Tourism Businesses — Investment-based Income Tax Concessions

6.1 Introduction

The basic hotel and resort concession discussed in Chapter 4 and the employment-based concessions discussed in Chapter 5 are only part of the income-tax incentives potentially available to Nepal's tourism sector.

The Income Tax Act contains a broader set of concessions designed to encourage substantial investment, expansion, public ownership and reinvestment in tourism-related industries. For a sufficiently large hotel, resort or other qualifying tourism enterprise, these provisions can be considerably more valuable than the ordinary 20% effective hotel tax rate.

The principal provisions relevant to this guide include incentives for:

• large new tourism investments;

• large tourism projects providing substantial direct employment;

• expansion of existing tourism industries;

• tourism enterprises with capital investment exceeding NPR 1 billion, NPR 3 billion or NPR 5 billion;

• listed tourism-service companies;

• private companies converting into public companies;

• capitalisation of accumulated profit for expansion of tourism industries; and

• related investment structures.

The tax consequences of these provisions are potentially significant. A qualifying project may obtain a complete income-tax holiday for five, ten or fifteen years, followed in some cases by a period during which only 50% of the otherwise applicable income tax is payable.

Accordingly, management of a major hospitality project should evaluate Section 11 incentives before the investment structure and commencement date are finalised, rather than after the hotel has already started operation.

6.2 Tourism Industry Is Broader Than Hotel and Resort

The distinction established in earlier chapters becomes particularly important here.

The basic concession under Section 11(2ख) specifically refers to a:

hotel or resort,

among the qualifying businesses.

Several provisions discussed in this guide instead refer more broadly to:

tourism industry
or
industry related to the tourism sector.

These expressions potentially cover a wider range of activities.

Under the industrial-classification framework, tourism industries have included activities such as:

• tourist accommodation;

• motel;

• hotel;

• resort;

• bar;

• restaurant;

• travel agency;

• tour operator;

• spa;

• adventure-tourism activities; and

• other prescribed tourism businesses.

The Industrial Enterprises Act, 2076 classifies tourist accommodation, motel, hotel, resort, bar and restaurant within the tourism-industry category.

Accordingly, a stand-alone restaurant that does not qualify for the hotel/resort-specific Section 11(2ख) concession may nevertheless need to examine whether it qualifies as a tourism-sector industry under one of the broader investment provisions.

The distinction is important:

Hotel/resort concession and tourism-industry concession are not necessarily the same concession.

6.3 Registration and Classification Matter

A commercial description alone should not be relied upon when claiming a major tourism-industry tax holiday.

For a material claim, management should be able to demonstrate that the enterprise is properly registered and classified as the relevant tourism industry.

The permanent tax file should therefore contain, as applicable:

• industry-registration certificate;

• tourism registration;

• hotel/resort classification;

• company-registration documents;

• approved project profile;

• approved capital-investment amount;

• project amendments;

• commencement-of-operation evidence;

• employment information;

• fixed-asset and capital-investment schedules.

A company should not first attempt to establish its tourism-industry status several years after commencing operations merely because a tax holiday has become financially attractive.

6.4 Two Important Large-Investment Provisions

There are two distinct Section 11 provisions that can be relevant to a major tourism project.

They should not be confused.

The first links:

capital investment + employment

and is found within the major special-industry/tourism-industry provision.

The second links:

tourism-sector status + level of capital investment

and provides tiered tax holidays according to whether investment exceeds NPR 1 billion, NPR 3 billion or NPR 5 billion.

Management should calculate eligibility under each provision separately before determining which concession applies.

6.5 Large Investment Plus Employment Concession

Section 11(3)(ग) provides a substantial concession to a qualifying special industry or tourism industry other than a casino where both capital-investment and employment requirements are satisfied.

The principal conditions are:

capital investment of more than NPR 1 billion; and

direct employment of more than 500 persons throughout the year.

Where these requirements are satisfied, the qualifying industry receives:

100% income-tax exemption for the first five years from commencement of transactions, and

50% exemption from the income tax otherwise payable for the following three years.

IRD's published Section 11 concession information describes this NPR 1 billion / more-than-500-employee tourism-industry incentive, expressly excluding casinos.

6.6 Nature of the Five-Year Full Exemption

During the first five qualifying years:

income tax on qualifying income = Nil.

This is substantially different from the ordinary hotel concession.

Under the ordinary hotel concession:

25% ordinary tax → effective 20%.

Under the large-investment tax holiday:

qualifying income tax → 0% during the complete exemption period.

