registration, arrears, surcharges, termination exposure, and a compliant local operating route before continuing employer-style control. Do not assume that absence of a local entity supplies a special foreign-employer remittance process.

Sources: Supreme Court judgment in A.C.R. Wijesurendra v Sri Lanka Insurance Corporation, Department of Labour Employees' Provident Fund guidance, Employees' Trust Fund Board employer FAQ

Withholding certificate

Request a withholding certificate only when a documented source analysis concludes that Sri Lanka's resident-service withholding applies. For managerial, technical, or consultancy fees, the Act makes the fee Sri Lanka-source when paid by a Sri Lankan resident or charged to a Sri Lankan permanent establishment. The fixed foreign buyer has neither, so it should not automatically deduct the 5% resident-service withholding from such a fee. Where the rule does apply to a resident individual, the aggregate service payment must exceed LKR 100,000 in a calendar month; the 5% then applies to the full payment. Recheck the source and service category if the buyer develops a Sri Lankan permanent establishment or the work changes. If withholding is required, retain the certificate with the invoice and payment record for the contractor's tax credit support.

Issued by: The payer that is a withholding agent

Timing: For Sri Lankan withholding, give the contractor the certificate within 30 days of that month's close

Sources: Inland Revenue Act, consolidated through 2025, Inland Revenue Department, 2026 withholding notice

Use section 7(1)(c)'s normal VAT zero-rate route when a person outside Sri Lanka consumes or utilizes the service outside Sri Lanka and full foreign-currency payment arrives from abroad through a licensed Sri Lankan bank within six months after the relevant taxable period. If that receipt condition is missed, section 7(3) separately states that the section 2 rate does not apply where proof satisfies the Commissioner-General that the service was performed. The Act sets no standard proof procedure in that provision, so treat this as a fact-specific alternative. The 2026 VAT amendment separately addresses nonresident digital services supplied into Sri Lanka and garment buying offices; it does not replace this ordinary contractor export test. Customer location alone is insufficient. Record the foreign customer, deliverables, intended use, milestones, acceptance, invoice, and receipt, and monitor the separate 180-day foreign-exchange deadline. VAT invoicing rules for registered suppliers do not apply when the contractor is below threshold and has not registered voluntarily.

Sources: Value Added Tax Act, consolidated through 2025, Value Added Tax (Amendment) Act No. 14 of 2026, Inland Revenue value added tax guidance

What an invoice has to show

• Section 20 invoice treatment matched to the customer's Sri Lankan VAT-registration status

  Section 20(6) governs when a VAT-registered contractor makes a taxable supply to a customer that is not Sri Lankan VAT-registered. The contractor then issues an ordinary invoice showing total consideration including any VAT charged, and the document is not a tax invoice. If the foreign customer is Sri Lankan VAT-registered and makes the request described in section 20(1), the contractor must issue a tax invoice within 28 days after supply; section 20(2) governs its contents. Foreign status and the absence of a Sri Lankan entity or permanent establishment do not decide VAT-registration status. As a commercial record, the buyer may ask the invoice to identify the parties, service, dates, currency, value, and zero-rated basis.

  Sources: Value Added Tax Act, consolidated through 2025

Set the commercial due date in the contract and keep it comfortably inside Sri Lanka's 180-day deadline for receiving service-export proceeds. Treat the due date as a negotiated term rather than assuming a general 30-day rule, and tie it clearly to invoice receipt, milestone acceptance, or both. Operations should record when each service or milestone was provided, finance should issue the related invoice promptly, and the buyer should resolve approval disputes before they threaten the outer deadline. The contractor then receives the proceeds in Sri Lanka and supplies the receiving bank's supporting documents for each receipt.

Sources: Repatriation of Export Proceeds into Sri Lanka Rules No. 1 of 2024

The currency on the invoice

Invoice and pay in an agreed foreign currency when the contractor intends to use Sri Lanka's qualifying service-export tax treatment. Foreign-currency earnings remitted through a Sri Lankan bank remain required for an individual's maximum 15% income-tax rate. For VAT, full foreign-currency receipt from outside Sri Lanka through a licensed bank within six months is the normal section 7(1)(c) zero-rate route. Section 7(3) separately states that the section 2 rate does not apply if that receipt condition is missed and proof satisfies the Commissioner-General that the service was performed; it sets no standard proof procedure. No single foreign currency is prescribed. State the currency, amount, due date, fee allocation, and any conversion convention expressly, then pay the invoiced amount without an unexplained shortfall.

Sources: Inland Revenue Act, consolidated through 2025, Value Added Tax Act, consolidated through 2025

Local currency rules

Receive the service-export proceeds in Sri Lanka within 180 days after the service is provided and give the receiving licensed bank all related documentary evidence for each receipt immediately. For recurring work, the agreement should define when each milestone or monthly service is provided so the contractor can track the deadline. The current export-proceeds rule and Department of Foreign Exchange FAQ limit mandatory conversion to goods exporters, so service-export proceeds are not subject to that conversion requirement. The rule does not prescribe an exhaustive document list. The contractor should confirm the receiving bank's current checklist before the first receipt and keep a record of every document submitted.

Sources: Repatriation of Export Proceeds into Sri Lanka Rules No. 1 of 2024, Export proceeds amendment, Gazette 2492/10, Department of Foreign Exchange export proceeds FAQ

Deducting 5% from every Sri Lankan contractor invoice

Do not apply the resident-service withholding rate until the payment's Sri Lankan source and service category have been tested. For managerial, technical, or consultancy fees, the Act's specific source rule looks for a resident payer or a nonresident payer's Sri Lankan permanent establishment. The fixed buyer has neither. Procurement should describe the service accurately, finance should retain the no-presence and source analysis, and the parties should revisit it if the buyer opens a Sri Lankan operation or the work changes character. If withholding becomes applicable, deduct under the current rule and issue the statutory certificate within 30 days after the relevant month.

Sources: Inland Revenue Act, consolidated through 2025

Using an offshore address without proving Sri Lanka's outside-use and receipt conditions

Document where the customer actually consumes or utilizes the service before applying export-service tax treatment. A foreign billing address or foreign-currency invoice alone does not prove outside use or, for the normal section 7(1)(c) VAT route, full foreign-currency bank receipt within six months. The individual contractor's maximum 15% income-tax rate separately requires outside use, foreign-currency earnings, and remittance through a Sri Lankan bank, without section 7(3)'s VAT alternative. If the VAT receipt condition is missed, section 7(3) states that the section 2 rate does not apply where proof satisfies the Commissioner-General that the service was performed; it sets no standard proof procedure. Record intended use, delivery, acceptance, invoice, and receipt evidence. If work supports Sri Lankan activity or evidence is mixed, obtain a fact-specific tax position before invoicing at zero VAT.

Sources: Value Added Tax Act, consolidated through 2025, Inland Revenue Act, consolidated through 2025

Losing the 180-day clock between delivery and payment

Define the service-provision date and bank evidence workflow before the first invoice. The export-proceeds clock runs for 180 days from service provision, and documentary evidence is due to the receiving bank for every receipt. A vague monthly retainer, delayed acceptance, consolidated invoice, partial receipt, or unexplained deduction can make the contractor's deadline and reconciliation unclear. Use dated milestones or monthly service periods, approve invoices against those records, identify deductions before payment, and give the contractor a receipt reference that maps to the invoice. The contractor should ask the receiving bank for its document list early and keep the submitted pack with the tax records.

Sources: Repatriation of Export Proceeds into Sri Lanka Rules No. 1 of 2024