Protocol Amending the Convention… US and SriLanka… Taxes on Income, September 20, 2002

PROTOCOL AMENDING THE CONVENTION BETWEEN

THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND

THE GOVERNMENT OF THE DEMOCRATIC SOCIALIST REPUBLIC OF

SRI LANKA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE

PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

SIGNED AT COLOMBO MARCH 14, 1985

The Government of the United States of America and the Government of the
Democratic Socialist Republic of Sri Lanka, desiring to conclude a Protocol to amend the
Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income signed at Colombo on March 14, 1985 (hereinafter referred to as
“the Convention”), have agreed as follows:
Article I
Paragraph 3 of Article 1 (Personal Scope) of the Convention shall be deleted and
replaced with the following:
“3. Notwithstanding any provision of the Convention except paragraph 4 of this
Article, a Contracting State may tax its residents (as determined under Article 4
(Resident)), and by reason of citizenship may tax its citizens, as if the Convention had
not come into effect. For this purpose, the term “citizen” shall include a former citizen
or long-term resident whose loss of such status had as one of its principal purposes the
avoidance of tax (as defined under the laws of the Contracting State of which the person
was a citizen or long-term resident), but only for a period of 10 years following such
loss.”
A new paragraph 5 shall be added to Article 1 (Personal Scope) of the Convention as
follows:
“5. Notwithstanding the provisions of subparagraph 2(b):
(a) the provisions of Article 26 (Mutual Agreement Procedure) of this
Convention exclusively shall apply to any dispute concerning whether a measure
is within the scope of this Convention, and the procedures under this Convention
exclusively shall apply to that dispute; and
(b) unless the competent authorities determine that a taxation measure is
not within the scope of this Convention, the nondiscrimination obligations of
this Convention exclusively shall apply with respect to that measure, except for
such national treatment or most-favored-nation obligations as may apply to trade
in goods under the General Agreement on Tariffs and Trade. No national
treatment or most- fa vored-nation obligation under any other agreement shall
apply with respect to that measure.
(c) For the purpose of this paragraph, a “measure” is a law, regulation,
rule, procedure, decision, administrative action, or any similar provision or
action.”
Article II
Subparagraph (b) of paragraph 2 of Article 2 (Taxes Covered) of the Convention shall
be deleted and replaced by the following:
“(b) In the United States: the Federal income taxes imposed by the
Internal Revenue Code of 1986, but excluding the accumulated earnings tax, the

2
personal holding company tax, and social security taxes (hereinafter referred to
as “United States tax”).”
Article III
Subparagraph (f) of paragraph 1 of Article 3 (General Definitions) of the Convention
shall be deleted and replaced by the following:
“(f) the terms “enterprise of a Contracting State” and “enterprise of the
other Contracting State” mean respectively an enterprise carried on by a resident
of a Contracting State, and an enterprise carried on by a resident of the other
Contracting State; the terms also include an enterprise carried on by a resident of
a Contracting State through an entity that is treated as fiscally transparent in that
Contracting State;”
The following new subparagraph (j) shall be added to paragraph 1 of Article 3 (General
Definitions) of the Convention:
“(j) the term “qualified governmental entity” means:
(i) any person or body of persons that constitutes a governing
body of a Contracting State, or of a political subdivision or local
authority of a Contracting State;
(ii) a person that is wholly owned, directly or indirectly, by a
Contracting State or a political subdivision or local authority of a
Contracting State, provided (A) it is organized under the laws of the
Contracting State, (B) its earnings are credited to its own account with
no portion of its income inuring to the benefit of any private person, and
(C) its assets vest in the Contracting State, political subdivision or local
authority upon dissolution; or
(iii) a pension trust or fund of a person described in
subparagraphs (i) or (ii) that is constituted and operated exclusively to
administer or provide pension benefits described in Article 19 (Pensions,
Social Security, and Child Support Payments);
provided that an entity described in subparagraphs (ii) or (iii) does not carry on
commercial activities.”
Paragraph 2 of Article 3 (General Definitions) of the Convention shall be deleted and
replaced by the following:
“2. As regards the application of the Convention at any time by a Contracting
State, any term not defined therein shall, unless the context otherwise requires, or the
competent authorities agree to a common meaning pursuant to the provisions of Article
26 (Mutual Agreement Procedure), have the meaning which it has at that time under the
laws of that State for the purposes of the taxes to which the Convention applies. For the
purposes of this paragraph, the meaning given to any term under the laws of that State
relating to the taxes to which the Convention applies shall prevail over any meaning
given to that term under any other laws of that State.”
Article IV
Subparagraph (b) of paragraph 1 of Article 4 (Resident) shall be deleted and replaced by
the following:

