Tax Implications of Company Incorporation in Nepal for Foreign Firms

Company incorporation in Nepal presents attractive opportunities for foreign firms seeking to expand into South Asia. With its strategic location between India and China, competitive labor costs, and emerging digital infrastructure, Nepal is gaining attention. However, understanding the tax landscape is crucial before setting up a business.

In this article, we explore the primary tax implications foreign firms should consider when incorporating in Nepal.

1. Corporate Income Tax Rates

Foreign companies incorporated in Nepal are subject to Nepali corporate tax laws, just like domestic companies. The general corporate income tax (CIT) rate is:

• 25% for most companies.

• 30% for entities operating in financial institutions, telecommunications, insurance, or liquor and tobacco industries.

However, special tax incentives are available for industries such as tourism, hydropower, IT, and manufacturing, especially in designated Special Economic Zones (SEZs).

2. Withholding Taxes on Payments to Foreign Entities

When a company incorporated in Nepal makes payments to non-resident entities, certain withholding taxes may apply:

• 15% on royalties

• 5–15% on dividends, depending on whether tax treaties apply

• 15% on technical service fees or consultancy services

These rates are applicable even if the payments are made outside Nepal.

3. Value Added Tax (VAT)

Foreign-owned companies in Nepal must register for VAT if their annual turnover exceeds NRs. 2 million. The standard VAT rate is:

• 13%

VAT is applicable on goods and services provided in Nepal. Exported goods and services are generally zero-rated, which is favorable for export-oriented businesses.

4. Repatriation of Profits

Foreign companies are allowed to repatriate profits, dividends, or capital after fulfilling local tax obligations. The repatriation must be approved by:

• The Department of Industry (DoI)

• The Nepal Rastra Bank (NRB)

Documentation proving tax compliance, audited financials, and board approval are required. Delays can occur if tax filing is not properly handled.

5. Double Taxation Avoidance Agreements (DTAAs)

Nepal has signed Double Taxation Avoidance Agreements (DTAAs) with over 10 countries, including India, China, South Korea, Austria, and Mauritius. These treaties can reduce withholding tax rates and avoid taxation on the same income in both jurisdictions.

Foreign investors should assess whether their home country has a DTAA with Nepal to plan for tax efficiency.

6. Permanent Establishment Risks

Foreign companies providing remote services or appointing local agents in Nepal should be cautious of triggering a Permanent Establishment (PE) status. If deemed a PE, the foreign company may become liable for Nepali corporate tax even without full incorporation.

Consulting a local tax expert can help assess this risk and optimize business structure.

7. Tax Filing and Compliance Obligations

All companies in Nepal, including foreign-owned firms, must:

• Maintain proper bookkeeping and accounting in accordance with Nepali Accounting Standards (NAS)

• Submit annual income tax returns within three months after the fiscal year ends (i.e., by mid-October)

• File VAT returns monthly

• Deduct and submit TDS (Tax Deducted at Source) on applicable payments

Non-compliance may result in penalties, ranging from fines to restriction on repatriating profits.

8. Custom Duty and Import Taxes

Foreign companies that import goods into Nepal must factor in customs duties which vary by category. On average:

• 5–30% import duty applies

• Additional VAT (13%) and excise duties may be imposed

Importers must be registered with the Department of Customs and comply with valuation, classification, and procedural regulations.

9. Capital Gains Tax

Foreign investors selling shares of their Nepali company may be liable for Capital Gains Tax (CGT):

• 10% for natural persons

• 15% for companies

If the shares are in a listed company, the rate may be lower. Planning exits or joint ventures must include CGT implications to avoid last-minute surprises.

10. Sector-Specific Tax Incentives

Some industries offer holidays or concessions on tax:

• Hydropower Projects: 100% tax exemption for 10 years, then 50% for 5 years.

• Tourism Infrastructure: Incentives under tourism promotion laws.

• IT Sector: Software development and export get tax rebates and easier repatriation approval.

Final Thoughts

Understanding the tax implications of company incorporation in Nepal is essential for foreign firms looking to maximize benefits and ensure regulatory compliance. While Nepal offers competitive rates and growing opportunities, navigating tax laws requires careful planning, proper structuring, and support from professionals familiar with local accounting and tax regulations.

A well-informed approach will help foreign businesses unlock Nepal’s potential while remaining on the right side of the law.