Accordingly, if a project qualifies for the full exemption, applying the ordinary 20% hotel concession during the same period produces no additional tax saving.

6.7 Following Three Years

After completion of the five-year full-exemption period, the provision grants a:

50% exemption from the income tax otherwise payable for the next three years.

If the ordinary tax otherwise applicable after relevant classification would be 25%, a 50% tax reduction would mathematically produce:

25% × 50%
= 12.5%

before considering the interaction with any other legally available concession.

However, management should not automatically stack the basic hotel concession and every other Section 11 incentive. The Section 11 interaction rules discussed later in this guide must be considered.

6.8 “More Than NPR 1 Billion”

The statutory wording is important.

The condition is:

more than NPR 1 billion,

not:

NPR 1 billion or more.

Accordingly, an investment exactly equal to NPR 1,000,000,000 should not automatically be treated as satisfying wording that requires investment exceeding NPR 1 billion.

For a project approaching the threshold, management should establish the qualifying capital investment with precision.

6.9 Capital Investment Is Not the Same as Paid-Up Capital

This distinction is fundamental.

A hotel's:

• paid-up share capital;

• authorised share capital;

• debt;

• total project cost;

• fixed assets;

• industry-registration capital investment;

are not necessarily identical amounts.

A company may, for example, have: Paid-up equity:

NPR 600 million

Bank loan:

NPR 800 million

Total project investment:

NPR 1.4 billion.

It would be incorrect to conclude automatically that the project fails the NPR 1 billion investment test merely because paid-up share capital is only NPR 600 million.

Conversely, a company with authorised capital of NPR 2 billion does not prove that NPR 2 billion has actually been invested.

Management should therefore prepare a formal Capital Investment Reconciliation based on the statutory and regulatory meaning applicable to the project.

6.10 Suggested Capital Investment Reconciliation

For management purposes, the investment schedule should reconcile:

Project cost approved in industry registration

to:

• land, where relevant to the qualifying investment basis;

• building and civil works;

• plant and machinery;

• furniture and fixtures;

• hotel equipment;

• electrical and mechanical systems;

• pre-operating capitalised cost;

• other qualifying project assets;

• approved subsequent project amendments;

and then reconcile those amounts to:

Fixed Asset Register + CWIP + General Ledger + Financing Structure.

The purpose is to establish the actual investment rather than merely quote an amount from the memorandum of association.

6.11 More Than 500 Direct Employees

The large-investment/employment concession also requires:

more than 500 persons

to receive direct employment throughout the year.

The wording “more than 500” should be distinguished from “500 or more”.

A conservative application therefore requires at least:

501 qualifying direct employees

where this particular provision applies.

The employment requirement should be separately established from the 500-person threshold discussed in Chapter 5, which belongs to another concession.

6.12 Employment Under the Large Investment Provision

Management should maintain evidence of:

• direct employment;

• employee headcount;

• employment continuity;

• payroll;

• salary banking;

• SSF;

• citizenship/employment records where relevant.

Outsourced personnel should not automatically be treated as direct employees.

A large hotel expecting this tax holiday should therefore integrate employment planning into the project model from the construction and pre-opening stages.

6.13 Casino Exclusion

The Section 11(3)(ग) tourism-industry provision expressly excludes:

casino.

Accordingly, a casino business should not claim this particular concession merely because casinos appear within broader tourism-industry classifications.

This series principally deals with hotels, resorts and restaurants; casino taxation requires a separate analysis.

6.14 Commencement of Transaction Determines the Holiday Period

The tax holiday begins from:

the date of commencement of transaction/business

specified under the applicable provision.

This makes the commencement date extremely important.

The following dates should not automatically be assumed to be identical:

• company-incorporation date;

• investment-approval date;

• tourism-registration date;

• construction-completion date;

• soft-opening date;

• formal inauguration;

• first commercial sale;

• full commercial operation.

Management should establish and document the legally relevant commencement date.

A tax holiday running for five or ten years can be materially affected by a commencement date being incorrectly determined.

6.15 Partial First Fiscal Year

A tax holiday expressed as running from the date of commencement of transaction is different from a concession requiring full-year operation.

Accordingly, where the project commences part-way through a fiscal year, the treatment should follow the precise statutory commencement wording rather than automatically applying the full-year test used in Section 11(2ख).

The tax file should clearly identify:

commencement date;

first qualifying income year;

year number of tax holiday; and

date on which the full exemption and subsequent partial exemption expire.

6.16 Tax Holiday Register

A major tourism project should maintain a permanent schedule such as:

This prevents tax-holiday periods from being reconstructed from memory years later.

