Foreign Company Taxation in Nepal: A Complete Guide to VAT, Withholding & Corporate Taxes

With its growing economy, strategic location, and pro-investment policies, Nepal is rapidly becoming a preferred destination for foreign investors. Whether you're entering through a wholly owned subsidiary, a joint venture, or a branch office, understanding the local tax system is essential.

While foreign company registration in Nepal has been simplified under recent reforms, taxation remains a critical compliance pillar. This guide covers everything foreign businesses need to know about Nepal’s Value Added Tax (VAT), Withholding Tax (TDS), and Corporate Income Tax (CIT) structure, including timelines, rates, and sector-specific provisions.

1. Overview of Nepal’s Taxation Framework

Nepal’s taxation system is governed by:

• Income Tax Act 2058 (2002)

• Value Added Tax Act 2052 (1996)

• Tax Procedures Act 2058

• Finance Act (updated annually)

The key principle is that foreign companies registered in Nepal are treated similarly to domestic entities for tax purposes, with equal obligations to file returns, deduct taxes, and undergo audits.

2. Corporate Income Tax (CIT) in Nepal

Corporate Income Tax (CIT) is levied on profits earned from Nepal-based activities.

Applicable Rates for Foreign-Owned Entities:

CIT Filing Requirements:

Nepal’s fiscal year runs from mid-July to mid-July. CIT must be paid even if no profits are declared (minimum tax applies).

3. Value Added Tax (VAT)

Value Added Tax is a 13% consumption tax applicable on goods and services sold or imported in Nepal.

VAT Registration:

Foreign companies must register for VAT if:

• Annual turnover exceeds NPR 2 million, or

• They engage in import/export, consultancy, or digital services

VAT Compliance:

Exports are zero-rated, meaning companies can claim input VAT refunds.

Input Tax Credit:

• Foreign companies can claim input VAT on goods/services used for business

• Must maintain proper VAT invoices and records

4. Withholding Tax (TDS) in Nepal

Withholding tax, locally known as Tax Deducted at Source (TDS), is applicable when payments are made for services, salaries, rent, royalties, and more.

Key TDS Rates Relevant to Foreign Companies:

TDS must be deducted at payment time and deposited to the tax office by the 25th of the following month.

TDS Compliance Tasks:

• Maintain a TDS register

• File monthly TDS returns

• Issue TDS certificates to payees

• Reconcile TDS records with audited accounts

5. Dividend Distribution and Taxation

Foreign subsidiaries can remit dividends to their parent companies after meeting tax obligations and obtaining regulatory approvals.

Dividends are considered final payments and are not taxed again at the shareholder level in Nepal.

6. Taxation of Branch Offices vs Subsidiaries

Branch offices may appear tax efficient due to no dividend tax, but lack the legal protections and operational flexibility of subsidiaries.

7. Indirect Taxes & Other Levies

In addition to VAT and CIT, foreign companies may be subject to:

Ensure proper classification of goods and services to apply correct indirect tax rates.

8. Tax Incentives and Exemptions for Foreign Investors

Nepal offers targeted tax reliefs for sectors prioritized under national policy.

Foreign companies must apply for incentives during initial registration and reflect them in audited accounts.

9. Compliance Checklist for Foreign-Owned Entities

• Register for PAN, VAT, and TDS

• Maintain double-entry bookkeeping under NFRS

• Appoint a Chartered Accountant (CA) licensed by ICAN

• Submit audited financial statements annually

• File monthly and annual tax returns

• Track withholding tax and input VAT

• Maintain documentation for profit repatriation

Failure to comply may result in penalties, suspension of business licenses, or blocked fund transfers abroad.

10. Common Pitfalls to Avoid

• Ignoring TDS on payments to foreign consultants

• Missing deadlines for tax returns or payments

• Claiming VAT input without proper invoices

• Paying dividends without tax clearance

• Treating overseas services as tax-exempt without review

Proactive tax planning and local advisory support are essential.

Conclusion: Make Tax Compliance Your Competitive Advantage

Nepal's tax structure for foreign companies may seem complex, but it is predictable and legally defined. Whether it’s VAT, corporate income tax, or withholding obligations, foreign investors must embed tax compliance into their operating model from day one.

A clear understanding of local tax laws, combined with timely filing and strategic planning, will ensure that your venture remains legally protected and financially optimized.

If you’re considering foreign company registration in Nepal, knowing the tax environment isn’t just good governance—it’s a competitive edge in a growing economy.