Business and Investment Losses in Nepal — Set-off & Carry-forward Guide

Business Loss

A business loss can generally be used against income from another business of the person.

Section 20 also permits business losses to interact more broadly with investment-income computation, subject to the statutory rules.

Example

Trading business profit: NPR 5,000,000

Hotel business loss: NPR 2,000,000

Eligible same-year business loss: NPR 2,000,000

Net business position: NPR 3,000,000

before other tax adjustments.

Business Loss Can Be Broader Than Investment Loss

A key rule is:

Business loss can generally be used against business and eligible investment income.

But:

Investment loss cannot generally be used against business income.

Section 20's current framework distinguishes these two directions.

Example

Business income: NPR 2,000,000

Investment loss: NPR 500,000

The investment loss should not automatically reduce business income.

Instead, it remains subject to the investment-loss rules.

Investment Loss

Investment losses can generally be offset against:

• other qualifying investment income; and

• eligible future investment income,

subject to the statutory carry-forward period.

Ordinary carry-forward: 7 income years

Loss Cannot Be Deducted Against Employment Income

Business/investment losses should not simply be deducted from salary income.

Example: Employment income:

NPR 2,000,000

Business loss: NPR 700,000

Do not automatically calculate: NPR 2,000,000 − NPR 700,000.

The employment-income and business-loss rules must be kept separate.

Seven-Year Carry-forward

Assume business loss arose in FY 2083/84 and could not be utilised.

Subject to Section 20 and other restrictions, the undeducted loss can ordinarily be carried forward through the following seven income years.

A loss register should therefore identify an expiry year, not merely an opening balance.

Example format:

For an ordinary eligible loss arising in FY 2083/84, the following seven income years run from FY 2084/85 through FY 2090/91. Unused amounts fall outside that ordinary window from FY 2091/92. Keep any special twelve-year period or other restriction separate.

Twelve-Year Special Projects

The Act permits a longer 12-year period for specified projects, including:

• qualifying public infrastructure build-operate-transfer projects;

• powerhouse construction and electricity generation/transmission projects;

• qualifying petroleum operations.

Do not apply 12 years simply because a business is capital-intensive.

The activity must fall within the statutory category.

Foreign-source Loss

Foreign-source losses are ring-fenced.

Section 20 provides that an undeducted foreign-source loss may be deducted only in computing income from the relevant foreign source, subject to the statutory framework.

Accordingly, The loss register should contain: country/source as a mandatory field for foreign losses.

A foreign-source loss should not simply be combined with all Nepal-source losses.

Loss Connected With Exempt Income

Losses associated with non-taxable/exempt income are also restricted.

Section 20 requires such losses to remain connected with that non-taxable income category.

More importantly, Section 20(8) provides that where a person receives a full tax exemption for the business/investment income of an income year, the loss of that income year cannot be carried forward to later years.

Example

Qualifying business: 100% income-tax exemption in FY 2083/84.

Business loss during exempt year: NPR 4,000,000.

The business should not automatically preserve that loss for use after the full exemption period expires.

Partial Exemption vs Full Exemption

This distinction matters.

Full exemption

Section 20(8) restriction applies.

Partial concession

The result can differ, and eligible losses may continue subject to the statutory framework.

Therefore the tax file should record: Type of Section 11 concession

rather than merely: Tax holiday = yes.

Change in Control — Section 57

A major ownership change can destroy the ability to use old tax losses.

The core Section 57 rule is triggered where ownership of an entity changes by 50% or more compared with its ownership before the preceding three-year period, subject to the detailed statutory tests and current exceptions.

After a qualifying change in control, the entity can be prohibited from deducting losses incurred before the ownership change.

Finance Act 2083 also modifies exceptions within the change-in-control framework, so mergers, succession, death-related transfers, capital changes or restructurings should be reviewed against the current law before concluding that losses lapse.

Practical Warning

Before:

• selling shares;

• admitting a major investor;

• restructuring;

• transferring family ownership;

• undertaking acquisition,

calculate the possible tax value of carried-forward losses.

Long-term International Contracts

Section 20 contains a special mechanism for qualifying long-term contracts obtained through international competition.

In specified circumstances, IRD may permit a loss to be carried backward to earlier income years, subject to written approval and the statutory computation.

This is not a general loss carry-back rule.

Ordinary taxpayers should not assume that Nepal generally permits tax losses to be carried backward.

Taxpayer Can Determine Priority

Where a taxpayer has losses from more than one eligible business/investment and more than one potential income stream against which they may be used, Section 20 allows the taxpayer to determine the priority of deduction in the circumstances specified by the Act.

This can matter where losses have different expiry dates.

Practical approach

Usually review:

1. oldest loss;

2. earliest expiry;

3. source restriction;

4. concession status;

5. Section 57 risk;

6. tax-rate consequence.

Loss From Asset Disposal

Losses from disposal of:

• business assets/liabilities; and

• non-business chargeable investment assets

also interact with Section 36 and the wider Section 20 loss framework.

They should not be mixed indiscriminately with ordinary operating losses.

A separate disposal-loss schedule should be maintained where material.

Loss Register Recommended by CMA

Maintain:

• source business/investment;

• origin FY;

• Nepal/foreign source;

• country;

• original loss;

• current-year utilisation;

• cumulative utilisation;

• remaining balance;

• ordinary/special carry-forward period;

• expiry FY;

• full/partial exemption status;

• Section 57 ownership-change flag;

• supporting return;

• IRD assessment adjustment;

• audit reference.

Example — Multiple Loss Years

Current-year taxable business income before losses: NPR 5,000,000

Available losses: FY 2079/80: NPR 800,000
FY 2081/82: NPR 1,200,000
FY 2082/83: NPR 500,000

Assuming all are eligible and unrestricted: Total potentially usable losses:

NPR 2,500,000

Taxable business income after loss utilisation: NPR 2,500,000

The business should document which loss year is utilised first and update each remaining balance.

Loss Review Checklist

• Identify every loss year

• Separate business and investment losses

• Separate Nepal and foreign source

• Track foreign country/source

• Check 7-year expiry

• Check 12-year eligibility

• Check full tax exemption

• Check partial concessions

• Check Section 57 ownership changes

• Reconcile losses with prior returns

• Reconcile IRD assessments/amendments

• Check asset-disposal losses

• Check long-term-contract rules

• document utilisation priority

• Carry closing balance correctly

Common Mistakes

Carrying losses forever

Offsetting investment loss against salary

Combining foreign-source loss with Nepal income

Carrying losses generated during a full tax exemption

Ignoring Section 57 before share transfer

Using accounting accumulated loss instead of tax loss

Failing to reconcile losses with prior tax returns

Further guidance and practical checks

The tax loss shown in the return can differ materially from accumulated losses in the financial statements. A separate year-by-year tax-loss register should be maintained.