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No. of pages: 19

Strategic Level
Corporate Taxation

Instructions to candidates

(1) Time allowed: Reading and planning – 15 minutes

Writing – 3 hours

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(2) Total: 100 marks
(3) All questions are compulsory.
(4) This paper consists of two sections.
Section 1: 2 questions
Section 2: 1 question (Common pre-seen provided prior to the examination is
in relation to this question)

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(5) Begin each answer on a separate page in the answer booklet. Submit all
workings.
(6) The examination will be conducted as an open book examination and only the
following publications will be permitted to be used at the examination hall.
• Inland Revenue Act No. 24 of 2017 and subsequent amendments.
• Value Added Tax Act No. 14 of 2002 and the subsequent amendments.
• Relevant gazette notifications.

3
(7) Candidates are allowed to bring or use the above permitted publications subject
to the following.
• Highlighting, sidelining and underlining relevant sections in the
publications are allowed. Short notes in the permitted publications are
allowed, only if they are handwritten and are relevant to a particular
paragraph or section in the publication which explains that paragraph or
section. Any other notes written on the publications are not allowed.
• Attaching, pasting or inserting any other documents to the permitted
publications are not allowed. DECEMBER
• Page tabs to refer the pages are allowed.
(8) Notes, textbooks (other than permitted publications) or any other materials 2024
will not be allowed. Photocopies/extracts of the above publications will not be
allowed.
(9) Answers should be in the English Language, in the answer booklet/s given to
you.
(10) Answers written on the answer booklets, graph papers and any other
stationery distributed at the examination hall, only, are considered in marking
of the answer scripts. Any other attached documents are not taken into account
at the time of marking the answer scripts.
SECTION 1
 SECTION 1
Question 01

STORM Research Inc. (STORM) is a company operating in the United States of America (USA)
which is engaged in the business of providing business analytics and market research data to
companies in the USA and other countries. The company is heavily reliant on its online data
gathering platform and has a team of professionals who is qualified in computer science and
data handling. STORM has registered an overseas company in Sri Lanka and its IT support team
operates from an office in Bambalapitiya.

The Sri Lanka team has 30 IT professionals and 6 support staff to handle finance and HR. Most
of the IT professionals work from home and the office in Bambalapitiya can only accommodate
10 employees at any given time. The team maintains accurate logs on the time spent on each
assignment. At the end of each month, the local office sends an invoice based on the time spent
for the services performed in Sri Lanka. The hourly rate incorporates the costs related to staff
including salary, EPF, ETF, gratuity etc. and other overhead costs such as rent, utilities and
other services in maintaining an office in Sri Lanka.

The income statement of STORM’s Sri Lanka office for the year ended 31 March 2024 is as
follows.
Rs. Rs.
Revenue 84,235,645
Less: Direct expenses
Salaries 35,623,781
EPF 5,343,567
ETF 1,068,713
Gratuity 845,256
Software licenses 5,458,245 (48,339,562)
Gross profit 35,896,083
Other income
Interest income in LKR 5,464,235
Less: Overhead expenses
Salaries 5,623,781
EPF 843,567
ETF 168,713
Gratuity 365,245
Head office expenses 16,679,369
Rent 2,160,000
Utilities 546,000
Office expenses 365,694
Depreciation 1,466,475
Amortisation 495,364
Professional charges 576,246
Staff welfare 143,565 (29,434,019)
Net profit before tax 11,926,299

SL3 – December 2024 Page 2 of 19

The following details have been provided by the accountant.

• Revenue includes an invoice totaling USD 180,000 which has been invoiced to STORM
Research Inc. in the USA, and payments for all invoices have been received in foreign
currency through a bank account in Sri Lanka. (Assume USD 1 = LKR 300)

• The balance revenue is from invoices issued to Orange Holdings PLC, a large investment
company incorporated in Sri Lanka, to develop a data analytics model to analyse potential
investments in Sri Lanka.

• Software licenses have been obtained from Orax Inc., a listed company in the USA, and the
withholding tax has been deducted when making the payment.