3
“(b) an item of income, profit or gain derived through an entity that is
fiscally transparent under the laws of either Contracting State shall be
considered to be derived by a resident of a State to the extent that the item is
treated for purposes of the taxation law of such Contracting State as the income,
profit or gain of a resident;”
The following new subparagraphs (c) and (d) shall be added to paragraph 1 of Article 4
(Resident):
“(c) in the case of the United States, a legal person organized under the
laws of the United States and that is generally exempt from tax in that State and
is established and maintained in that State either:
(i) exclusively for a religious, charitable, educational, scientific,
or other similar purpose; or
(ii) to provide pensions or other similar benefits to employees
pursuant to a plan
is to be treated for purposes of this paragraph as a resident of the United States;
and
(d) a qualified governmental entity is to be treated as a resident of the
Contracting State where it is established.”
Article V
A new paragraph 8 shall be added to Article 7 (Business Profits) of the Convention as
follows:
“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 VI
Paragraph 5 of Article 8 (Shipping and Air Transport) of the Convention shall be
deleted and replaced with the following:
“5. Profits of an enterprise of a Contracting State from the use, maintenance, or
rental of containers (including trailers, barges, and related equipment for the transport of
containers) used for the transport in international traffic of goods or merchandise shall
be taxable only in that State.”
Paragraph 6 of Article 8 (Shipping and Air Transport) of the Convention shall be
deleted and replaced with the following:
“6. For purposes of determining the maximum tax which may be imposed by a
Contracting State under paragraphs 2 and 4, the following rules shall apply:

4
(a) the tax which may be imposed by the other Contracting State under
paragraph 2 shall not exceed the lesser of the tax which may be imposed under
the provisions of that paragraph and the lowest rate of Sri Lanka tax that may be
imposed on the profits of the same kind derived under similar circumstances by
a resident of a third State. For purposes of this subparagraph, if Sri Lanka
imposes an additional amount of tax which is not covered by this Convention in
place of the income tax on an enterprise resident in a third State, the amount of
such additional tax shall be treated as Sri Lanka tax; and
(b) the tax which may be imposed by the other Contracting State under
paragraph 4 shall not exceed the lesser of the tax which may be imposed under
the provisions of that paragraph, and the lowest Sri Lanka tax burden on such
income derived by a resident of any third State.
For purposes of this paragraph, Sri Lanka tax imposed on a resident of a third State
shall not include tax imposed by Sri Lanka under special provisions of its statutory law,
in effect on the date of signature of this Convention, on income of the kind dealt with in
this Article, which special provisions are applicable only to income derived by the
Government or by a government agency of a third State.”
Article VII
The following shall be added at the end of paragraph 2 of Article 10 (Dividends) of the
Convention:
“In the case of dividends paid by a United States Real Estate Investment Trust (REIT),
the tax rate limitation in the preceding sentence shall apply instead of the rate of tax
applicable under domestic law only if:
(a) the beneficial owner of the dividends is an individual holding a less
than 10 percent interest in the REIT;
(b) the dividends are paid with respect to a class of stock that is publicly
traded and the beneficial owner of the dividends is a person holding an interest
of no more than 5 percent in any class of the REIT’s stock; or
(c) the beneficial owner of the dividends is a person that beneficially
holds an interest of 10 percent or less in the REIT and the value of no single
interest in real property owned by the REIT exceeds 10 percent of the value of
the REIT’s total interests.”
Paragraph 3 of Article 10 (Dividends) of the Convention shall be deleted and replaced
with the following:
“3. The term “dividends” as used in this Article means income from shares,
mining shares, founders' shares, or other rights, not being debt-claims, participating in
profits, as well as income from other corporate rights which is subjected to the same
taxation treatment as income from shares by the taxation laws of the State of which the
company making the distribution is a resident; and income from arrangements,
including debt obligations, carrying the right to participate in profits, to the extent so
characterized under the laws of the Contracting State in which the income arises.”
Article VIII
Paragraph 4 of Article 11 (Interest) of the Convention shall be deleted and replaced with
the following:

