Nepal: Taxation on IT Sector in Nepal

Every year, the Parliament passes the Finance Bill for the upcoming year proposing various economic and financials provisions for the prosperous development of the country. Finance Act, 2025 has added/amended some concessional provisions focusing on the IT Sector for Fiscal Year 2025-26:

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1. Digital Permanent Establishment (PE)

The concept of Digital PE for taxation has been removed by the Finance Act, 2025. The repealed provision is:

If there is a significant digital presence in Nepal by staying outside of Nepal, the said location, or if the data or services are transacted in Nepal for at least 90 days during the last 12 months, where the server is outside of Nepal, the said location shall be considered as the Permanent Establishment.

2. General Exemption

The following exemption is given on tax to be imposed on the income of the IT industry that operates fully throughout any income year:

General Tax Rate: 25%

1. In case of Resident Individual: 1/3^rd concession for rate of 30% (i.e., effective rate: 20%)
2. In case of Entity: concession by 20% (i.e., effective rate: 20%)

3. Employment-based Exemption

Tax shall be levied as follows on the income of the IT industry in any income year, providing direct employment to the Nepalese citizens throughout any income year:

• 100 or more: 10% concession (i.e., effective rate: 18%)
• 300 or more: 20% concession (i.e., effective rate: 16%)
• 500 or more: 25% concession (i.e., effective rate: 15%)
• 1,000 or more: 30% concession (i.e., effective rate: 14%)
• More than 100 Nepalese citizens, covering at least 33% from among women, marginalized group or persons with disability throughout the year: an additional 10% concession

4. Area-based Exemption

75% of applicable tax shall be exempted on income from industry related with software development, data processing, cyber cafe, digital mapping established in IT park, zoological park, geological park, biotech park, and IT park prescribed by the Government of the Nepal after publishing in Nepal Gazette.

5. Exemption on Dividend Tax

IT industry capitalizing its accumulated earnings for the purpose of capacity enhancement of such industry, the dividend tax (@5%) to be imposed on such capitalization shall be fully exempted.

6. Exemption to Start-up Business

100% exemption on applicable tax up to 5 years from the date of commencement of transaction to a start-up business established by utilizing innovative knowledge, concept, skill, technology, technique as prescribed by the Inland Revenue Department having annual transaction up to NPR 100 million.

7. Lower Tax Rate for Freelancers

Income Tax Rate: 5%

Conditions:

1. Individuals other than conducting business,
   
2. Export of IT-related service, and
3. Payment to be received in foreign currency.

8. Zero Rate of VAT

Zero rate of VAT is applicable in cases where services are to be supplied to a person outside Nepal in either of the following two conditions:

1. A supply of services by a person residing in Nepal to a person outside Nepal, who has no business transaction, business representative, or legally recognized agent in Nepal,
2. A supply of goods or services to a person who is residing and is registered in Nepal to a person who is residing outside Nepal.

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Reference/Citation 

Government of Nepal - Ministry of Communication and Information Technology - Department of Printing

https://dop.gov.np/ 

Government of Nepal - Ministry of Finance - Inland Revenue Department

https://ird.gov.np/