Three Tax Points For Foreign Investors Investing in Nepal

1. Tax rate for Non-Resident Natural Person

  • Under Schedule 1 to Section 4 of Income Tax Act 2002, tax shall be imposed at the flat rate of 25% on the taxable income in an Income Year of a Non-Resident Natural person.
  • Pursuant to Section 92, payments made to non-resident person that are subject to withholding tax under Sections 87, 88, 88(a) or 89 shall be final tax. For payments that are derived from source in Nepal and on which withholding tax has not been deducted are included in taxable income of the non-resident person.

2. Tax implication on Foreign Permanent Establishment

  • Under Section 68 of the act and Directive 4.7, a foreign permanent establishment is taxed as if it were a resident person. If the after-tax income is repatriated to parent company in foreign country, such amount is treated as dividend and subject to 5% withholding tax.
  • Generally, tax rate for entities is 25%. However, an entity engaged in businesses mentioned in Section11 of the act enjoys exemptions & concessions. The same tax treatment applies to foreign permanent establishment.
  • Pursuant to Section 70 and Schedule 1 of the act:
  • A non-resident person providing water transport, charter service or air transport service, is taxed on the following taxable income:
  • Transportation of passengers departing from Nepal, and
  • Transportation of mails, livestock or goods dispatched from Nepal.
  • A non-resident person operating a cable, radio, optical fiber or earth-satellite communication business from the transmission of news or information through equipment installed in Nepal, irrespective of whether or not the news or information has originated from Nepal, is taxed on the amount received from such business.
  • The tax rate is 5%, provided that, in the case of non-resident person providing telecommunication, air transport or water transport service, which does not so depart from Nepal or where the equipment is not installed in Nepal, the tax rate is 2%.

3. Foreign Tax Credit

  • If foreign income is included in taxable income of a resident person, the resident person is entitled to foreign tax credit for tax paid in foreign country in respect of that foreign income. Tax credit can be claimed as follows:
  • The foreign tax paid can be deducted as expense in calculating taxable income; or
  • The foreign tax paid can be adjusted against tax liability in Nepal. However, no claim for foreign tax credit may be made in respect of an assessable foreign income at a rate higher than the average rate of tax of that person in Nepal. The unutilised tax credit may be carried forward to the following.
  • Assessable foreign income from each country must be calculated separately.