5
“4. The term “interest” as used in this Convention means income from
Government securities, bonds or debentures, whether or not secured by mortgage, and
whether or not carrying a right to participate in profits, and debt-claims of every kind as
well as all other income assimilated to income from money lent by the taxation laws of
the State in which the income arises, including an excess inclusion with respect to a
residual interest in a real estate mortgage investment conduit. Penalty charges for late
payment shall not be regarded as interest for purposes of this Convention. The term
“interest” also does not include income dealt with under Article 10 (Dividends).”
Paragraph 5 of Article 11 (Interest) of the Convention shall be deleted and replaced with
the following:
“5. The provisions of paragraphs 2 and 3 shall not apply:
(a) if the beneficial owner of the interest, being a resident of a Con­
tracting State, carries on business in the other Contracting State in which the
interest arises through a permanent establishment situated therein, or performs in
that other State independent personal services from a fixed base situated therein,
and the debt-claim in respect of which such interest is paid is effectively
connected with such permanent establishment or fixed base; in such case, the
provisions of Article 7 (Business Profits) or Article 15 (Independent Personal
Services), as the case may be, shall apply;
(b) to an excess inclusion with respect to a residual interest in a real
estate mortgage investment conduit; such an interest may be taxed in the
Contracting State in which the excess inclusion arises according to the laws of
that State; or
(c) to interest that is contingent interest of a type that does not qualify as
portfolio interest under United States law, and to equivalent amounts under the
law of Sri Lanka; if the beneficial owner is a resident of the other Contracting
State, such interest may be taxed in the Contracting State in which it arises, but
the tax so charged shall not exceed 15 percent of the gross amount of the
interest.”
Paragraph 6 of Article 11 (Interest) of the Convention shall be deleted and replaced with
the following:
“6. Interest shall be deemed to arise in a Contracting State when the payer is that
State itself, a political or administrative subdivision, a local authority or a resident of
that State. Where, however, the person paying the interest, whether he is a resident of a
Contracting State or not, has in a Contracting State a permanent establishment or a fixed
base or a trade or business subject to tax in that State on a net basis under Article 6
(Income from Immovable Property (Real Property)) or paragraph 1 of Article 13
(Capital Gains), and such interest is borne by such perma nent establishment, fixed base,
or trade or business, then such interest shall be deemed to arise in the State in which the
permanent establishment, fixed base, or trade or business is situated.”
Article IX
The following new Article shall be added as Article 12A (Branch Tax) of the
Convention:

6
“Article 12A
BRANCH TAX
1. A company that is a resident of a Contracting State may be subject in the
other Contracting State to a tax in addition to the tax chargeable under the other
provisions of this Convention.
2. Such tax, however, may be imposed only on
(a) in the case of the United States:
(i) the portion of the business profits of the corporation
attributable to a permanent establishment in the United States and the
portion of the income that is subject to tax in the United States on a net
basis under Article 6 (Income from Immovable Property (Real Property))
or Article 13 (Capital Gains) that represents the dividend equivalent
amount of such profits or income; and
(ii) the excess, if any, of interest allocable to the business profits
of the corporation that are subject to tax in the United States and
attributable to a permanent establishment in the United States or to the
income subject to tax in the United States on a net basis under Article 6
(Income from Immovable Property (Real Property)) or Article 13
(Capital Gains) of this Convention over the interest paid by the
permanent establishment or by the trade or business in the United States
under Articles 6 or 13.
(b) in the case of Sri Lanka:
(i) the portion of the business profits of the corporation
attributable to a permanent establishment in Sri Lanka and the portion of
the income that is subject to tax in Sri Lanka on a net basis under Article
6 (Income from Immovable Property (Real Property)) or Article 13
(Capital Gains) that represents the dividend equivalent amount of such
profits or income; and
(ii) the excess, if any, of interest allocable to the business profits
of the corporation that are subject to tax in Sri Lanka and attributable to a
permanent establishment in Sri Lanka or to the income subject to tax in
Sri Lanka on a net basis under Article 6 (Income from Immovable
Property (Real Property)) or Article 13 (Capital Gains) of this
Convention over the interest paid by the permanent establishment or by
the trade or business in Sri Lanka under Articles 6 or 13.
3. The taxes described in paragraph 2 of this Article shall not be imposed at a
rate exceeding
(a) the rate specified in paragraph 2 of Article 10 (Dividends) for the tax
described in subparagraphs (a)(i) and (b)(i) of paragraph 2 of this Article; and
(b) the rate specified in paragraph 2 of Article 11 (Interest) for the tax
described in subparagraphs (a)(ii) and (b)(ii) of paragraph 2 of this Article.”

