International Taxation in Nepal: A Guide for Multinational Companies

Navigating the complexities of international taxation is a crucial aspect of doing business for multinational companies operating in Nepal. With its dynamic economic environment and evolving tax regulations, understanding Nepal’s tax framework is essential to ensure compliance and optimise tax efficiency.

Key Features of Nepal’s International Tax Framework

Nepal’s international tax laws are primarily governed by the Income Tax Act, 2058 (2002), along with the directives issued by the Inland Revenue Department (IRD). Here are some critical aspects of Nepal’s international tax regime:

1. Permanent Establishment (PE)

Under Section 2(1)(o) of the Income Tax Act, 2058, a foreign entity is subject to tax on income derived from Nepal if it has a Permanent Establishment (PE) in the country. A PE includes:

• A fixed place of business, such as an office, factory, or branch.

• A construction or installation project lasting more than 90 days (as defined in Section 5(5)).

• The provision of services, including consultancy, for more than 90 days within a 12-month period.

Tax authorities closely monitor activities to determine whether a PE exists, and establishing or avoiding PE can have significant tax implications.

2. Double Taxation Avoidance Agreements (DTAAs)

Nepal has entered into Double Taxation Avoidance Agreements (DTAAs) with several countries, governed by Section 76 of the Income Tax Act, 2058, and the respective treaties. These agreements provide relief from double taxation by allocating taxing rights between Nepal and the other contracting state.

Key provisions of DTAAs include:

• Elimination of Double Taxation: Avoidance of dual taxation on income earned in both jurisdictions.

• Reduced Withholding Tax Rates: Concessional rates for dividends, interest, and royalty payments.

• Exchange of Information: Cooperation between tax authorities to prevent tax evasion as per Article 26 of model DTAA provisions.

3. Withholding Taxes

Nepal imposes withholding taxes on various cross-border payments under Section 88 of the Income Tax Act, 2058. The following rates generally apply:

• Dividends: 5% (may vary under applicable DTAA).

• Royalties, interest, and technical service fees: 15% (reduced rates may apply under DTAA).

It is crucial for companies to correctly determine and deduct withholding taxes to avoid penalties and ensure compliance as per Section 89 of the Act.

4. Transfer Pricing Regulations

Transfer pricing is regulated under Sections 33 and 34 of the Income Tax Act, 2058. The tax authorities scrutinise transactions between related entities to ensure that they are conducted at arm’s length. The key provisions include:

• Documentation requirements to justify the pricing of intra-group transactions.

• The need for contemporaneous documentation to support transfer pricing policies.

• The imposition of penalties under Section 117 for non-compliance or adjustments.

5. Tax Incentives and Relief

Nepal provides several tax incentives to attract foreign investment, as outlined in Sections 11 and 12 of the Income Tax Act, 2058. Examples include:

• Tax holidays for specified periods for industries in priority sectors.

• Reduced corporate tax rates for industries established in Special Economic Zones (SEZs).

• Exemptions on custom duties for imported capital equipment under relevant customs regulations.

Compliance and Reporting Obligations

Tax Residency

For tax purposes, a company is considered a resident of Nepal under Section 2(1)(v) of the Income Tax Act, 2058, if it is incorporated in Nepal or its effective management is located in Nepal. Non-resident entities are taxed only on Nepal-sourced income as per Section 8.

Annual Tax Filing

Multinational companies operating in Nepal must:

• File an annual corporate income tax return under Section 96 of the Act.

• Submit audited financial statements as required by the IRD.

• Maintain adequate records to substantiate income and deductions as per Section 81.

Tax Audits

The IRD has the authority to conduct tax audits under Section 119 of the Income Tax Act, focusing on areas such as transfer pricing, PE determination, and cross-border transactions. Companies should ensure that they maintain robust documentation to withstand scrutiny.

Recent Developments and Trends

Nepal’s tax authorities are increasingly adopting digital systems for tax administration under the Revenue Administration Management Information System (RAMIS). Additionally, Nepal’s commitment to the OECD’s Base Erosion and Profit Shifting (BEPS) framework signals a focus on combating tax avoidance and ensuring fair taxation of multinational enterprises.

How We Can Help

Our team of seasoned tax professionals and legal experts specialises in international taxation, offering services such as:

• Structuring cross-border transactions to minimise tax liability.

• Assisting with compliance under Nepal’s tax laws and DTAAs.

• Advising on transfer pricing strategies and documentation.

• Representing clients in tax audits and disputes.

By partnering with us, multinational companies can navigate the complexities of Nepal’s tax landscape with confidence.

Conclusion

Nepal offers significant opportunities for multinational companies, but these come with complex tax challenges. Understanding and adhering to Nepal’s international tax regulations is not just a compliance issue but also a strategic advantage. With proper planning and expert guidance, businesses can optimise their tax position while staying compliant.

For tailored advice on international taxation in Nepal, contact our experts today.