Tax law for foreign companies in Nepal is governed primarily by the Income Tax Act 2058 (2002) and its associated regulations. Foreign entities looking to operate in Nepal must navigate a complex system of direct and indirect taxes, as well as comply with various registration and reporting requirements.

The standard corporate tax rate for foreign companies in Nepal is 25%, though certain sectors such as banking, telecommunications, and tobacco face a higher rate of 30%. Non-resident companies are taxed on their Nepal-sourced income, while resident companies are subject to tax on their worldwide income.

Foreign investors must obtain approval from the Department of Industries before making equity investments or entering into technology transfer agreements with Nepalese companies. Once approved, they need to incorporate a company, register with the Inland Revenue Office to obtain a Permanent Account Number (PAN), and comply with ongoing tax obligations.

Nepal has double taxation avoidance agreements with 11 countries, which can provide relief from double taxation through reduced withholding tax rates and other provisions. The country has also recently introduced measures to tax digital services provided by non-resident companies.

Valuation of Foreign Investment and Assessment of Tax

Foreign investment in Nepal is subject to valuation and tax assessment under the Income Tax Act 2058 (2002). The Department of Industry (DOI) is responsible for approving foreign investment and technology transfer in Nepal. Foreign investors must obtain approval from the DOI before making equity investments or entering into technology transfer agreements with Nepalese companies.

For equity investments in new ventures, foreign investors need to follow these key steps:

1. Incorporate the company at the Company Registrar’s Office
2. Register the industry with the Department of Industries
3. Obtain a Permanent Account Number (PAN) from the Inland Revenue Office
4. Register any applicable trademarks, designs or patents

The valuation of foreign investment is typically based on the amount of foreign currency invested or the fair market value of any capital assets or technology transferred. This forms the basis for assessing applicable taxes.

Foreign companies are taxed in Nepal on income derived from Nepalese sources. The standard corporate tax rate is 25%, with some variations:

• Banks and financial institutions: 30%
• Telecommunications, internet services, and certain other sectors: 30%
• Entities dealing in tobacco, alcohol and petroleum products: 30%

Dividends paid by resident companies to non-resident shareholders are subject to a final withholding tax of 5%. Interest, royalties and technical service fees paid to non-residents are generally subject to withholding tax at 15%.

Double Tax Relief in Nepal

Nepal provides relief from double taxation through unilateral and bilateral measures. The Income Tax Act allows resident taxpayers to claim a foreign tax credit for taxes paid in other countries, up to the amount of Nepalese tax payable on that foreign income.

For the foreign tax credit:

• It is limited to the lower of the foreign tax paid or the Nepalese tax payable on that income
• Any excess credits can be carried forward for up to 7 years
• The credit is calculated separately for each country source of income

Additionally, Nepal has entered into double taxation avoidance agreements (DTAAs) with several countries to prevent double taxation of income. These treaties generally provide relief through reduced withholding tax rates and exemptions for certain types of income.

Treaties of Taxation in Nepal

Nepal currently has double taxation avoidance agreements in force with 11 countries: Austria, China, India, Korea, Mauritius, Norway, Pakistan, Qatar, Sri Lanka, Thailand and Bangladesh (pending ratification).

These tax treaties aim to eliminate double taxation, prevent fiscal evasion, and promote economic cooperation between Nepal and the treaty partner countries. Key provisions in Nepal’s tax treaties typically include:

• Reduced withholding tax rates on dividends, interest, and royalties
• Exemption from tax for certain types of income like international shipping and air transport
• Provisions for exchange of information between tax authorities
• Mutual agreement procedures for resolving tax disputes

For example, under the Nepal-India tax treaty:

• Dividend withholding tax is reduced to 5-10% (vs. 5% domestic rate)
• Interest withholding tax is capped at 10% (vs. 15% domestic rate)
• Royalties withholding tax is limited to 15% (same as domestic rate)

Foreign investors should carefully review the applicable tax treaty, if any, to determine the most advantageous tax treatment for their investments and income flows between Nepal and their home country.

Taxation of Digital Services in Nepal

Nepal has recently introduced measures to tax digital services provided by non-resident companies to customers in Nepal. The key points regarding digital services taxation are:

• A 2% digital service tax applies on the transaction value of digital services provided by non-residents to Nepalese customers
• The tax applies when annual transactions exceed NPR 2 million
• Affected digital services include online advertising, streaming services, cloud services, online marketplaces, etc.
• Non-resident service providers must register with the Inland Revenue Department and file annual tax returns
• Income on which digital service tax is paid is not subject to further income tax

This new digital services tax aims to level the playing field between foreign digital companies and local businesses, while also expanding Nepal’s tax base. Non-resident digital service providers need to closely monitor their Nepal-sourced revenue to determine if they meet the registration and tax payment thresholds.