• Capital allowances for the year were Rs. 1,456,263.

• Gratuity paid by the company for the year was Rs. 834,620.

• Assume withholding tax has been deducted on all payments subject to tax at the time of
payment.

STORM has employed Ramesh Fernando as the CEO of its office in Colombo. He is a software
engineer who has worked in the USA for the past 25 years. He has been residing in Sri Lanka
since January 2023 and has registered for income tax in Sri Lanka. His T10 from the employer
provides the following details.

• Gross annual salary: Rs. 29,500,000

• APIT deducted by the employer: Rs. 9,738,000

In addition to the above, Ramesh has the following income.

• Rental income from a property in Ward Place that has been rented out as an office:
Rs. 650,000 per month. Withholding tax has been deducted by the tenant. Other than
rates paid amounting to Rs. 120,000 for the year, there have been no other related
expenses.
• Interest income from LKR fixed deposits: Rs. 4,500,000. Withholding tax has been
deducted by the bank.
• Interest income from USD fixed deposits: USD 25,000.
• Gain on sale of quoted shares: Rs. 567,000.
• Dividend income of Rs. 6,783,567, consists of a combination of dividends paid out of
dividend received and dividends subject to withholding tax where it has been declared
out of profits.
• He has no other income during the year, other than those listed above.

Ramesh has made a payment of Rs. 3,750,000 as quarterly self-assessment payments up to

31 March 2024.

SL3 – December 2024 Page 3 of 19

Ramesh has also confirmed the following.

As at 31 March 2023 As at 31 March 2024

Rs. Rs.
Bank balances 45,755,126 6,457,235
Cash in hand 435,632 234,357

In January 2024, Ramesh purchased an apartment in QLife for a value of Rs. 75,000,000. The
Assistant Commissioner from the High Net Worth Individuals Unit at the Inland Revenue
Department has contacted Ramesh and alleged that his assessable income reported in the
return of income for Y/A 2023/24 is not sufficient to finance the purchase of an apartment
during the year.

Extracts of Articles 5, 7 and 12 of the Double Tax Agreement between Sri Lanka and USA
are given in Annexure 1 for your reference.

Required:

(a) Compute the income tax payable by STORM including remittance tax for Y/A
2023/24.
(10 marks)

(b) Explain the income tax obligations of Orax Inc. in Sri Lanka including its exposure to
permanent establishment (based on the double tax treaty between Sri Lanka and
USA), and how the tax will be paid in Sri Lanka.
(6 marks)

(c) Compute the assessable income of Ramesh for Y/A 2023/24.

(5 marks)

(d) Explain to Ramesh how he can prove to the Assistant Commissioner that he had
sufficient income to purchase the apartment during Y/A 2023/24.
(4 marks)

(Total: 25 marks)

SL3 – December 2024 Page 4 of 19

Question 02

(a)

D-Rex Lanka (Pvt) Ltd (DRL) is a company incorporated in Sri Lanka engaged in the business
of manufacturing and selling rubber products to local and foreign customers.

The following information was extracted from the monthly financial statements of the
company prepared for the month ended 31 March 2024.

Value
Revenue Rs. ‘000
Direct export sales (exclusive of VAT) 87,500
Local sales – SVAT (exclusive of VAT) 24,500
Local sales (exclusive of VAT) 7,000
Local sales (inclusive of VAT) 27,600

Other income
Profit on sale of equipment 6,800

Additional information

1. DRL is registered as both a Registered Identified Purchaser (RIP) and Registered

Identified Supplier (RIS) under the SVAT scheme since DRL is an exporter.
2. Local sales – SVAT consist of the supply of goods to RIPs under the SVAT scheme.
3. Local sales (exclusive of VAT) consist of the supply of specially designed items amounting
to Rs. 2,500,000 to the High Commission of India in Sri Lanka. The balance amount relates
to supplies made to VAT registered customers. No imported items were used with
respect to the sale made to the High Commission.
4. DRL supplies its products to local customers who are not registered for VAT by issuing
VAT inclusive invoices.
5. During the month, DRL sold some of its equipment for Rs. 8,500,000. No separate VAT
was charged for this transaction.
6. Input VAT details for the month ended 31 March 2024 are as follows.

