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Understanding Nepal's Taxation System

1. What main taxes are businesses subject to in your jurisdiction?
The main taxes that businesses are subject to in Nepal are as follows:
 
Income tax, made up of:
normal corporate tax: at 25%. Certain sectors like hydropower are taxed at concessional rate of 20% and other sectors like banking are taxed at 30% (section 2(4), Schedule 1, Income Tax Act 2002 (ITA)));
dividend: at 5% (section 88 (2) (a), ITA); and 
capital gains (for the gain from the disposition of the shares of non-listed company) are subject to withholding tax at 10% for a natural person and at 15% for others (section 95A, ITA).
 
However, the entire capital gain is subject to tax at the normal corporate rate applicable to the particular entity/person.
Value Added Tax (VAT): at 13% on the goods and service subject to VAT (Value Added Tax Act 1996).
Withhold taxes: certain payments are subject to withholding including payment of royalties (15%) and rent (10%).
Custom duty: applies at the rate as imposed by the Fiscal Act introduced each fiscal year based on the nature of the goods being imported.
Tax returns are filed under a self-assessment system and must be certified by the auditor and submitted along with the audited accounts within the stipulated time.
 
2. What are the circumstances under which a business becomes liable to pay tax in your jurisdiction?
Tax resident
The following companies are considered to be resident in Nepal for tax purposes in any fiscal year:
  • Companies registered in Nepal (in which case the place of management will not be relevant). 
  • Companies registered outside Nepal, if their place of effective management is deemed to be in Nepal in such fiscal year.
Resident businesses are taxed on their worldwide income. In addition, a foreign permanent establishment of a non-resident person situated in Nepal is also considered to be a resident of Nepal for tax purposes.
Section 2 (ay) of the ITA read with Sections 2 (ay) and 2 (aab) of the ITA defines ''foreign permanent establishment'' as a foreign company, trust, partnership that:
  • Undertakes business fully or partly from any places in Nepal through an agent, other than an independent agent.
  • Installs or uses its main machinery or equipment at any place in Nepal.
  • Provides technical, professional or consultancy services for a period or periods aggregating 90 days during a 12-month period, from one or more places within Nepal.
  • Engages in a construction, installation, establishment or supervision of a project for a period of 90 days or more from any place in Nepal.
A permanent establishment is subject to:
Corporate tax at 25%.
Tax on dividend (any income remitted to the head office) at 5%.
Non-tax resident
Non-resident businesses are taxed on income having source in Nepal.
 
3. What is the tax position when profits are remitted abroad?
  • Profits remitted to foreign entities are taxed in the following manner:
  • Dividends taxed at the rate of 5%
  • Interest taxed at the rate of 15%.
  • Royalties taxed at the rate of 15%.
  • Repatriation of income by permanent establishment of foreign entities taxed at the rate of 5%.
  • Capital gains on disposal of shares will be subject to normal corporate tax rate (certain amount would be deducted as withholding tax which can be taken credit at the time of making final payment).
The dividend is considered as finally taxed after withholding at the rate of 5%. The payments made to non-residents after deducting the applicable taxes on royalties or interest are considered finally taxed and no additional tax is payable in Nepal.
If Nepal has entered into a Double Tax Avoidance Treaty (DTA) with another country, and a person's same income is taxable in both countries, the beneficial tax provisions (exemption or lower rate of tax) under the DTA would be applicable (section 73(1) , Income Tax Act).
Section 73(5), Income Tax Act) provides limitation on benefit under the DTA as:
  • The entity claiming the benefit is an entity that is considered a resident (for the purpose of the DTA) of the country with which the DTA has been entered into.
  • 50% or more of the vested ownership of the entity is owned by natural persons or entities (in which no natural person has an interest), which are not residents of Nepal and/or the country with the DTA.
As majority of the DTAs were signed by Nepal prior to introduction of the Income Tax Act, the provisions of Section 73(5) should not apply to those DTAs. Further, even in cases where the DTAs signed after commencement of the Income Tax Act and which do not specifically provide for limitation of benefit provision, operation of limitation of benefit as provided in Section 73(5) needs to be considered from the perspective of Nepal Treaty Act 1990 which provides that provisions of the domestic law which are inconsistence with the treaty provision shall be void to the extent of inconsistency.

Nepal has entered into DTAs with the following ten countries:
  • People Republic of China.
  • India.
  • Mauritius.
  • Sri Lanka.
  • Pakistan.
  • Republic of Korea.
  • Thailand.
  • Austria.
  • Norway.
  • Qatar.