Sri Lankan migrant workers are exempt from the 15% tax and are not subject to taxation on the money they remit to Sri Lanka. Additionally, any interest earned on such remittances held in foreign currency bank accounts is also exempt from income tax under Section 9, in conjunction with the Third Schedule of the Inland Revenue Act No. 24 of 2017 (IRA 2017).
According to the IRA 2017, residents of Sri Lanka are taxed on their global income, subject to certain exemptions, as per Section 69(1). Conversely, non-residents are taxed under the same section only on income derived from employment, business, investments, or other sources within Sri Lanka (Section 4). Since migrant workers earn their income from foreign employers outside Sri Lanka, such income does not fall under “income arising in or derived from a source in Sri Lanka,” making it exempt from taxation.
Residency Status of Migrant Workers
Typically, migrant workers are “domiciled” in Sri Lanka but are not considered “residents” for tax purposes. However, in the year of departure for foreign employment and the year of return, their residency status must be evaluated to determine tax obligations. As a general rule, migrant workers are deemed non-residents and are therefore not liable to pay income tax on their foreign earnings.
Residency status is determined by Sections 69(1) and 70(1) of the IRA 2017:
Section 69(1): A person is considered a tax resident if they either reside in Sri Lanka or are present in the country for at least 183 days within any 12-month period.
Section 70(1): A person who meets the 183-day criterion is considered a resident from the beginning of that period, while others are treated as residents for the entire tax year if they meet the residency conditions.
Understanding “Domicile” vs. “Residence”
Tax residency involves two key concepts:
Domicile refers to a person’s permanent legal home, which is the place they intend to return to, even if they live elsewhere. A person can only have one domicile at a time.
Residence refers to the place where a person physically lives. Unlike domicile, a person can have multiple residences, and it is considered a short-term status.
For instance, a Sri Lankan migrant worker employed in Dubai under a four-year contract is domiciled in Sri Lanka but does not reside there. Section 69(1)(a) considers only those who “reside” in Sri Lanka as tax residents, meaning migrant workers generally fall outside this definition. However, special provisions in Section 70(1) apply in the year of departure and return.
Legislative Background on Residency Definition
Initially, the Inland Revenue Bill of 2017 included “domicile” as a tax residency criterion under Section 69(1)(b). However, this provision was removed following advocacy by the Tax Committee of the Sri Lankan Bar Association to protect migrant workers. The original wording proposed that individuals domiciled in Sri Lanka would be tax residents unless they had a permanent home abroad for the entire year.
Conclusion
Since the reference to domiciled persons as tax residents was removed from Section 69(1), migrant workers are not subject to income tax on foreign earnings. This exemption remains despite recent budget proposals to impose a 15% tax on service exporters. As a result, Sri Lankan migrant workers can continue to remit foreign income without tax liabilities in Sri Lanka.