Rs. ‘000
Input VAT paid at Customs 2,150
Input VAT on local purchases 1,250
VAT amount on SVAT purchases 1,850
Unabsorbed input VAT brought forward 250

7. Input VAT on local purchases includes a payment made for maintenance work amounting
to Rs. 15,000 in relation to a director’s car.
8. There is a tax invoice with a VAT amount of Rs. 19,000 which is dated 30 September 2022
under ‘Input VAT on local purchases’.
9. DRL received credit vouchers totaling Rs. 4,410,000 in respect of the month of March
2024.

SL3 – December 2024 Page 5 of 19

10. The company made an interim VAT payment of Rs. 1,400,000 before the due date.

Required:

(i) Assess the balance tax payable by DRL for the month ended 31 March 2024 per the
provisions of the VAT Act.
(11 marks)

DRL has appointed C&G Associates (C&G) to conduct an internal audit for Y/A 2023/24. During
the internal audit, C&G identified the following issues with respect to VAT.

1. DRL has been unable to collect the sales proceeds relating to an export invoice dated July
2023 amounting to Rs. 23,500,000 even as at 31 October 2024.

2. DRL purchased goods worth Rs. 45 million from a RIS in the month of December 2023
and settled the invoice including the VAT amount based on a tax invoice issued by the RIS.

3. A property (land and building) was disposed of during the month of January 2024 and
the entire transaction has not been considered for VAT.

Required:

(ii) State the implications of the above transactions/incidents per the VAT Act.
(4 marks)

(b)

Himesh Amarasinghe is an investor whose portfolio consists of investments in diverse

businesses. Currently, he is evaluating making an investment in an entity called Idea Software
(Pvt) Ltd (ISL) which is in the business of developing software for the local market. The
company commenced its business operations a few years ago and currently sells its products
to a few local corporates.

Himesh reviewed the latest financial statements of ISL and identified the following information
in its financial statements for the year ended 31 March 2024.

1. The company is registered only for income tax and Advance Personal Income Tax (APIT)
with the Inland Revenue Department.
2. Turnover of the company for the year ended 31 March 2024 was Rs. 120 million
(turnover of the last two quarters (Q3 and Q4) of the year ended 31 March 2024 were
Rs. 30 million and Rs. 40 million respectively)

SL3 – December 2024 Page 6 of 19

3. ISL has purchased computers on two different occasions and VAT was charged on one
invoice which was dated 30 March 2024. The other invoice, issued on 21 November 2023,
had no VAT charged on it.
4. An assessment for corporate income tax was issued for Y/A 2021/22 imposing an
additional tax liability, penalty, and interest. ISL has made a request for an administrative
review seven months ago. However, no response/determination has been issued by the
Inland Revenue Department yet.

Himesh has reached out to one of his friends, a practicing chartered accountant, and asked for
his opinion on the facts stated above.

Assume that you are the chartered accountant Himesh has reached out to.

Required:

(i) Discuss the tax applicability (income tax and value-added tax) of ISL for
Y/A 2023/24 and thereafter, per the prevailing provisions of the relevant Acts.
(5 marks)

(ii) Identify the reason for the different VAT treatment of the two invoices relating to
the purchase of computers.
(2 marks)

(iii) Evaluate the options available to ISL which it can take with respect to the
assessment issued for Y/A 2021/22.
(3 marks)

(Total: 25 marks)

SL3 – December 2024 Page 7 of 19

 SECTION 2
Question 03 (based on the common pre-seen)

(a)

In addition to the information provided in the common pre-seen in relation to Ecom Logistics
PLC (ELP), the following additional information for the year ended 31 March 2024 is also
available.

(i) The detailed unaudited income statement of ELP for the year ended 31 March 2024 is as
follows.

