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What global businesses need to know about payroll in Sri Lanka
Sri Lanka has largely thrived as an independent country in recent decades. This former British colony, formerly known as Ceylon, has built a highly mixed economy where services represent nearly 60% of GDP, but the production of tea, coconuts, and rubber still play a major part.
Sitting in the Indian Ocean off the southern tip of India, Sri Lanka generally has a welcoming attitude to incoming international businesses. However, it can often be hampered by instability – most recently a major economic and inflation crisis that sparked protests in 2022 – which means awareness of what’s going on in the country is key.
There have been a number of changes to Sri Lanka’s payroll and employment regulations in recent years, and this guide details what’s new, including all the other key facts.
Getting Started
Unlike many other countries, the range of Sri Lankan business set-up processes that can be conducted online is relatively limited. Instead, it’s recommended to visit Sri Lanka in person and complete everything while you’re there, including opening a Sri Lankan bank account. The good news is that you should be able to complete everything within ten days or so, and the fees involved are relatively small.
Businesses in Sri Lanka can register as one of many different entities. The most common for foreign businesses are limited liability companies (LLCs) and public limited companies (PLCs), neither of which come with any minimum capital requirement. Branch offices can also be set up, but profits from these are subject to a 10% ‘branch tax’.
The set-up process starts with the reservation of a company name online with the Registrar of Companies, then the signing of a consent form in person by the company secretary and director. These consent forms, the company registration, and the Articles of Association must then be submitted to the Registrar of Companies.
Next, a notice of incorporation should be filed with the Daily Newspapers and Government Publication Bureau, followed by contacting the Taxpayer Services Unit for a Tax Identification Number. The final steps are registering for VAT, and with the Department of Labour for an EFP number.
Employment Considerations
Written employee contracts are not required in Sri Lanka. Collective bargaining is permitted for certain sectors, but Sri Lankan laws do not make it easy for unions to conduct business. In addition, it can be difficult to organize workers because of varying cultural norms and economic circumstances.
Working hours in Sri Lanka vary from industry to industry. For example, workers in offices and shops are subject to a maximum of eight hours per day and 45 hours per week, but limits for factory workers are nine hours per day and 48 hours per week. All employees working at least eight hours per day are entitled to a one-hour break.
Overtime is capped at 12 hours per week, and is paid at 150% of the normal rate; some senior management positions may be exempt from restrictions on the amount of overtime worked.
Probationary periods are allowed, with the duration negotiated and agreed to by the employee and employer before work begins – a maximum of six months applies (one year for senior employees). Notice periods are similarly agreed in employment contracts, and are capped at six months.
Compensation, Bonuses and Severance
Sri Lanka first introduced a national minimum wage in 2016, and since 2021 it has remained at LKR 12,500 per month (approx. £32; $40; €37). There are no regulations regarding the payment of bonuses, although they are more common within the public sector than they are in the private sector. Nonetheless, compensation and bonus structures should be agreed upon between employer and employee in the contract.
Termination of employment for non-disciplinary reasons normally requires approval from the Commissioner of Labour, unless a notice period (typically one month) is mutually agreed in the contract of employment. Entitlement is half a month’s wages per year of service, as long as the employee has at least five years of service.
Tax and Social Security
Income tax in Sri Lanka is levied on a ‘pay as you earn’ basis. However, the bandings have changed a number of times in the last few years. As of 2023/24, there are six bandings: the lowest of 6% applies to the first LKR 500,000 earned each year (approx. £1300, $1600; €1500); the highest of 36% applies to earnings over and above LKR 2.5 million (approx. £6400, $8000; €7500).
Most industries are now subject to a corporation tax rate of 30%, except those involved with gambling, tobacco or alcohol, which are subject to a 40% rate. The VAT rate in Sri Lanka is currently 15%, and exports and selected international services are exempt.
There are four types of social security contributions in Sri Lanka:
- Social Security Family Allowance: 5.75% employer
- Work Injury Fund: 2-5% employer
- Employees Provident Fund: 12% employer, 8% employee
- Employees Trust Fund: 3% employer
Holidays and Leave
Sri Lanka has a relatively high 25 days of public holidays each year. Whether employees get paid time off for them can vary from one industry to another, although generally speaking, it is not provided when a holiday day falls at the weekend. Paid leave entitlement is 14 days per year once one full year of service has been completed; at least seven of the 14 days must be taken consecutively.
Maternity leave is paid in full by social security over 12 weeks – two weeks prior to the birth and ten after it. For a mother’s third child onwards, this entitlement reduces to six weeks (two weeks before birth and four weeks after). A paternity leave entitlement of three days only applies to public-sector workers.
Medically certified sick leave runs to no more than seven days per year. There are also other types of ‘duty leave’ available, including for employees volunteering for armed forces reserves, for medical examinations, for voting, or to take part in language exams.
In Summary
Strong trade links and low wage levels make Sri Lanka an attractive proposition for a range of international businesses and industries. However, the complexity of setting up a business operation, political instability, and frequent changes to payroll regulations can make compliance a challenge. We’d recommend partnering with a global payroll expert that can give you the latest Sri Lanka-specific advice, and set your expansion off on the front foot.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.