Telecommunications Services and Charges in Nepal

The telecommunications sector in Nepal is subject to specific tax provisions and charges:

• Telecom service providers are taxed at the higher 30% corporate income tax rate
• A Telecommunications Service Charge (TSC) of 10% applies on the use of telecom services including phone, mobile and internet
• TSC is collected by telecom operators from consumers and remitted to the government monthly
• Interconnection charges between telecom operators are exempt from TSC
• Up to 50% of repair and maintenance costs for fixed bandwidth services can be exempt

Telecom operators face stringent compliance requirements, including:

• Monthly TSC returns and payments within 25 days of the end of each month
• Penalties of 15% per annum interest for late payment of TSC
• Fines of up to 5% for delays in submitting TSC returns

Foreign investors in Nepal’s telecom sector need to factor in these sector-specific taxes and charges when evaluating investment opportunities and financial projections.

Laws & Treaties Governing Taxation in Nepal

The key laws governing taxation in Nepal include:

• Income Tax Act 2058 (2002) and Income Tax Rules 2059 (2002)
• Value Added Tax Act 2052 (1996) and Value Added Tax Rules 2053 (1996)
• Excise Duty Act 2058 (2002) and Excise Duty Rules 2059 (2002)
• Customs Act and Customs Rules

The Income Tax Act is the primary legislation for direct taxes, covering personal and corporate income tax. The VAT Act governs the value-added tax system, while the Excise Duty Act deals with excise duties on certain goods.

Nepal’s double tax treaties, as mentioned earlier, also form part of the legal framework governing cross-border taxation. These treaties take precedence over domestic tax laws where applicable.

Other relevant laws include the Foreign Investment and Technology Transfer Act, which governs foreign investment approvals and related matters.

Authorities Governing Taxation in Nepal

The key authorities responsible for tax administration in Nepal are:

1. Inland Revenue Department (IRD): The primary agency responsible for administering income tax, VAT and excise duties. It operates under the Ministry of Finance.
2. Department of Customs: Responsible for customs duties and import taxes.
3. Large Taxpayers Office (LTO): A specialized unit under the IRD that handles the tax affairs of large corporate taxpayers.
4. Inland Revenue Offices: Local offices of the IRD that handle tax administration at the district level.
5. Revenue Tribunal: An independent body that hears appeals against tax assessments and decisions of the tax authorities.

The tax authorities have wide-ranging powers to assess taxes, conduct audits, impose penalties for non-compliance, and take recovery actions against defaulting taxpayers. Foreign companies operating in Nepal need to maintain proper books of accounts, file timely tax returns, and comply with various tax regulations to avoid potential disputes with the tax authorities.

Corporate Tax Compliance in Nepal

Foreign companies operating in Nepal must adhere to various tax compliance requirements:

1. Registration: Obtain a Permanent Account Number (PAN) from the Inland Revenue Office.
2. Accounting: Maintain proper books of accounts as per Nepalese accounting standards.
3. Tax Year: The tax year in Nepal runs from mid-July to mid-July (Nepali fiscal year).
4. Tax Returns: File annual income tax returns within 3 months of the end of the tax year (extendable by up to 3 months).
5. Advance Tax: Pay income tax in three installments during the year (by mid-January, mid-April, and mid-July).
6. Withholding Taxes: Deduct and remit applicable withholding taxes on various payments like dividends, interest, and service fees.
7. VAT: If applicable, register for VAT, file monthly VAT returns, and remit VAT collected.
8. Audited Accounts: Submit audited financial statements along with the tax return.
9. Transfer Pricing: Maintain documentation to support arm’s length pricing for related party transactions.
10. Branch Offices: Foreign company branch offices in Nepal are taxed similarly to resident companies.

Non-compliance with tax regulations can result in penalties, interest charges, and potential legal actions.

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

International Tax Lawyers in Nepal

International tax lawyers in Nepal provide various services including:

• Advising on tax implications of foreign investment structures
• Assisting with tax registrations and compliance
• Interpreting and applying double tax treaties
• Representing clients in tax audits and disputes
• Providing opinions on complex international tax issues
• Advising on transfer pricing and related party transactions
• Assisting with tax aspects of cross-border mergers and acquisitions

When selecting an international tax lawyer in Nepal, companies should consider factors such as expertise in international tax matters, experience with foreign clients, knowledge of relevant industries, and reputation in handling tax disputes.

Legal Memorandums & Opinions on Taxation in Nepal

Foreign investors often seek legal memorandums and opinions on various tax matters in Nepal. These may cover issues such as:

• Tax implications of proposed investment structures
• Applicability of tax treaty benefits
• Tax treatment of specific transactions or arrangements
• Interpretation of ambiguous tax provisions
• Risk assessment of tax positions taken by the company
• Tax aspects of corporate restructurings or exit strategies

Legal opinions from reputable law firms can provide a level of assurance to foreign investors and may be useful in discussions with tax authorities or in the event of disputes. However, it’s important to note that while legal opinions can provide valuable guidance, they are not binding on the tax authorities or courts.

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

Conclusion

Nepal’s tax system for foreign companies involves a complex interplay of domestic laws, international treaties, and specific sector regulations. While the government has taken steps to attract foreign investment through various tax incentives, compliance requirements remain stringent.

Foreign investors need to carefully consider the tax implications of their Nepal operations, including corporate income tax, withholding taxes, VAT, and sector-specific charges. Proper tax planning, including utilization of treaty benefits where applicable, can help optimize the tax position of foreign companies operating in Nepal.

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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.