6.17 Expansion of an Existing Large Tourism Industry

Section 11(3)(ग) also contains a separate concession for qualifying expansion of an existing industry.

The current IRD description requires the existing qualifying industry to:

• increase its existing installed capacity by at least 25%;

• raise its capital to NPR 2 billion; and

• provide direct employment to more than 300 persons throughout the year.

Where the conditions are satisfied, the income generated from the increased capacity receives:

full income-tax exemption for the first five years; and

50% exemption for the following three years.

This is not necessarily an exemption for the entire pre-existing business.

6.18 Income From Increased Capacity Must Be Identified

The phrase:

income from increased capacity

is crucial.

Suppose an existing hotel has: 100 rooms

and expands to: 150 rooms.

The tax concession is not necessarily an automatic holiday for all income generated by all 150 rooms.

Management must establish the income attributable to the qualifying capacity expansion in accordance with the applicable provision.

This creates a practical need for pre-expansion and post-expansion accounting.

6.19 Installed Capacity in a Hotel Context

“Installed capacity” is straightforward in a manufacturing factory producing a stated number of units.

For a hotel or resort, it may require greater interpretation.

Possible capacity indicators may include:

• registered room capacity;

• number of approved rooms;

• beds;

• cottages/villas;

• formally registered operating capacity;

• another capacity measure used in industry registration.

Management should not simply use:

25% increase in revenue

as equivalent to:

25% increase in installed capacity.

Revenue can increase because room rates or occupancy rise without any capacity increase.

The expansion should therefore be supported by:

• amended industry registration;

• approved project documents;

• room/capacity schedule;

• construction records;

• regulatory approval;

• completion information.

6.20 Illustration — Expansion Condition

Assume an existing qualifying resort has: Original registered accommodation capacity:

200 rooms.

Expansion adds:

60 rooms.

Increase:

60 ÷ 200
= 30%.

The 25% capacity condition is numerically met.

If the other conditions relating to capital and employment are also satisfied, the resort can examine the expansion concession.

By contrast, adding only:

40 rooms

would represent:

20%

and would not satisfy a requirement of at least 25% capacity expansion.

6.21 Capital Must Reach NPR 2 Billion

The expansion provision does not merely require additional investment.

IRD's description refers to the qualifying existing industry raising capital to:

NPR 2 billion

together with the 25% capacity expansion and more-than-300 direct-employment requirement.

Management should therefore test all conditions together.

A 30% capacity expansion does not by itself establish eligibility.

6.22 More Than 300 Direct Employees for Expansion

The expansion provision also refers to direct employment of:

more than 300 persons throughout the year.

Again, “more than 300” suggests a minimum of 301 rather than exactly 300 under a conservative reading.

The employment schedule should therefore be linked directly to the expansion tax computation.

6.23 Separate Accounting for Expansion Income

A qualifying expansion should have its own management segment.

For example: OLD-HOTEL

Existing rooms and operations

EXP-01

New wing / qualifying capacity expansion

Revenue and direct costs should be separately identifiable.

Common expenses may then be allocated on a reasonable basis.

The purpose is to establish:

profit from qualifying expansion

rather than merely total hotel profit.

6.24 Tiered Tourism-Investment Concession

Separate from the employment-linked provision, Section 11(3ट) provides particularly significant tax holidays to an industry related to the tourism sector or an international airline according to the amount of capital investment.

The current statutory structure provides three investment tiers:

More Than NPR 1 Billion

Full income-tax exemption for five years, followed by

50% exemption for the next three years.

More Than NPR 3 Billion

Full income-tax exemption for ten years, followed by

50% exemption for the next five years.

More Than NPR 5 Billion

Full income-tax exemption for fifteen years.

The tiered NPR 1 billion, NPR 3 billion and NPR 5 billion structure is contained in Section 11(3ट). IRD's amendment material introducing the tiers records the same 5-year, 10-year and 15-year structure.

6.25 Summary of Section 11(3ट)

This can be one of the most financially valuable tax provisions available to a major Nepal hospitality project.

6.26 No Express Employment Threshold in Section 11(3ट)

An important distinction from Section 11(3)(ग) is that the Section 11(3ट) capital-tier provision is structured around:

tourism-sector status + capital investment.

The NPR 1 billion / 3 billion / 5 billion provision does not contain the same express “more than 500 direct employees” test appearing in Section 11(3)(ग).

Accordingly, the two provisions should not be treated as interchangeable.

A large tourism project should calculate eligibility independently under both.

6.27 Illustration — NPR 1.5 Billion New Resort

Assume a new qualifying resort has capital investment of:

NPR 1.5 billion.