7
Article X
Paragraph 4 of Article 13 (Capital Gains) of the Convention shall be deleted and
replaced with the following:
“4. Gains derived by an enterprise of a Contracting State from the alienation of
ships, aircraft, or containers operated or used in international traffic or movable
property pertaining to the operation or use of such ships, aircraft, or containers shall be
taxable only in that State.”
Article XI
Paragraph 1 of Article 16 (Dependent Personal Services) shall be deleted and replaced
with the following:
“1. Subject to the provisions of Articles 18 (Artistes and Athletes), 19 (Pensions,
Social Security, and Child Support Payments) and 20 (Government Service), salaries,
wages, and other remuneration derived by a resident of a Contracting State in respect of
an employment shall be taxable only in that State unless the employment is exercised in
the other Contracting State. If the employment is so exercised, such remuneration as is
derived therefrom may be taxed in that other State.”
Article XII
Article 17 (Directors’ Fees) shall be deleted and replaced by the following:
“Directors' fees and other compensation derived by a resident of a Contracting
State for services rendered in the other Contracting State as a member of the board of
directors of a company that is a resident of the other Contracting State may be taxed in
that other Contracting State.”
Article XIII
Paragraph 2 of Article 19 (Pensions, Social Security, and Child Support Payments) shall
be deleted and replaced by the following”
“2. Notwithstanding the provisions of paragraph 1, pensions paid and other
payments made under a public scheme that is part of the social security system of a
Contracting State shall, notwithstanding the provisions of Article 20 (Government
Service), be taxable only in that State.”
Article XIV
The second sentence of Article 20 (Government Service) of the Convention shall be
deleted and replaced with the following:
“However, the provisions of Articles 15 (Independent Personal Services), 16
(Dependent Personal Services), 18 (Artistes and Athletes), or 19 (Pensions, Social
Security, and Child Support Payments), as the case may be, shall apply, and the
preceding sentence shall not apply, to remuneration paid in respect of services rendered
in connection with a business carried on by a Contracting State or political subdivision
or local authority thereof.”

8
Article XV
Article 23 (Limitation on Benefits) of the Convention shall be deleted and replaced by
the following:
“1. A resident of a Contracting State shall be entitled to benefits otherwise
accorded to residents of a Contracting State by this Convention only to the extent
provided in this Article.
2. A resident of a Contracting State shall be entitled to all the benefits of this
Convention if the resident is:
(a) an individual;
(b) a qualified governmental entity;
(c) a company, if
(i) all the shares in the class or classes of shares representing
more than 50 percent of the voting power and value of the company are
regularly traded on a recognized stock exchange, or
(ii) at least 50 percent of each class of shares in the company is
owned directly or indirectly by companies entitled to benefits under
clause (i), provided that in the case of indirect ownership, each
intermediate owner is a person entitled to benefits of the Convention
under this paragraph;
(d) a person described in subparagraph 1(c)(i) of Article 4 (Resident);
(e) a person described in subparagraph 1(c)(ii) of Article 4 (Resident),
provided that more than 50 percent of the person's beneficiaries, members or
participants are individuals resident in either Contracting State; or
(f) a person other than an individual, if:
(i) On at least half the days of the taxable year persons described
in subparagraphs (a), (b), (c), (d) or (e) own, directly or indirectly
(through a chain of ownership in which each person is entitled to benefits
of the Convention under this paragraph), at least 50 percent of each class
of shares or other beneficial interests in the person, and
(ii) less than 50 percent of the person's gross income for the
taxable year is paid or accrued, directly or indirectly, to persons who are
not residents of either Contracting State (unless the payment is
attributable to a permanent establishment situated in either State), in the
form of payments that are deductible for income tax purposes in the
person’s State of residence.
3. (a) A resident of a Contracting State not otherwise entitled to benefits
shall be entitled to the benefits of this Convention with respect to an item of
income derived from the other State, if:
(i) the resident is engaged in the active conduct of a trade or
business in the first-mentioned State,
(ii) the income is connected with or incidental to the trade or
business, and

