The 15% Tax on Foreign Income, Explained

If you're paid from abroad — freelance clients, a foreign employer, platform work — this is the rule that decides most of your tax bill. Here's what actually changed, and what the 15% does and doesn't cover.

Until March 2025, this income was exempt. It isn't now.

For years, money earned from services provided to people outside Sri Lanka, paid in foreign currency and remitted through a bank, was exempt from income tax entirely.

That exemption ended on 1 April 2025. From the 2025/2026 tax year onwards, foreign earnings are inside the tax net like everything else.

In its place came a concession: a maximum rate of 15% on two kinds of income, provided the money is received in foreign currency and remitted through a bank to Sri Lanka:

• Service exports. Services rendered — in or outside Sri Lanka — to any person, to be utilised outside Sri Lanka.
• Foreign source income. Gains and profits earned from any foreign source, in foreign currency.

If you're a freelancer or consultant in Sri Lanka billing overseas clients, the first category is written for you.

"Maximum rate" means a cap, not a flat tax

This is the most common misreading. The 15% is a ceiling, not a rate everyone pays.

Your tax is still worked out the normal way first: total income, minus the Rs. 1,800,000 personal relief, then the 6% to 36% bands on what's left. The cap means the tax on qualifying income can't exceed 15% of it.

Two consequences:

• Smaller earners are unaffected. If the normal bands already put you below 15%, you pay the lower figure. The cap never increases anyone's tax.
• The saving grows with income. The bands reach 36% on taxable income above Rs. 2,500,000; the cap holds qualifying income at 15%. The higher your income, the more the cap is worth.

A worked example

Nuwan is a freelance developer in Colombo. His overseas clients pay him USD into his Sri Lankan bank account — about Rs. 7,200,000 for the year, all of it qualifying. He has no other income.

Subtract the relief: 7,200,000 − 1,800,000 = Rs. 5,400,000 taxable.

The cap saves Nuwan Rs. 654,000 for the year. His bill works out to about 11% of what he actually earned.

At lower incomes the picture is different: on Rs. 3,600,000 of income, the normal bands produce Rs. 222,000 — already below the 15% ceiling — so the cap changes nothing.

The crossover is exact. The cap starts saving you money the moment taxable income passes Rs. 2,200,000, which is Rs. 4,000,000 of income for the year. Below that, you're already paying under 15% and the cap is doing nothing for you.

If you have local income alongside the foreign money, how the cap is apportioned across the two isn't spelled out in the law. That's a question for whoever prepares your return, not one to guess at.

The two conditions are doing all the work

The 15% is not a blanket rate on "foreign income". Both conditions have to hold:

1. Paid in foreign currency. A foreign client paying you in rupees doesn't qualify.
2. Remitted through a bank to Sri Lanka. Money that sits in an overseas account, a foreign Payoneer or Wise balance you never bring home, doesn't meet the condition — and as a resident you owe Sri Lankan tax on it anyway, at the normal bands up to 36%.

That second point is the expensive one. Living in Sri Lanka means you're taxed on income from anywhere in the world, whether or not it ever reaches a Sri Lankan account. Keeping the money offshore doesn't keep it out of the tax net; it just forfeits the cap.

Remote employees: your case is genuinely less clear

If you're salaried by a foreign company — employed, not freelancing — be careful about assuming the 15% applies to you.

There are two doors into the 15%. One is shut for you. The other might be open.

Door one: "foreign source income." This one's shut. If you do the work while sitting in Sri Lanka, the law treats your pay as Sri Lankan income, no matter where your employer is or where they pay you from. So it isn't foreign source income, and this door doesn't open.

Door two: "services rendered." This one doesn't care where you sit. It covers services rendered in Sri Lanka, to someone abroad, used abroad. That's a fair description of a remote job. The catch is the word services. Whether a salary counts as rendering a service, or is just employment income taxed at the normal bands, has never been settled.

So it comes down to what your contract actually makes you: an employee, or a contractor providing services. That same classification also decides whether you can deduct expenses at all.

We're not going to pretend this one has a clean answer. If this is you, it's exactly the kind of question to put to a professional with your contract in hand.

Freelancers don't have this problem. Door two clearly covers you, and it works even though you're doing the work from Sri Lanka.

Nobody is withholding tax for you

Employed people in Sri Lanka have tax deducted from every payslip. Your foreign client or employer deducts nothing — they're outside the reach of Sri Lankan withholding rules.

The 5% withholding you may have heard about only applies when a Sri Lankan withholding agent pays a resident individual a service fee over Rs. 100,000 in a month. A client in Berlin or Sydney isn't one.

That makes you responsible for paying as you go. If you earn from a business, or from employment where no one withholds, you're an instalment payer: quarterly payments on 15 August, 15 November, 15 February and 15 May, with the year's return due by 30 November the following year. For Y/A 2025/2026 that return deadline is 30 November 2026.

Already taxed abroad? That counts

If a foreign country taxed the same income, you can claim a foreign tax credit against your Sri Lankan bill, with evidence of the foreign tax paid.

Two limits catch people out:

• The credit is capped at your average Sri Lankan tax rate, not at whatever you paid abroad. Nuwan above pays about 11% on average, so his ceiling is 11% of the foreign income — not the full foreign tax if that was higher. Anything above the ceiling is lost. It can't be refunded or carried to another year.
• You have two years from the end of the year you earned the income to actually pay the foreign tax. Miss that and the credit goes, unless the IRD grants more time.

What this comes down to

The rate on your foreign income is decided by three things: whether you're resident here, whether you were paid in foreign currency, and whether the money came through a bank to Sri Lanka. Get all three right and the ceiling is 15%. Get the last one wrong and the same income can cost more than twice as much.

Whether you have to file at all — and what happens if you don’t — is the other half of the picture, and it is covered in Chapter 1, Who has to file?