It commences commercial operation on the relevant date.

Under the capital-tier provision, the project may qualify for: Years 1–5:

100% income-tax exemption

Years 6–8:

50% exemption from tax otherwise payable.

If the ordinary corporate tax would otherwise be 25%, the tax during Years 6–8 would, before considering other interactions:

25% × 50%
= 12.5%.

6.28 Illustration — NPR 3.5 Billion Hotel

Capital investment:

NPR 3.5 billion.

The project exceeds:

NPR 3 billion.

Accordingly, the relevant tier potentially provides: Years 1–10:

100% income-tax exemption

Years 11–15:

50% exemption from tax otherwise payable.

The difference between structuring a project at NPR 2.9 billion and NPR 3.1 billion can therefore be economically significant, provided the additional investment is commercially genuine and qualifies under the statutory investment test.

6.29 Illustration — NPR 5.5 Billion Integrated Resort

Capital investment:

NPR 5.5 billion.

The project exceeds:

NPR 5 billion.

The qualifying tax holiday becomes:

15 years of full income-tax exemption.

For a project of this scale, the tax concession should form part of the original investment feasibility study and financing model.

6.30 Threshold Planning Must Be Commercially Genuine

Tax incentives should not encourage artificial project costs.

For example, if a genuine project is expected to cost NPR 2.95 billion, management may legitimately consider whether additional commercially useful investment would move the project above NPR 3 billion and simultaneously improve the project.

It would be inappropriate, however, to inflate invoices or undertake sham transactions solely to create the appearance of crossing an investment threshold.

The capital investment must be real, documented and commercially supportable.

6.31 Capital Investment Should Be Monitored During Construction

For a project targeting a threshold, management should prepare a monthly investment schedule showing:

approved investment;

committed investment;

actual expenditure;

qualifying capital investment;

forecast at completion.

This schedule should distinguish:

• land;

• buildings;

• civil works;

• machinery;

• furniture;

• hotel equipment;

• technology;

• project costs;

• working capital where relevant to the prescribed investment basis.

Tax planning should not depend solely on the company's authorised share capital.

6.32 Financing Method Does Not Necessarily Determine Investment Amount

A major tourism project may be financed through:

• equity;

• bank loan;

• shareholder loan;

• foreign investment;

• retained profit.

The fact that part of the project is debt-financed does not automatically mean that the underlying project investment disappears.

The tax test refers to capital investment, not merely shareholder equity.

Management should therefore distinguish:

how the project is financed

from:

the amount invested in the project.

6.33 Interaction Between the Two Large-Investment Provisions

A project exceeding NPR 1 billion and employing more than 500 persons may potentially fall within both:

• Section 11(3)(ग); and

• Section 11(3ट),

depending upon its classification and facts.

The taxpayer should not assume that both tax holidays can be added together.

The provisions must be read with the Section 11 interaction rules.

For the same qualifying income, management should identify the legally available treatment and select the concession permitted under Section 11(5).

Where both provisions produce the same five-year full exemption plus three-year 50% relief, there may be no economic difference during that period, but the statutory basis should still be identified correctly.

6.34 Section 11(5) — Restriction on Stacking Concessions

As discussed previously, Section 11 contains an important rule where the same income qualifies for more than one concession.

In broad terms, the special Section 11(2ख) concession may operate together with one other qualifying concession, but multiple additional concessions should not simply be multiplied indefinitely.

Management should therefore prepare an Incentive Selection Schedule whenever several concessions appear available.

For example: Option A:

basic hotel concession + employment concession

Option B:

basic hotel concession + listed-company concession

Option C:

major investment tax holiday

Option D:

another permitted tourism-investment concession.

The legally available and economically appropriate option should then be selected.

6.35 Tax Holiday and the Basic 20% Hotel Concession

During a year of complete tax exemption:

ordinary tax = NPR X

tax holiday exemption = 100%

final tax = Nil.

Applying a further 20% hotel concession to a nil tax liability does not create a negative tax.

Accordingly, management should focus on the concession that actually determines the tax liability rather than presenting cumulative percentages that have no economic meaning.

6.36 Tax Losses During a Full Tax-Holiday Period

A large tourism project may generate losses during its initial years.

As discussed in Chapter 3, losses arising during a period in which the relevant income is fully exempt require careful treatment under Section 20.

Management should not assume that a loss arising during a fully exempt period can simply be accumulated and used after the tax holiday ends.

The interaction between:

tax exemption

and

tax-loss carry-forward

should therefore be included in project modelling.

