Taxation in Nepal: What It Means for Your Business

If you are evaluating private vs. public company in Nepal, taxation is not a side detail. It is the decision driver. For foreign companies, Nepal’s tax system directly affects cost efficiency, compliance exposure, repatriation planning, and long-term scalability.

This guide breaks down taxation in Nepal in plain English. It explains how private and public companies are taxed, what foreign investors should expect, and how to choose the right structure for your business goals.

Why “Private vs Public Company in Nepal” Matters for Foreign Companies

Nepal welcomes foreign investment. But it does so under a tightly regulated tax and corporate framework. The legal form you choose determines:

• Corporate income tax rates
• Dividend taxation
• Compliance burden
• Disclosure and audit requirements
• Investor exit flexibility

For most foreign companies, the choice is not academic. It affects cash flow, timelines, and regulatory risk.

Understanding Company Types in Nepal

Before diving into taxes, it is important to understand how Nepal classifies companies.

Private Company in Nepal

A private company is the most common structure for foreign investors. It is governed by Nepal’s Companies Act and is limited by shares.

Key characteristics:

• Minimum 1 shareholder
• Maximum 101 shareholders
• Share transfer is restricted
• No public offering of shares

This structure suits subsidiaries, back offices, IT centers, and service operations.

Public Company in Nepal

A public company can invite the public to subscribe to its shares. It is subject to stricter governance and disclosure rules.

Key characteristics:

• Minimum 7 shareholders
• No maximum shareholder limit
• Can issue shares publicly
• Mandatory higher compliance standards

This model suits banks, hydropower, manufacturing, and capital-intensive ventures.

Taxation Framework in Nepal: A Quick Overview

Nepal follows a source-based taxation system. Income sourced in Nepal is taxable in Nepal.

Taxes relevant to companies include:

• Corporate income tax
• Dividend tax
• Withholding taxes
• Value Added Tax (VAT)
• Social Security Fund contributions

The Inland Revenue Department Nepal administers most taxes.

Corporate Income Tax: Private vs Public Company in Nepal

Standard Corporate Tax Rates

For most sectors, corporate tax rates are aligned for both private and public companies.

At first glance, there is no difference. But incentives and surcharges change the real picture.

Tax Incentives for Public Companies

Public companies enjoy certain tax benefits designed to encourage capital market development.

Examples include:

• Reduced tax rate if listed on Nepal Stock Exchange
• Lower tax burden for hydropower and infrastructure projects
• Sector-specific exemptions

This can reduce the effective tax rate below 25%.

Practical Insight

For foreign companies not planning public listing, these incentives rarely apply. Most foreign investors operate as private companies and pay the standard rate.

Dividend Taxation: What Foreign Investors Must Know

Dividend tax is where structure matters.

Dividend Tax Rate

Nepal levies a 5% withholding tax on dividends.

This applies to:

• Private companies
• Public companies

The tax is final for non-resident shareholders.

Double Taxation Considerations

Nepal has Double Tax Avoidance Agreements (DTAAs) with several countries.

These treaties may:

• Reduce effective dividend tax
• Allow tax credits in the home country

Always check treaty applicability before structuring dividends.

Withholding Taxes on Payments

Withholding tax affects foreign companies operating in Nepal through local entities.

Common withholding rates include:

• Service fees: 15%
• Interest: 15%
• Royalties: 15%

These apply regardless of whether the entity is private or public.

VAT and Indirect Taxes

VAT in Nepal is charged at 13% on taxable supplies.

Who Must Register for VAT

A company must register for VAT if:

• Annual turnover exceeds statutory thresholds
• It engages in VAT-liable activities

Both private and public companies follow the same VAT rules.

Compliance Burden: Private vs Public Company in Nepal

Taxation is not just about rates. Compliance cost matters.

Private Company Compliance

A private company typically handles:

• Annual tax returns
• Annual audit
• Withholding tax filings
• VAT filings if applicable

Disclosure requirements are moderate.

Public Company Compliance

Public companies face additional layers:

• Quarterly and annual disclosures
• Enhanced audit standards
• Regulatory filings with market regulators
• Higher governance costs

For foreign companies, this translates to higher administrative overhead.

Comparison Table: Private vs Public Company in Nepal (Tax Focus)

Foreign Investment and Tax Structuring

Foreign companies typically enter Nepal through:

1. Wholly owned subsidiaries
2. Joint ventures
3. Branch or liaison offices

For tax efficiency, subsidiaries structured as private companies dominate.

Why Private Companies Are Preferred

• Predictable tax treatment
• Lower compliance burden
• Easier profit repatriation
• Faster setup

Public companies make sense only when large capital raising is planned.

Sector-Specific Tax Considerations

Some sectors enjoy preferential tax treatment.

Examples include:

• Hydropower
• Manufacturing
• IT services exports
• Special economic zones

These incentives can apply to both private and public companies, depending on structure and licensing.

Common Tax Risks for Foreign Companies

Foreign investors often underestimate local tax nuances.

Key risks include:

• Misclassification of income
• Improper withholding tax deductions
• Late VAT filings
• Transfer pricing scrutiny

Choosing the right company structure reduces these risks.

Strategic Guidance: Choosing Between Private and Public

When advising foreign companies, we apply three filters:

1. Capital strategy – Do you need public funds?
2. Tax optimization – Do incentives materially reduce tax?
3. Compliance appetite – Can you manage higher disclosure?

For most service-oriented foreign firms, private companies win.

EEAT: Legal and Regulatory Basis

This analysis aligns with:

• Income Tax Act of Nepal
• Companies Act of Nepal
• Guidelines issued by the Inland Revenue Department
• Foreign Investment and Technology Transfer Act

These frameworks define taxation, compliance, and investor obligations.

Conclusion: Private vs Public Company in Nepal; The Tax Verdict

For foreign companies, private vs public company in Nepal is primarily a tax and compliance decision. While headline tax rates look similar, real-world costs differ significantly.

Private companies offer simplicity, predictability, and lower compliance. Public companies unlock incentives but demand scale, capital needs, and governance maturity.

Choosing the right structure early saves years of tax friction and regulatory rework.

Frequently Asked Questions 

Is tax lower for public companies in Nepal?

Public companies may access incentives, but standard tax rates match private companies.

Can foreign companies own 100% of a Nepal company?

Yes, subject to sector rules and foreign investment approvals.

Are dividends taxed twice in Nepal?

Dividends face a final 5% withholding tax, often creditable under treaties.

Do private companies need VAT registration?

Only if turnover or activities meet VAT thresholds.

Which structure is best for a Nepal back office?

A private company is usually the most efficient option.