Notes Rs. million

Revenue from contracts with customers 447,352
Cost of sales Note 2 (371,302)
Gross profit 76,050
Other income Note 1 3,853
Selling and distribution expenses Note 2 (5,634)
Administrative expenses Note 2 (44,418)
Profit from operating activities 29,851
Finance costs Note 3 (983)
Finance income Note 4 67
Share of profit from associate (net of tax) (61)
Profit before tax 28,874
Income tax expense (7,466)
Profit for the year 21,408

Note 1: Other income

Rs. million
Dividend income 1,050
Profit on sale of fixed assets 2,250
Fair value gain on disposal of shares listed on the Colombo
Stock Exchange 553
Total 3,853

SL3 – December 2024 Page 8 of 19

 Note 2: Extract of certain expenses recorded under cost of sales, administrative
expenses and selling and distribution expenses

Rs. million
Export expenses 121,500
Import expenses 188,500
Director fees 8,500
Salaries and wages 11,775
EPF/ETF 2,400
Staff welfare 490
Provision for retirement benefits 266
Consultancy fees 75
Professional fees 1,646
Legal fees 125
IT service costs 2,290
Royalty fees 8,850
Digital marketing expenses 225
Sales promotions 2,890
Improvement expenses 3,900
Depreciation and amortisation 1,700
Amortisation of right-of-use (ROU) assets 1,500
CSR expenses 85
Meeting expenses 45
Research and development (R&D) expenses 60
Bad and doubtful debts 480
Internet and telephone expenses 74
Foreign travel expenses 620
Fines and penalties 110
WHT write-off 12

Note 3: Finance costs

Rs. million
Interest on loan 110
OD interest 85
Exchange loss (net) 711
Interest on ROU lease liability 65
Bank charges 12
Total 983

SL3 – December 2024 Page 9 of 19

 Note 4: Finance income

Rs. million
Interest on investment in Treasury bills and bonds 48
Interest on fixed deposits 19
Total 67

(ii) Dividend income is net of AIT.

(iii) Details of assets acquired during the year are as follows.

Description Cost
Rs. million
Land 1,600
Buildings 850
Furniture and fittings 125
Office equipment 175
Motor vehicles 95
Computer and equipment 430
Intangible assets (system software) 2,200
Work-in-progress 102
Total 5,577

The estimated useful life of the intangible assets is 6 years.

The company purchased Rs. 60 million worth of motor cars for the use of its executive
staff, and they are included under motor vehicles. The balance amount relates to a
lorry purchased for transport purposes.

(iv) Capital allowances claimed during Y/A 2022/23 were Rs. 1,260 million. None of the
assets reached their full tax depreciated levels in Y/A 2022/23.

(v) The ROU asset and lease liability represent the SLFRS 16 adjustment with respect to a
lease agreement entered into to use a warehouse. During the year, a new property was
leased and the addition to the ROU asset was Rs. 4,673 million. The actual lease rental
paid during the year was Rs. 1,650 million.

(vi) ELP disposed of a few office equipment and machinery (fully depreciated for
accounting purposes) during Y/A 2023/24. The total sale price of the said assets was
Rs. 2,250 million. Other details of these assets are as follows.

Description Year of purchase Cost (Rs. million)

Office equipment Y/A 2019/20 350
Machinery Y/A 2020/21 1,100

(vii) Staff welfare includes expenses relating to training sessions conducted for all the
operational staff.

SL3 – December 2024 Page 10 of 19

(viii) Gratuity payment made during the year was Rs. 49 million.

(ix) Consultancy fees include a payment made to a company in cash amounting to

Rs. 1.5 million in the month of October 2023.

(x) Professional fees comprise of fees paid with respect to secretarial, audit, tax and other
services of similar nature. All the services were obtained from entities.

(xi) Legal fees were paid to obtain certain legal advice on labour-related matters.
Rs. 75 million was paid to LTD Legal Consultants (a partnership firm) and the balance
was paid to lawyers operating in their individual capacities (monthly fee for each
lawyer is more than Rs. 200,000). WHT has not been deducted from these payments.