A full exemption is highly valuable where the project is profitable; its value is naturally lower in a period where there would have been no taxable profit.

6.37 Timing of Profitability Matters

Consider two projects receiving the same five-year full exemption.

Project A

Loss in Years 1–3
Profit begins in Year 4.

Project B

Profit from Year 1.

Although both projects technically have the same five-year exemption period, Project B may obtain substantially greater cash-tax savings because more profit arises within the exemption window.

This is not a reason to manipulate revenue recognition.

It does, however, demonstrate why management should model realistic:

• construction completion;

• opening;

• occupancy ramp-up;

• financing cost;

• profitability;

when measuring the economic value of a tax holiday.

6.38 Listed Tourism-Service Company Concession

Section 11(3छ) provides a further concession for specified entities listed on the securities market, including entities providing tourism services.

The concession is:

15% exemption from the income tax otherwise payable.

IRD's Section 11 concession information includes listed tourism-service entities within this 15% relief.

A qualifying publicly listed hotel company should therefore test this provision separately.

6.39 Listing Is Different From Becoming a Public Company

A company can become a public company without immediately listing its shares on the securities market.

Accordingly:

public-company status

and:

stock-market listing

should not be treated as identical events.

The listed-tourism-service concession requires the relevant listing condition.

A company that has merely converted from private to public status should not automatically claim the listed-company concession unless the listing requirement is also satisfied.

6.40 Effective Rate Where Listed Concession Is Selected

Assume: ordinary corporate rate = 25%.

The hotel qualifies for the basic Section 11(2ख) concession:

25% × 80%
= 20%.

If the 15% listed-tourism-service concession is the additional concession lawfully selected:

20% × 85%
= 17% effective tax rate.

This can be compared with the employment concessions:

This comparison demonstrates why concession selection matters.

For example, a listed hotel employing only 150 qualifying employees may obtain a better tax result from the 15% listed-company relief than from the 100-person employment concession, subject to Section 11's interaction rules.

6.41 Listing Should Not Be Undertaken Merely for Tax

Listing has significant commercial and regulatory consequences, including:

• public-shareholder obligations;

• securities regulation;

• corporate governance;

• financial reporting;

• disclosure requirements;

• listing costs.

A 15% reduction from income tax otherwise payable is only one factor.

Management should therefore evaluate the concession as part of the overall listing decision rather than treat listing as a tax scheme.

6.42 Private Company Converting Into Public Company

Section 11(3ड) provides a separate concession where a qualifying private company with paid-up capital of:

NPR 500 million or more

converts into a public company and carries on its business as a public company.

The concession is:

10% exemption from the income tax otherwise payable for three years from the date of conversion.

A company that is required by Section 12 of the Companies Act to be incorporated as a public company does not obtain this concession merely by satisfying a status that it was already legally required to have. IRD's published concession table reflects the NPR 500 million paid-up-capital threshold, three-year period and 10% relief.

6.43 Paid-Up Capital Test Is Specific Here

Unlike the major tourism-investment provisions, Section 11(3ड) specifically refers to:

paid-up capital.

This should be distinguished from:

project capital investment.

Accordingly: Authorised capital:

NPR 1 billion

Issued capital:

NPR 700 million

Paid-up capital:

NPR 450 million

would not automatically satisfy a statutory requirement of paid-up capital of NPR 500 million.

Management should use the actual paid-up capital legally registered at the relevant date.

6.44 Effective Rate After Public Conversion

Assume a qualifying hotel has: Ordinary tax rate:

25%.

Basic hotel concession:

effective 20%.

If the public-conversion concession is selected as the additional permitted concession:

20% × 90%
= 18% effective rate

for the applicable three-year period.

Again, this should be compared with any employment concession.

For example:

• 100-person employment concession → 18%;

• public conversion concession → 18%;

• 300-person employment concession → 16%.

Where several provisions apply, management should select the treatment permitted by Section 11 that provides the appropriate result.

6.45 Conversion and Listing Can Occur at Different Dates

Consider: Private company converts to public company:

1 Shrawan 2083.

Shares become listed:

1 Magh 2084.

The public-conversion concession and listed-company concession arise from different statutory events.

Management should therefore maintain:

• conversion date;

• listing date;

• three-year concession period;

• relevant income years.

They should not be combined into a single undocumented “public-company concession”.

6.46 Capitalisation of Accumulated Profit

Section 11(3ठ) provides another important tourism-sector incentive.

Where a:

special industry or industry related to the tourism sector

capitalises its accumulated profit into shares for the purpose of increasing the capacity of the same industry, the dividend tax that would otherwise arise on that capitalisation is:

100% exempt.