9
(iii) the trade or business is substantial in relation to the activity
in the other State generating the income.
(b) For purposes of this paragraph, the business of making or managing
investments will not be considered an active trade or business unless the activity
is banking, insurance or securities activity conducted by a bank, insurance
company or registered securities dealer.
(c) Whether a trade or business is substantial for purposes of this para-
graph will be determined based on all the facts and circumstances. In any case,
however, a trade or business will be deemed substantial if, for the preceding
taxable year, or for the average of the three preceding taxable years, the asset
value, the gross income, and the payroll expense tha t are related to the trade or
business in the first-mentioned State equal at least 7.5 percent of the resident's
(and any related parties') proportionate share of the asset value, gross income
and payroll expense, respectively, that are related to the activity that generated
the income in the other State, and the average of the three ratios exceeds 10
percent.
(d) Income is derived in connection with a trade or business if the
activity in the other State generating the income is a line of business that forms a
part of or is complementary to the trade or business. Income is incidental to a
trade or business if it facilitates the conduct of the trade or business in the other
State.
4. A resident of a Contracting State not otherwise entitled to benefits may be
granted benefits of the Convention if the competent authority of the State from which
benefits are claimed so determines.
5. For purposes of this Article the term “recognized stock exchange” means:
(a) the NASDAQ System owned by the National Association of
Securities Dealers, Inc. and any stock exchange registered with the U.S.
Securities and Exchange Commission as a national securities exchange under
the U.S. Securities Exchange Act of 1934; and
(b) the Colombo Stock Exchange; and
(c) any other stock exchange agreed upon by the competent authorities of
the Contracting States.”
Article XVI
1. Paragraph 4 of Article 24 (Relief from Double Taxation) of the Convention shall be
deleted and replaced with the following:
“4. For purposes of allowing relief from double taxation pursuant to this Article,
and subject to the limitations of the domestic laws of either Contracting State, income
derived by a resident of a Contracting State which may be taxed in the other
Contracting State in accordance with this Convention (other than solely by reason of
citizenship in accordance with paragraph 3 of Article 1 (Personal Scope)) shall be
deemed to arise in that other State.”

10
Article XVII
Paragraph 5 of Article 25 (Nondiscrimination) of the Convention shall be renumbered
as paragraph 6, and a new paragraph 5 shall be added as follows:
“5. Nothing in this Article shall be construed as preventing either Contracting
State from imposing the tax described in Article 12A (Branch Tax).”
Article XVIII
Paragraph 2 of Article 26 (Mutual Agreement Procedure) shall be deleted and replaced
by the following:
“2. The competent authority shall endeavor, if the objection appears to it to be
justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case
by mutual agreement with the competent authority of the other Contracting State, with a
view to the avoidance of taxation which is not in accordance with the Convention. Any
agreement reached shall be implemented notwithstanding any time limits or other
procedural limitations in the domestic law of the Contracting States.”
Article XIX
This Protocol shall be subject to ratification in accordance with the applicable
procedures of each Contracting State and instruments of ratification shall be exchanged at
Colombo as soon as possible. The Protocol shall enter into force upon the exchange of
instruments of ratification, and shall have effect in accordance with Article 29 (Entry into
Force) of the Convention.
IN WITNESS WHEREOF the undersigned, duly authorized thereto by their respective
Governments, have signed this Protocol.
Done at New York this 20
th
day of September, 2002, in duplicate, in English. A
Sinhalese language text shall be prepared which shall be considered equally authentic upon an
exchange of diplomatic notes confirming its conformity with the English language text.
FOR THE GOVERNMENT OF THE FOR THE GOVERNMENT OF THE
SRI LANKA:
UNITED STATES OF AMERICA: DEMOCRATIC SOCIALIST REPUBLIC OF