(xii) IT service costs represent the expenses payable to the principals in other countries.
The same expense payable is recorded under ‘other payables’ and the amount of
Rs. 1,850 million has been overdue for more than 3 years as at the balance sheet date.

(xiii) Royalty fees include payments made to foreign suppliers on several software
purchases. The payments were made after deducting the relevant WHT amounts.

(xiv) Digital marketing expenses include Rs. 25 million worth of payments made to an
individual who is a software engineer. WHT has not been deducted from these
payments.

(xv) Sales promotions include gifts given to several stakeholders amounting to

Rs. 24 million.

(xvi) Rs. 45 million was incurred as an improvement expense which constituted a major
modification to a machinery that was purchased during Y/A 2018/19 at a cost of
Rs. 75 million.

(xvii) CSR expenses relate to a donation made to the Ministry of Education.

(xviii) An amount of Rs. 9 million included under meeting expenses was incurred for the
purchase of liquor and tobacco.

(xix) R&D expenses were incurred in relation to increasing the speed of the new ERP system
to improve supply chain management for the purpose of the company’s business
development.

(xx) Bad and doubtful debts include a bad debt write-off amounting to Rs. 80 million.
Adequate action was taken to recover this debt before it was written off. The balance
amount relates to the provision made during the year (Rs. 420 million) in respect of
debtors exceeding a credit period of 180 days minus the bad debt recoveries
(Rs. 20 million), which had been allowed as an actual write-off during the previous
year of assessment.

SL3 – December 2024 Page 11 of 19

(xxi) Internet and telephone expenses include expenses incurred for the purchase of some
communication equipment amounting to Rs. 15 million that can be used for more than
5 years.

(xxii) Foreign travel expenses include the expenses related to personal visits of directors and
their families amounting to Rs. 18 million.

(xxiii) Fines and penalties relate to a payment made to the Inland Revenue Department in
respect of several late payments.

(xxiv) WHT write-off represents an irrecoverable WHT receivable amount recorded in the
statement of financial position.

(xxv) Loans and overdrafts have been obtained to be used in the production of income. The
closing balance of the said debt balances is Rs. 21,215 million.

(xxvi) The exchange loss is the net amount after adjusting for both exchange gains and losses,
details of which are as follows.

Exchange loss: Rs. 1,100 million (this is a realised loss that relates to payments to
creditors and receipts from debtors.)

Exchange gain: Rs. 389 million (this is an unrealised exchange gain that relates to
valuation of debtors and creditors booked in foreign currency as at the balance sheet
date.)

In addition to the above, Rs. 88 million worth of unrealised exchange gains on foreign
debtor balances as at the opening balance sheet date have been realised during the
year. This amount has not been taxed in the last year’s tax computation since it was
unrealised.

(xxvii) Interest income represents the net amount, and the WHT receivable amount has not
been accounted for yet (assume that there is no accrued interest accounted for the year
of assessment).

(xxviii) The company made advance income tax payments amounting to Rs. 5,200 million
during Y/A 2023/24.

Required:

Assess the balance income tax payable/ (refund due), if any, by ELP for Y/A 2023/24.
(30 marks)

SL3 – December 2024 Page 12 of 19

(b)

By 2023, Roshan was able to gradually increase his shareholding in ELP to become a majority
shareholder of ELP with 51% ownership.

Since Roshan does not have a controlling power in Ocean Shipping Line (Pvt) Ltd (OSL), he
wishes to proceed with purchasing shares of OSL which are currently owned by two brothers
who are looking to divest. Roshan expects to use his own funds to purchase those shares either
through a loan given to ELP as a shareholder (for ELP to invest) or in his individual capacity. If
he purchases these shares, his shareholding (indirectly/directly) in OSL will increase to 51%.
Since Roshan intends for OSL to operate without impacting the overall performance of ELP, he
is contemplating having the shareholding in OSL under his individual name instead of under
ELP.