This is not a reduction in corporate business income tax.

It is an exemption from the dividend tax arising from the qualifying capitalisation.

6.47 Purpose of the Capitalisation Concession

The provision encourages businesses to:

retain profits within the enterprise

and:

use them for capacity expansion,

rather than distributing the funds to shareholders as cash.

This can be particularly useful for a hotel planning:

• an additional wing;

• more rooms;

• new villas;

• expanded conference facilities;

• additional tourism capacity;

• other qualifying capacity expansion.

6.48 Mere Bonus Share Issue Is Not Enough

Management should pay particular attention to the statutory purpose.

The concession refers to capitalisation:

for expansion of the capacity of the same industry.

Therefore, management should not assume:

accumulated profit converted into bonus shares = automatic dividend-tax exemption.

Where the company merely capitalises reserves without any genuine qualifying capacity expansion, the specific condition may not be satisfied.

The capacity-expansion objective should be clearly documented.

6.49 Illustration — Qualifying Capitalisation

Assume a resort has: Accumulated profit:

NPR 200 million.

Management plans an additional accommodation wing costing:

NPR 250 million.

The company capitalises:

NPR 200 million of accumulated profit into shares

and uses the capital structure as part of the same resort's documented capacity expansion.

Where the statutory requirements are met:

dividend tax on the qualifying capitalisation is fully exempt.

This can provide a significant financing advantage compared with distributing profit and subsequently seeking new equity.

6.50 Management Documentation for Capitalisation

The tax file should contain:

• audited retained-earnings balance;

• board resolution;

• shareholder resolution;

• share-capital increase documents;

• Office of Company Registrar filings;

• industry-registration amendment;

• expansion plan;

• cost estimate;

• financing plan;

• evidence of capacity increase;

• fixed-asset/CWIP records;

• share-allotment records.

The accounting entry alone is insufficient to establish the statutory purpose.

6.51 Accounting Perspective on Capitalisation

From an accounting perspective, a qualifying capitalisation generally reallocates an amount within equity.

Conceptually:

accumulated profit / retained earnings

is converted into:

share capital.

No cash is necessarily paid to shareholders.

The tax significance arises because such capitalisation could otherwise be treated as a dividend-type distribution for tax purposes, but the qualifying Section 11 provision provides full dividend-tax relief.

The financial-statement accounting should continue to follow the applicable accounting and company-law requirements.

6.52 Capitalisation Is Different From Cash Dividend

Suppose accumulated profit is NPR 200 million.

Option A — Cash Dividend

Company distributes the amount to shareholders.

Normal dividend-tax provisions apply.

Option B — Qualifying Capitalisation for Expansion

Accumulated profit is converted into shares and used for qualifying capacity expansion.

The specific Section 11 provision may provide:

100% dividend-tax exemption on the qualifying capitalisation.

The two transactions therefore have different tax consequences.

6.53 Expansion Should Be of the Same Industry

The statutory wording refers to capacity expansion of:

the same industry.

Suppose a hotel earns accumulated profit and uses it to capitalise a completely unrelated manufacturing business.

The hotel-sector capitalisation concession should not automatically be assumed.

The expanded activity should remain within the qualifying industry contemplated by the provision.

6.54 Restaurant and Broader Tourism Incentives

An important distinction should again be emphasised.

A stand-alone restaurant does not automatically receive the ordinary hotel/resort-specific Section 11(2ख) concession.

However, the industrial classification of tourism industries includes restaurant activities. Therefore, where a broader Section 11 provision refers to a:

tourism industry

or:

tourism-sector-related industry,

a properly registered restaurant may need to examine its eligibility separately.

For example, a very large integrated tourism restaurant or hospitality project meeting the relevant capital-investment conditions should not reject the broader tourism concession merely because it is not technically a hotel.

Conversely, inclusion in a tourism-industry schedule does not by itself prove that every condition of the tax concession is met.

6.55 Resort Versus Tourism Industry

A qualifying resort may potentially fall within:

1. the specific hotel/resort concession;

2. employment-based hotel/resort concession;

3. broader tourism-industry large-investment concession;

4. capital-tier tourism concession;

5. listed tourism-service concession;

6. capitalisation concession.

This multiplicity makes resorts particularly suitable for a formal Section 11 Incentive Matrix.

6.56 Suggested Section 11 Incentive Matrix

Management may prepare:

This should be prepared before the annual tax provision is finalised.

6.57 Concession Optimisation

Management should calculate the cash-tax outcome under each legally available option.

Consider a listed hotel employing 350 persons.

