Company Law and Taxation
This domain covers the Companies Act No. 7 of 2007 and the main tax statutes, led by the Inland Revenue Act No. 24 of 2017 and the Value Added Tax Act No. 14 of 2002.
Core rules
- Incorporation by registration with the Registrar of Companies; the certificate of incorporation is conclusive, and the company is a separate legal person with perpetual succession (Salomon principle).
- Companies may be private or public, limited or unlimited, holding or subsidiary; single-member companies are permitted. Shares under the 2007 Act have no par value; stated capital replaces share premium concepts.
- Directors owe duties of care, good faith and avoidance of conflicts; they must keep accounting records, prepare financial statements, file annual returns and appoint auditors where required.
- A dividend may be paid only if the solvency test is satisfied: the company must be able to pay debts as they fall due and assets must exceed liabilities.
- Income tax: year of assessment runs 1 April to 31 March; self-assessment applies. A resident company is taxed on worldwide income, a non-resident on Sri Lanka-source income. Taxable income = assessable income − qualifying payments − loss relief. Capital gains arise on realisation of investment assets; withholding tax is an advance of income tax.
- VAT: output tax less input tax; registration thresholds, zero-rating on exports, and VAT collected as agent of the State.
Worked example
A resident company has business profit Rs 6,000,000, interest income Rs 500,000, qualifying payments Rs 300,000 and brought-forward loss Rs 200,000. Taxable income = 6,000,000 + 500,000 − 300,000 − 200,000 = Rs 6,000,000. Apply the company rate in force for that year of assessment; rates and concessions change with each Budget, so confirm the current First Schedule rather than assuming.
Traps that cost marks
- Using a presumed 30% rate when a concessionary rate applies.
- Paying a dividend without testing solvency.
- Treating share capital or revaluation gains as distributable profit.