Understanding Tax Law For Local and FDI Companies in Nepal

This article provides a detailed yet accessible summary of the key taxes applicable to companies, including corporate tax, value-added tax (VAT), and withholding taxes. Moreover, it highlights generous tax concessions available to investors, especially for industries in Special Economic Zones (SEZs), IT and hydropower sectors, and others businesses generating significant local employment. Readers will gain a clear understanding of how Nepal incentivizes local companies and foreign investment companies through strategic tax benefits while maintaining fiscal responsibility.

After reading this article, readers will have a comprehensive overview of the tax landscape for companies (both local companies and foreign investment companies) in Nepal and insight into how Nepal balances revenue generation with investment promotion.)

For tax purposes, a company is classified as a resident of Nepal in a fiscal year under the following conditions:

a) Domestic Entities: Companies formally registered in Nepal 

b) Foreign Entities: Companies registered abroad but with their primary place of effective management located in Nepal during that fiscal year.

Resident businesses are liable to pay taxes on their global income. Additionally, a foreign permanent establishment (PE) operated in Nepal by a non-resident entity is also treated as a tax resident.

2.1) Definition of Foreign Permanent Establishment (PE):

As per Sections 2(ay) and 2(aab) of Nepal’s Income Tax Act (ITA), a foreign PE includes foreign companies, trusts, or partnerships that meet any of these criteria:

a) Conduct business activities in Nepal (fully or partially) via a dependent agent.

b) Install or utilize core machinery/equipment within Nepal.

c) Deliver technical, professional, or consultancy services for a cumulative 90 days or more within a 12-month period from locations in Nepal.

d) Engage in construction, installation, establishment, or supervision projects lasting 90 days or more within Nepal.

2.2) Taxation of Permanent Establishments:

a) Corporate Tax: 25% on taxable income.

b) Dividend Tax: 5% on profits remitted to the foreign head office.

2.3) Non-Resident Businesses:

Entities not qualifying as residents are taxed solely on income generated from Nepalese sources.

The main taxes that businesses are subject to in Nepal come under the Income Tax Act 2002 (2058) (hereinafter referred to as the “ITA”), Value Added Tax Act 1996 (2052) (hereinafter referred to as the “VAT Act”), and Excise Duty Act 2002(2058). In Nepal, tax payers are required to assess their income themselves and pay the applicable taxes, i.e. Nepal has a self-assessment taxation system.  The taxes applicable to companies are as follows:

3.1.  Income Tax:

The applicable income tax rates in Nepal vary depending on the nature of the industry in which the company operates. The following table outlines the standard corporate tax rates for different sectors:

3.2. Value Added Tax (VAT)

The VAT Act prescribes a uniform rate of 13% VAT for all types of transactions involving goods and services that are subject to VAT as prescribed under the VAT Act. 

Some of the goods and services as prescribed in Schedule-I of VAT Act are exempt from the VAT. Likewise, some of the goods and services as prescribed in Schedule-II of Value Added Tax Act, 2052 are subject to zero rate of VAT.

3.3. Withholding tax/tax deducted at source (TDS):

Certain types of payments made by businesses are subject to withholding tax, also known as Tax Deducted at Source (“TDS”). This means that tax must be deducted by the payer at the time of payment and remitted to the tax authorities. The applicable TDS rates vary based on the nature of the payment and the recipient. The key categories and their corresponding rates are outlined below:

The ITA offers a range of tax exemptions and concessions to encourage investment and promote specific industries and activities. These incentives are designed to support economic growth, generate employment, and attract foreign capital. The key tax concessions available to companies and other qualifying entities are provided below:

Note: 

Here, 

01. Applicable Rate: Tax rate applicable to the special industry after concession under Section 11(2)(b) of the ITA

02. Normal Rate: Tax rate applicable to industry other than special industries

Nepal has signed Double Tax Avoidance Agreement (DTAA) with 11 countries i.e. India, Bangladesh, Thailand, Sri Lanka, Mauritius, Austria, Pakistan, China, South Korea, Norway and Qatar. The ITA has provisions to ensure that investors don’t have to face the burden of double taxation which means having to pay taxes in both Nepal and the foreign investors home country as long as Nepal has signed a DTAA with the respective country. 

Foreign investors who invest in Nepal enjoy the right of repatriation. After fulfilling all the procedures, they can repatriate the amount at the prevailing exchange rate. The amount can be repatriated either (i) in the same foreign currency which the foreign investor had brought or (ii) in a different foreign currency for which approval from NRB will be required. 

6.1. What can be repatriated? 

 A foreign investor is allowed to repatriate the following: 

01. Earnings through dividend or through sale proceeds against investment in shares

02. Compensation and Indemnity

03. Sale proceeds upon share transfer

04. Returns of Capital at the time of Liquidation

05. Technology transfer fees, royalty and license fees that have been earned through technology transfer and 

06. Lease rent under lease financing. 

6.2 Required Approvals For Repatriation 

Depending on the investment amount, foreign investors are required to take approval from either Department of Industry or Investment Board of Nepal and Nepal Rastra Bank. The requirement is as listed below:

6.3. Tax Payment

Foreign investors must ensure that they pay all the applicable taxes in order to repatriate their investment amount. Below are the applicable tax rates: 

As per Section 20 of FITTA, a foreign investor can repatriate its investment after paying all the tax liabilities that are applicable according to the prevailing laws of Nepal i.e. tax under Income Tax Act and VAT. Thus, the table below is not required as per my opinion. 

6.4 Capping on Royalty Repatriation

The Foreign Investment and Technology Transfer Act (FITTA) Regulation sets a ceiling on the amount of royalty that can be repatriated to foreign entities. These limits apply to the following types of agreements:

01. Technology Transfer Agreements (excluding agreements solely for trademark usage).

02. Technology transfer agreements specifically for trademark usage

Date of Publication: 24 April 2025

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