Taxable qualifying income:

NPR 100 million.

Potential outcomes might include:

Basic Hotel Concession Only

Effective rate:

20%

Tax:

NPR 20 million.

Basic + Listed Tourism Concession

20% × 85%

17%

Tax:

NPR 17 million.

Basic + 300-Employee Concession

20% × 80%

16%

Tax:

NPR 16 million.

Where the rules permit only one additional concession, the 300-person employment concession produces a lower tax in this illustration.

The tax file should record why the selected concession was used.

6.58 A Full Tax Holiday Usually Dominates Percentage Concessions

Suppose the same hotel qualifies under a tourism-investment provision granting:

100% exemption.

Its current tax becomes:

Nil.

In that period, selecting a 15%, 20% or 30% reduction instead would ordinarily produce a worse result.

Accordingly, management should first identify whether a full exemption applies before optimising percentage concessions.

6.59 Future Years Must Also Be Modelled

The most advantageous provision in the current year is not necessarily the most important provision over the full project life.

Consider:

• a five-year full exemption followed by three years at 50%;

• a ten-year full exemption followed by five years at 50%;

• a 15-year full exemption.

Management should model taxes over the entire relevant horizon.

This is particularly important in:

• project feasibility studies;

• hotel acquisitions;

• financing negotiations;

• valuations;

• investment committee decisions.

6.60 Tax Holiday as Part of Project Valuation

For a major hotel project, the value of a tax holiday should be included in projected free cash flows.

A simple project model should show:

EBITDA

less:

depreciation/tax adjustments

equals:

taxable income

multiplied by:

applicable tax after concession

to determine:

cash tax.

A 10-year or 15-year tax holiday can materially change:

• project IRR;

• equity return;

• debt-service capacity;

• valuation.

Tax concessions should therefore be incorporated into the investment model before financing is committed.

6.61 Acquisition of an Existing Hotel With a Tax Holiday

A buyer acquiring an existing hotel should not automatically assume that the remaining tax holiday can simply be transferred.

Management should examine:

• which taxpayer originally qualified;

• ownership change;

• Section 57 implications;

• business continuity;

• conditions of the specific concession;

• remaining holiday period.

A tax holiday is not a free-standing asset that can necessarily be transferred independently of the taxpayer and qualifying business.

This issue should form part of acquisition due diligence.

6.62 Change in Ownership During Concession Period

A material ownership change can have broader Income Tax Act consequences, including Section 57 implications.

Accordingly, before:

• selling controlling shares;

• admitting a major investor;

• restructuring a project company;

management should consider whether the transaction affects:

• losses;

• tax attributes;

• tax-holiday continuity;

• related concessions.

The concession should therefore be reviewed as part of transaction structuring.

6.63 Merger or Restructuring

Similarly, a hotel enjoying a substantial tax holiday should not undertake:

• merger;

• demerger;

• transfer of business;

• property transfer;

• operator change;

without analysing the effect on the qualifying taxpayer.

The concession generally relates to the particular person/business satisfying statutory conditions, not merely the physical hotel building.

6.64 Tax Holiday and Depreciation

Management should continue to maintain tax-depreciation schedules even during a full tax-exemption period.

The fact that no tax is payable does not eliminate the need to determine:

• tax depreciation;

• asset pools;

• taxable income;

• losses;

• future tax base.

However, because losses during exempt years can have special treatment, the timing consequences of accelerated depreciation should be modelled carefully.

A larger depreciation deduction in a year where all income is already exempt may have less economic value than the same deduction in a taxable year.

6.65 Tax Planning Should Consider Timing of Capital Allowances

Assume a tourism project has:

100% income-tax exemption for ten years.

If accelerated tax depreciation reduces taxable income during those ten years but the income would already have been fully exempt, the immediate cash-tax benefit may be limited.

Management should therefore understand the interaction between:

• concession period;

• depreciation pool;

• future taxable years;

• loss rules.

This is a management-model issue rather than simply a depreciation-rate issue.

6.66 Advance Tax During Tax Holiday

Where the qualifying income is fully exempt, management's estimated advance-tax computation should reflect that exemption to the extent legally available.

However, if the entity also earns non-exempt income, such as:

• unrelated rental income;

• investment income;

• another business income,

advance tax may still arise on those amounts.

Management should therefore avoid assuming:

“Company has tax holiday = company pays no income tax at all.”

The exemption follows qualifying income.

6.67 Separate Accounting Remains Essential

During a tax holiday, the company may earn: Qualifying tourism income:

NPR 100 million

Non-qualifying rental income:

NPR 10 million.