Currently 26% of the shareholding in OSL is owned by ELP, therefore Roshan wants to analyse
the tax implications of the proposed acquisition, as he wants to minimise the tax leakage on his
proposed restructuring arrangement in OSL.

For this purpose, he has suggested two options and wishes to evaluate the tax implications of
each.

Option 1: Transfer 26% of the shares of OSL owned by ELP to Roshan at the market value in
the first instance, and then purchase another 25% of OSL’s shares directly under his name.

Option 2: ELP to purchase a further 25% of shares of OSL, and then transfer all 51% of shares
to Roshan.

Required:

(i) Assess the two options above and their capital gains tax (CGT) implications, including
whether the CGT liabilities on the transactions can be avoided/deferred in the hands of
ELP.

(Candidates are expected to discuss the provisions relating to the transfer of assets
between associated persons)
(8 marks)

(ii) Explain the tax compliance requirements on the filing of returns and the payment of
taxes with respect to CGT, per the provisions of the Inland Revenue Act.

(2 marks)

SL3 – December 2024 Page 13 of 19

(c)

Before increasing his shareholding in OSL, Roshan decided to engage a reputed consultancy
firm to perform a due diligence.

They highlighted the following findings with respect to taxation.

1. The company has accumulated business losses from Y/A 2018/19.

2. The company has accumulated unclaimed finance costs from Y/A 2018/19.

3. An assessment has been issued for Y/A 2022/23 disallowing an amount of

Rs. 3.7 million, which was debited to the income statement. This amount was paid for
the improvement of machinery purchased at a cost of Rs. 6.5 million during the same
year of assessment. At the time of purchase, the company was aware that the machinery
could not be used for the production of income without first improving it.

Required:

(i) Analyse the ability of OSL (post restructuring) to claim accumulated business losses and
unclaimed financial costs (you may explain the limitations on claiming business
losses/finance costs, the ability to carry forward to future periods, and suggestions to
improve claimability).
(5 marks)

(ii) Assess whether OSL can successfully defend its position against the assessment issued
on the payment made for the improvement of machinery per the provisions of the Inland
Revenue Act No. 24 of 2017. Support your answer with a decided case law.
(5 marks)

(Total: 50 marks)

SL3 – December 2024 Page 14 of 19

Annexure 1
Extracts of the Agreement between the Government of the Democratic Socialist Republic
of Sri Lanka and the Government of the United States of America for the avoidance of
double taxation and the prevention of fiscal evasion with respect to taxes on income

Article 5

Permanent Establishment

1. For the purposes of this Convention, the term "permanent establishment" means a fixed
place of business through which the business of an enterprise is wholly or partly carried
on.

2. The term "permanent establishment" shall include especially:

(a) a place of management;

(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a store or premises used as a sales outlet; and
(g) a mine, an oil or gas well, a quarry, or other place of extraction of natural resources.

3. The term "permanent establishment" likewise encompasses:

(a) a building site or construction or installation project, or an installation or drilling

rig or ship used for the exploration for or development of natural resources, but
only if it lasts more than 183 days; and
(b) the furnishing of services, including consultancy services, by an enterprise through
employees or other personnel engaged by the enterprise for such purpose, but only
where activities of that nature continue (for the same or a connected project)
within the country for a period or periods aggregating more than 183 days within
any 12-month period.

4. Notwithstanding the preceding provisions of this Article, the term "permanent

establishment" shall be deemed not to include:

(a) the use of facilities solely for the purpose of storage, display, or delivery of goods
or merchandise belonging to the enterprise, other than goods or merchandise
held for sale by such enterprise in a store or premises used as a sales outlet;
(b) the maintenance of a stock of goods or merchandise belonging to the enterprise
solely for the purpose of storage, display, or delivery, other than goods or
merchandise held for sale by such enterprise in a store or premises used as a sales
outlet;
(c) the maintenance of a stock of goods or merchandise belonging to the enterprise
solely for the purpose of processing by another enterprise;

SL3 – December 2024 Page 15 of 19

 (d) the maintenance of a fixed place of business solely for the purpose of purchasing
goods or merchandise, or of collecting information, for the enterprise;
(e) the maintenance of a fixed place of business solely for the purpose of carrying on,
for the enterprise, any other activity of a preparatory or auxiliary character;
(f) the maintenance of a fixed place of business solely for any combination of the
activities mentioned in subparagraphs (a) to (e) of this paragraph.

