5. The Inland Revenue Act, No. 4 of 1963, in its application to the foreign company, and to the Sri Lanka company in connection with or in relation to but only in connection with or in relation to, any matter arising out of the transfer by the foreign company of its business, assets and liabilities in Sri Lanka to the Sri Lanka company shall have effect subject to the modifications set out hereunder, that is to say-
| (A) in respect of the foreign company-
| | (1) no deduction under section 10 of that Act shall be allowed in respect of any sum given by the foreign company to the Sri Lanka company for the payment of any gratuity, pension, or other benefit by the Sri Lanka company to any employee for services rendered by him to the foreign company; | | |
| | (2) no account shall be taken of any capital gains or capital losses of the foreign company arising from-
| | | (a) the transfer of its business and property to the Sri Lanka company, or |
| (b) the transfer by the foreign company to any of its shareholders of any shares in the Sri Lanka company if the transfer of such shares is made within twelve months after the allotment of shares to the foreign company by the Sri Lanka company and if such shares are transferred to the shareholders in the same proportion in which such shareholders held shares in the foreign company immediately prior to such transfer; |
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| | (3) in relation to the transfer of any plant, machinery, fixtures or building to the Sri Lanka company by the foreign company such of the provisions of section 10 of that Act as ordinarily are applicable upon such transfer shall have no application to the foreign company; | | |
| | (4) the provisions of section 15 (3) of that Act shall have no application; and | | |
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| (B) in respect of the Sri Lanka company-
| | (1) that company shall, for the purpose of ascertaining its profits and income, be entitled to deduct-
| | | (a) the preliminary expenses including conveyance expenses incurred in connection with the formation of the company; |
| (b) any sum paid to an employee as pension, gratuity or other benefit for services rendered by him to the foreign company; and |
| (c) where more than fifty per centum of the shares in that company are held by the foreign company or by such shareholders in the foreign company as are not citizens of Sri Lanka or by both, the expenses incurred by the Sri Lanka company in respect of the visit to Sri Lanka once in every year by one director of the Sri Lanka company who is not resident in Sri Lanka in connection with the production of the profits or income from the trade or business carried on by the Sri Lanka company; |
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| | (2) for the purpose of computing the capital gain or the capital loss of the Sri Lanka company arising from the change of ownership of any property previously transferred to that company by the foreign company-
| | | (a) the value of such property at the time of its acquisition by the Sri Lanka company shall-
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| (b) any expenditure which was previously incurred by the foreign company in respect of such property and which the foreign company would have been entitled to deduct had the foreign company been the owner of such property immediately before the occurrence of the change of ownership shall be an expenditure which the Sri Lanka company shall be entitled to deduct; |
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| | (3) for the purpose of the application of the provisions of section 10 of that Act to the Sri Lanka company in relation to any such plant, machinery, fixtures or building transferred to that company by the foreign company, the Sri Lanka company and the foreign company shall be treated as one and the same company and accordingly-
| | | (a) no deduction under paragraph (h) of subsection (1) of section 10 of that Act for depreciation by wear and tear of any such plant, machinery or fixtures (transferred to the Sri Lanka company by the foreign company) shall be allowed to the Sri Lanka company; |
| (b) any deduction previously made under the provisions of that section by the foreign company in respect of any such plant. section by the foreign company in respect of any such plant, machinery or fixtures shall be treated as a deduction made by the Sri Lanka company; |
| (c) where the Sri Lanka company sells, discards, or otherwise disposes of, or otherwise ceases to be the owner of, such plant, machinery, fixtures or building the provisions of that section shall apply to the Sri Lanka company in respect of such plant, machinery, fixtures or building in the same manner and to the same extent as those provisions would have applied to the foreign company if the foreign company had been the owner of such plant, machinery, fixtures or building immediately before the occurrence of the sale, discard or other disposal or cessation of ownership; |
| (d) in the event of the repair or renewal by the Sri Lanka company of any such plant, machinery, fixtures or building that company shall be entitled to make in respect of the repair or renewal the same deduction the foreign company would have been entitled to make if the repair or renewal had been effected by the foreign company; and |
| (e) for the purpose of calculating the written-down value of any such plant, machinery or fixtures the cost to the Sri Lanka company of such plant, machinery or fixtures shall be the written-down value of such plant, machinery or fixtures at the time of the transfer of such plant, machinery or fixtures to the Sri Lanka company; |
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| | (4) any loss (including any capital loss) which was incurred by the foreign company in respect of which a deduction could have been made by that company if it had not transferred its business to the Sri Lanka company shall be treated as a loss incurred by the Sri Lanka company and accordingly the Sri Lanka company shall be entitled to make in respect of that loss any deduction which the foreign company could have made under that Act had it not transferred its business; | | |
| | (5) any amount in respect of which a deduction could have been made by the foreign company under section 15 (4) of that Act if it had not transferred its business to the Sri Lanka company shall be treated as an amount in respect of which the Sri Lanka company shall be entitled to make a deduction. | | |
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Sri Lanka Consolidated Acts