Who counts as a tax resident? Understanding residency rules for individuals – By Suresh R. I. Perera

Who counts as a tax resident? Understanding residency rules for individuals – By Suresh R. I. Perera

Source : sundayobserver.lk

Determining the tax residency of an individual is a foundational step in Sri Lankan tax law, as it establishes whether a person is liable for tax on their worldwide income (residents) or only on income derived from a source in Sri Lanka (non-residents).

Under the Inland Revenue Act (IRA), No. 24 of 2017, and the recently passed Inland Revenue (Amendment) Act No. 11 of 2026, the rules for residency are established through specific physical, occupational, and administrative tests.

Primary statutory tests for residency

Under Section 69(1) of the 2017 Act, an individual is deemed a resident for a year of assessment if they meet any of the following criteria:

a) Physical presence (the 183-day rule): An individual is resident if they are physically present in Sri Lanka for an aggregate of one hundred and eighty-three days or more during any twelve-month period that commences or ends during the tax year.

b) Place of residence: An individual is considered a resident if they simply reside in Sri Lanka.

c) Government employment abroad: An employee or official of the Government of Sri Lanka who is posted abroad during the year is deemed resident, as is the spouse.

d) Maritime employment: An individual employed on a Sri Lanka ship (within the meaning of the Merchant Shipping Act) is considered a resident during the period of such employment.

Commencement and duration of residency

If an individual becomes a resident only because of the 183-day physical presence rule, their residency status begins from the start of that 183-day period. In all other cases, an individual who qualifies as a resident at any point during a year of assessment is treated as a resident for the entire year.

Key amendments in the 2026 Amendment Act

The Inland Revenue (Amendment) Act No. 11 of 2026 introduces two significant exceptions to the standard residency rules:

(a) Investor category visa:

As per Amendment an individual holding an investor category visa (issued by the Controller of Immigration and Emigration) shall not be considered a resident of Sri Lanka for tax purposes, notwithstanding the standard rules in Section 69.

(b) Foreign employment with unassociated employers:

To provide clarity for those working abroad, the 2026 Amendment Act declares that if an individual leaves Sri Lanka for employment under a contract of not less than one year with an “unassociated employer”, they shall not be considered a resident from the first day of that year of assessment until the contract expires.

An “unassociated employer” refers to an independent entity that does not share a relationship of control, partnership, or relative-ship with the individual’s previous Sri Lankan employer (as defined in Section 196 of the Act).

For example, Ms. Silva, a Sri Lankan nurse who takes up a two-year contract with a Qatar hospital that has no connection to her former Sri Lankan employer, would be treated as non-resident from April 1, 2026, even if she visits Sri Lanka during that period.

Her Qatar salary falls outside the local charge. The key qualification is that the employer must be “unassociated”, an independent entity with no relationship of control, partnership, or family connection to a Sri Lankan enterprise as defined in Section 196 of the Act.

Liability limitations for deemed residents

The law provides certain types protection for non-citizens who are deemed resident solely due to their employment.

Maritime workers: Non-citizens employed on Sri Lankan ships who are deemed resident are not liable for income tax as residents on their foreign-source income; their liability is restricted to their income from the employment on such ship or other Sri Lankan sources.

For example, Rahman, a foreign national working as crew on a Sri Lankan vessel, would pay tax on his ship wages but his overseas bank interest would remain outside the Sri Lankan charge despite his notional residency.

Asset consequences when residency changes

A change in residency status triggers specific consequences for an individual’s assets under the capital gains provisions.

When a person becomes resident, the cost base of all non-domestic assets they held immediately before becoming resident is reset to market value at that date. Future gains are measured from this stepped-up figure.

When a resident leaves Sri Lanka and ceases to be resident, the position is reversed: they are treated as having realised all non-domestic assets at market value immediately before departure. This deemed disposal can crystallise a significant capital gains tax liability even without an actual sale. For example: Dr. Jayasinghe, a Sri Lankan resident holding UK shares bought for Rs. 5 million and now worth Rs. 20 million, would face tax on a Rs. 15 million deemed gain at the point of emigration. Pre-departure planning to manage this exit charge is, therefore, essential.

The individual residency provisions of the IRA are deceptively straightforward in structure but demanding in application. The 183-day rule needs careful counting across straddling tax years. The place of residence test can capture arriving individuals from the start of the year. And the deemed disposal rule on departure can produce unexpected capital gains exposures.

The 2026 amendments bring welcome clarity for investor category visa holders and contract migrant workers, though the unassociated employer requirement will need careful documentation in practice.

The writer is an Attorney-at-Law (LLB), FCMA (UK), CGMA, FCMA, who was awarded Tax Practice Leader of the Year 2024 (ASPAC) by the International Tax Review and was also a top-four finalist for Tax Litigation and Disputes Practice Leader of the Year (ASPAC).