5. Notwithstanding the provisions of paragraphs 1 and 2, where a person – other than an

agent of an independent status to whom paragraph 7 applies – is acting in a Contracting
State on behalf of an enterprise of the other Contracting State, that enterprise shall be
deemed to have a permanent establishment in the first-mentioned State in respect of any
activities which that person undertakes for the enterprise, if such a person:

(a) has, and habitually exercises in that State an authority to conclude contracts in the
name of the enterprise, unless the activities of such person are limited to those
mentioned in paragraph 4 which, if exercised through a fixed place of business,
would not make that fixed place of business a permanent establishment under the
provisions of that paragraph; or
(b) has no such authority, but habitually maintains in the first-mentioned State a stock
of goods or merchandise from which he regularly fills orders or makes deliveries on
behalf of the enterprise and additional activities conducted in that State on behalf
of the enterprise have contributed to the conclusion of the sale of such goods or
merchandise.

6. Notwithstanding the preceding provisions of this Article, an insurance enterprise of one of

the Contracting States shall, except in regard to re-insurance, be deemed to have a
permanent establishment in the other Contracting State if it collects premiums in the
territory of that other State or insures risks situated therein through a person other than
an agent of an independent status to whom paragraph 7 applies.

7. An enterprise shall not be deemed to have a permanent establishment in a Contracting

State merely because it carries on business in that State through a broker, general
commission agent, or any other agent of an independent status, where such persons are
acting in the ordinary course of their business. However, when the activities of such an
agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be
considered an agent of an independent status within the meaning of this paragraph, if it is
shown that the transactions with the agent and the enterprise were not made under
arm’s length conditions.

8. The fact that a company which is a resident of a Contracting State controls or is controlled
by a company which is a resident of the other Contracting State, or which carries on
business in that other State (whether through a permanent establishment or otherwise),
shall not of itself constitute either company a permanent establishment of the other.

SL3 – December 2024 Page 16 of 19

 Article 7

Business Profits

1. The business profits of an enterprise of a Contracting State shall be taxable only in that
State unless the enterprise carries on business in the other Contracting State through a
permanent establishment situated therein. If the enterprise carries on business as
aforesaid, the business profits of the enterprise may be taxed in the other State but only so
much of them as is attributable to:

(a) that permanent establishment;

(b) sales in that other State of goods or merchandise of the same or similar kind as those
sold through that permanent establishment; or
(c) other business activities carried on in that other State of the same or similar kind as
those effected through that permanent establishment.

2. Subject to the provisions of paragraph 3, when an enterprise of a Contracting State carries

on business in the other Contracting State through a permanent establishment situated
therein, there shall in each State be attributed to that permanent establishment the
business profits which it might be expected to make if it were a distinct and independent
enterprise engaged in the same or similar activities under the same or similar conditions.

3. In the determination of the business profits of a permanent establishment, there shall be

allowed as deductions expenses which are incurred for the purposes of the business of the
permanent establishment, including executive and general administrative expenses,
research and development expenses, interest, and other expenses incurred, whether in the
State, in which the permanent establishment is situated or elsewhere. However, no such
deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards
reimbursement of actual expenses) by the permanent establishment to the head office of
the enterprise or any of its other offices, by way of royalties, fees, or other similar payments
in return for the use of patents or other rights, or by way of commission, for specific
services performed or for management, or by way of interest on moneys lent to the
permanent establishment. Likewise, no account shall be taken in the determination of the
profits of a permanent establishment for amounts charged (otherwise than towards
reimbursement of actual expenses) by the permanent establishment to the head office of
the enterprise or any of its other offices by way of royalties, fees, or other similar payments
in return for the use of patents or other rights, or by way of commission for specific services
performed or for management, or by way of interest on moneys lent to the head office of
the enterprise or any of its other offices.

