Corporate Tax Law in Nepal

What is Corporate Tax?

Corporate tax in Nepal refers to the tax levied on the profits earned by companies and other business entities operating in the country. It is a direct tax imposed on the taxable income of corporations and is governed by the Income Tax Act 2058 (2002).

The corporate tax system in Nepal follows a self-assessment model, where companies are required to calculate their own tax liability, file returns and pay taxes as per the provisions of the law. The tax is collected and administered by the Inland Revenue Department under the Ministry of Finance.

Corporate tax is an important source of revenue for the Government of Nepal. It applies to both domestic and foreign companies doing business in Nepal, subject to certain conditions. The tax is calculated based on the net profit of the company after allowing for various deductions and exemptions as specified in the Income Tax Act.

Who are applicable for Corporate Tax in Nepal?

Corporate tax in Nepal applies to the following types of entities:

1. Companies incorporated under the Companies Act of Nepal
2. Foreign companies operating in Nepal through a branch or liaison office
3. Partnerships with more than 20 partners
4. Cooperatives and other institutions specified by the Inland Revenue Department

Both resident and non-resident companies are subject to corporate tax in Nepal. A company is considered resident for tax purposes if:

• It is incorporated in Nepal, or
• Its place of effective management and control is situated in Nepal

Resident companies are taxed on their worldwide income, while non-resident companies are taxed only on income sourced from Nepal.

Certain entities like non-profit organizations engaged in social, religious or charitable activities may be exempt from corporate tax, subject to approval from tax authorities.

Types of Business Entities and their Taxation

The main types of business entities in Nepal and their tax treatment are:

Private Limited Company: The most common form of incorporation, taxed as a separate legal entity at applicable corporate tax rates.

Public Limited Company: Companies listed on the stock exchange, taxed similar to private limited companies but may avail certain tax benefits.

Branch Office: Foreign companies can establish branch offices which are taxed on income attributable to their Nepal operations.

Partnership Firm: Partnerships with up to 20 partners are taxed as a pass-through entity with income taxed in the hands of partners. Partnerships with more than 20 partners are taxed as companies.

Sole Proprietorship: Taxed as part of the individual owner’s income at applicable personal income tax rates.

Cooperative: Registered cooperatives may avail tax exemptions subject to certain conditions.

The choice of business entity impacts the applicable tax rates, compliance requirements and available exemptions/deductions. Companies and certain partnerships are treated as separate taxable entities while others may have pass-through taxation.

Corporate Tax Rates in Nepal

The standard corporate tax rate in Nepal is 25% of taxable income. However, different rates apply to certain sectors and types of income:

• Banks and financial institutions: 30%
• Insurance companies, telecom companies, petroleum businesses: 30%
• Companies listed on the stock exchange: 20%
• Special industries like manufacturing: 20%
• Gains from disposal of shares: 10% for resident natural persons, 15% for others

Small taxpayers with annual turnover up to NPR 5 million may opt for turnover based taxation at 0.25%-2% of turnover.

Dividend distributed by resident companies is subject to a 5% withholding tax, which is considered as final tax.

Non-resident companies are taxed at 25% on Nepal-sourced income. Certain payments to non-residents like royalties, technical fees etc. are subject to withholding tax at specified rates.

The applicable tax rate may be reduced under Double Taxation Avoidance Agreements (DTAAs) that Nepal has signed with various countries.

Deductions and Expenses of Tax in Nepal

The Income Tax Act allows various deductions and expenses to be claimed while computing taxable income for corporations:

Business Expenses: All expenses incurred wholly and exclusively for business purposes are allowed as deduction. This includes salaries, rent, utilities, repairs, interest etc.

Depreciation: Depreciation on fixed assets is allowed as per prescribed rates under the declining balance method. Additional depreciation is allowed for manufacturing industries.

Bad Debts: Specific bad debts that are written off are allowed as deduction subject to certain conditions.

Donations: Donations to approved charitable institutions are deductible up to 5% of adjusted taxable income or NPR 100,000, whichever is lower.

Research & Development: 50% of R&D expenses are allowed as deduction in the year incurred.

Employee Welfare: Contributions to approved retirement funds for employees are deductible within prescribed limits.

Prior Period Expenses: Expenses relating to previous years are allowed in the year of payment.

Carry Forward of Losses: Business losses can be carried forward for up to 7 years to be set off against future profits.

Certain expenses like personal expenses of directors, income tax, fines/penalties, expenses relating to exempt income etc. are specifically disallowed.

Proper documentation and compliance with procedural requirements is essential to claim deductions.

Capital Gains Tax for Corporations

Capital gains tax applies on the profit arising from sale of capital assets by corporations in Nepal. The main provisions are:

• Gains on sale of shares of unlisted companies are taxed at 10% for resident natural persons and 15% for others.
• For listed companies, gains are taxed at 5% for long term gains (holding period > 365 days) and 7.5% for short term gains.
• Gains on sale of land and building held for more than 5 years are taxed at 2.5%. For holding period less than 5 years, the rate is 5%.
• For other assets, the entire gain is added to taxable income and taxed at normal corporate tax rates.
• Losses from sale of capital assets can be set off only against capital gains.
• For non-residents, tax on capital gains may be reduced under applicable tax treaties.

The cost of acquisition, improvement costs and selling expenses are allowed as deduction while computing capital gains.

How to file for Corporate Tax in Nepal?

The process for filing corporate tax returns in Nepal involves the following key steps:

1. Obtain Permanent Account Number (PAN) from Inland Revenue Office.
2. Maintain proper books of accounts and get them audited by a certified auditor.
3. Calculate taxable income and tax liability as per Income Tax Act.
4. File annual income tax return in prescribed format within 3 months from end of fiscal year (mid-July).
5. Submit audited financial statements along with tax return.
6. Pay applicable taxes in three installments – by mid-January, mid-April and mid-July.
7. Deduct and deposit TDS on various payments as per prescribed rates.
8. File monthly/annual TDS returns.
9. Respond to any queries or assessment notices from tax office.

Online filing facility is available through the Inland Revenue Department’s web portal. Extension of 3 months for filing returns may be obtained on request.

Advance tax is to be paid in three installments based on estimated income. Interest applies on shortfall in advance tax payment.

Read More: Taxation in Nepal Nepalese Tax Structure Income Tax Rules, 2059

Tax Incentives for Corporations

Nepal offers various tax incentives to promote investments and industrial growth:

• Special industries like manufacturing get 20% concessional tax rate.
• Full tax exemption for 5-10 years for industries set up in underdeveloped areas.
• 50% rebate on taxable income from exports.
• Tax holiday for 5-7 years for power generation companies.
• Concessional 15% tax rate for IT companies.
• 100% tax exemption for first 5 years to industries with capital over NPR 1 billion.
• Various rebates based on employment generation, use of domestic raw materials etc.
• Accelerated depreciation for manufacturing and hotel industries.
• Tax exemption on dividends received from resident companies.
• Lower tax rates under Special Economic Zone Act.
• Investment based tax credits and deductions.

Most incentives require approval from Department of Industry or other relevant authorities. Proper documentation is needed to avail benefits.

Fines and Penalties for Non-Compliance

Non-compliance with corporate tax laws in Nepal can attract various penalties:

• Late filing fee of NPR 100 per month or 0.1% of gross turnover, whichever is higher.
• Interest on late payment of tax @ 15% per annum.
• Penalty of 50-100% of tax sought to be evaded for submitting false or misleading returns.
• Fine up to NPR 50,000 for non-maintenance of accounts.
• Penalty equal to withholding tax amount for failure to deduct TDS.
• Imprisonment up to 6 months for repeat offenders.
• Suspension of business for continued default.

The tax office can also conduct tax audits and reopen assessments up to 4 years in case of suspected evasion.

Review and Appeal of Corporate Tax in Nepal

Taxpayers have the following options to appeal against tax assessments:

1. Administrative Review: Application to Director General of Inland Revenue Department within 30 days of assessment order. 25% of disputed amount to be deposited.
2. Revenue Tribunal: Appeal to be filed within 35 days of DG’s order. 50% of disputed amount to be deposited.
3. Supreme Court: Appeal on questions of law within 35 days of Revenue Tribunal’s order.

The appeal should clearly state the grounds of appeal with supporting documents. Extension of time limit may be granted on valid grounds.

Taxpayers can also request for advance rulings from the tax department on applicability of provisions to a proposed transaction.

Read More:

1. Tax Audit Process in Nepal
2. An Overview of Tax Law in Nepal
3. Tax Law for Foreign Companies in Nepal
4. Corporate Tax Law in Nepal
5. VAT Registration Process in Nepal

Corporate Tax Lawyer in Nepal

For expert assistance on corporate taxation matters in Nepal, businesses can consult reputed law firms like Prime Law Associates. Their team of experienced corporate tax lawyers includes:

• Pradeep Thapa – Expert in international tax and transfer pricing
• Amit Karna – Specializes in tax litigation and dispute resolution
• Sukra Subba – Tax advisor with focus on tax planning and incentives
• Deepak Khanal – Handles tax compliance and regulatory matters

These lawyers can provide comprehensive advisory on optimizing tax structures, availing incentives, ensuring compliance and representing before tax authorities.

Contact Tax Lawyer in Nepal

Disclaimer: This material is presented solely for informational purposes, without constituting legal advice, counsel, or solicitation, and no liability shall arise from any actions, omissions, or reliance on its contents, directly or indirectly, in any manner whatsoever, irrespective of the jurisdiction or specific circumstances.