4. Insofar as it has been customary in a Contracting State to determine the profits to be

attributed to a permanent establishment on the basis of an apportionment of the total
profits of the enterprise to its various parts, nothing in paragraph 2 shall preclude that
State from determining the profits to be taxed by such an apportionment as may be
customary. The method of apportionment shall, however, be such that the result will be in
accordance with the principles contained in this Article.

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5. No business profits shall be attributed to a permanent establishment by reason of the mere
purchase by that permanent establishment of goods or merchandise for the enterprise.

6. For the purposes of the preceding paragraphs, the business profits to be attributed to the
permanent establishment shall be determined by the same method from year to year
unless there is good and sufficient reason to the contrary.

7. Where business profits include items of income which are dealt with separately in other
Articles of this Convention, then the provisions of those Articles shall not be affected by the
provisions of this Article.

8. In applying paragraphs 1 and 2 of this Article, paragraph 4 of Article 10 (Dividends),

paragraph 5 of Article 11 (Interest), paragraph 5 of Article 12 (Royalties), paragraph 3 of
Article 13 (Capital gains) and Article 15 (Independent Personal Services), any income or
gain attributable to a permanent establishment or fixed base during its existence is taxable
in the Contracting State where such permanent establishment or fixed base is situated,
even if payments are deferred and received after the permanent establishment or fixed
base has ceased to exist.

Article 12

Royalties

1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State
may be taxed in that other State.

2. Royalties defined in paragraph 4(a) may also be taxed in the Contracting State in which
they arise and according to the laws of that State, but if the beneficial owner of such
royalties is a resident of the other Contracting State, the tax so charged shall not exceed 10
percent of the gross amount of the royalties.

3. Royalties defined in paragraph 4(b) may also be taxed in the Contracting State in which
they arise and according to the laws of that State. However, if the beneficial owner of such
royalties is a resident of the other Contracting State, the rate of tax charged in the first-
mentioned State shall not exceed 5 percent of the gross amount of the royalties.

4. The term "royalties" as used in this Article means:

(a) payments of any kind received as a consideration for the use of, or the right to use,
any copyright of literary, artistic or scientific work, including cinematograph films or
films or tapes used for radio or television broadcasting, any patent, trademark, design
or model, plan, secret formula or process, or other like right or property, or for
information concerning industrial, commercial, or scientific experience. The term
"royalties" also includes gains derived from the alienation of any such right or
property which are contingent on the productivity, use, or disposition thereof;

(b) rentals for the use of tangible personal (movable) property.

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5. The provisions of paragraphs 2 and 3 shall not apply if the beneficial owner of the royalties,
being a resident of a Contracting State, carries on business in the other Contracting State
in which the royalties arise through a permanent establishment situated therein, or
performs in that other State independent personal services from a fixed base situated
therein, and the right or property in respect of which the royalties are paid is effectively
connected with such permanent establishment or fixed base. In such a case, the provisions
of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case
may be, shall apply.

6. Royalties shall be deemed to arise in a Contracting State:

(a) with respect to the royalties defined in paragraph 4(a), when the payer is that State
itself, a political subdivision or a local authority thereof, or a resident of that State.
However, where the right or property for which the royalties are paid is used within
the United States, the royalties shall be deemed to arise in the United States to the
extent of the use therein;

(b) with respect to royalties defined in paragraph (b), to the extent the property for
which the royalties are paid is used within that Contracting State.

7. Where, by reason of a special relationship between the payer and the beneficial owner or
between both of them and some other person, the amount of the royalties paid, having
regard to the use, right, or information for which they are paid, exceeds the amount which
would have been agreed upon by the payer and the person deriving the royalties in the
absence of such relationship, the provisions of this Article shall apply only to the last-
mentioned amount. In such a case, the excess part of the payments shall remain taxable
according to the law of each Contracting State, due regard being had to the other provisions
of this Convention.

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