The tax holiday should not automatically exempt the unrelated NPR 10 million.

Management should therefore maintain separate:

• revenue;

• direct expenditure;

• asset use;

• financing;

• common-cost allocation;

for qualifying and non-qualifying activities.

6.68 Foreign Investors

A major tourism project may include foreign investors.

The corporate income-tax concession discussed in this guide applies to the qualifying project income.

Foreign investors may separately face tax consequences concerning:

• dividend;

• interest;

• management fee;

• royalty;

• capital gains;

• repatriation;

• DTAA provisions.

A project tax holiday should therefore not be confused with exemption from every tax payable by shareholders or foreign service providers.

6.69 Dividend During a Corporate Tax Holiday

A company may earn tax-exempt business income and subsequently distribute dividend.

A corporate business-income exemption does not automatically mean that the shareholder-level dividend tax is also exempt.

A separate statutory exemption must exist.

The accumulated-profit capitalisation provision discussed above is one example where a specific dividend-tax exemption is provided.

Cash dividend should therefore be analysed separately.

6.70 Management Documentation for Large Investment Concessions

A large hotel or resort should maintain a permanent Investment Incentive File containing:

Legal

• company-registration documents;

• PAN/VAT;

• tourism/industry registration;

• concession-related approvals.

Investment

• approved project cost;

• amendments;

• actual capital investment;

• funding structure;

• fixed assets;

• CWIP;

• invoices/import documents.

Commencement

• completion certificate;

• first commercial transaction;

• first tax invoice;

• opening records;

• tourism approval.

Employment

Where required:

• employee headcount;

• direct employment;

• payroll;

• SSF;

• joining/leaving records.

Expansion

Where relevant:

• original capacity;

• expanded capacity;

• percentage increase;

• original capital;

• post-expansion capital;

• expansion-income schedule.

Tax

• applicable Section 11 provision;

• concession period;

• income segregation;

• annual concession computation.

6.71 Recommended Annual Incentive Review

At the beginning of each fiscal year, management should review:

Which concessions remain active?

Which tax-holiday year are we currently in?

Does a partial-exemption period begin this year?

Has the investment threshold changed?

Are employment conditions still satisfied?

Has the company listed its shares?

Is public-conversion relief still within its three-year period?

Has accumulated profit been capitalised for expansion?

Have there been ownership or restructuring changes?

This review should precede the annual tax budget.

6.72 FY 2082/83 and FY 2083/84

The core tourism-investment provisions discussed in this guide remain part of the Section 11 framework across the fiscal years covered by this series. The consolidated Income Tax Act incorporating Finance Act 2082 includes the tiered tourism-investment provision, while IRD separately published its FY 2083/84 Section 11 concession schedule on 22 Shrawan 2083.

For practical purposes, the principal structure is:

For any project making a major investment decision, the precise law effective on the project's commencement and qualification date should also be confirmed because long-term tax holidays may depend upon provisions existing when the qualifying investment is established.

6.73 Management Perspective

The tax provisions discussed in this guide should affect major capital decisions, not routine daily accounting.

Before committing to a substantial hotel, resort or restaurant investment, management should know:

What is the registered tourism-industry status?

What is the qualifying capital investment?

Does the investment exceed NPR 1 billion, 3 billion or 5 billion?

Is an employment condition also relevant?

What date will commence the tax-holiday period?

Is the project an entirely new industry or an expansion?

If expansion, can the increased-capacity income be measured separately?

Is conversion to a public company contemplated?

Is securities-market listing contemplated?

Can accumulated profits finance expansion more efficiently than cash dividend?

Which Section 11 concession produces the best lawful result?

The answers should be incorporated into the project model before the investment is finalised.

6.74 Conclusion

Nepal's income-tax framework provides substantial incentives for major investment in tourism-related industries.

The concessions range from percentage reductions in ordinary tax to complete income-tax holidays extending as long as fifteen years.

The principal investment incentives may be summarised as follows:

More than NPR 1 billion plus more than 500 direct employees:
five years full exemption and three years 50% relief under the applicable large-investment/employment provision.

Qualifying expansion of an existing industry:
at least 25% capacity expansion, capital reaching NPR 2 billion and more than 300 direct employees, with relief on income from increased capacity.

Tourism investment above NPR 1 billion:
five years full exemption plus three years 50%.

Tourism investment above NPR 3 billion:
ten years full exemption plus five years 50%.

Tourism investment above NPR 5 billion:
fifteen years full exemption.

Listed tourism-service entity:
15% exemption from tax otherwise payable.

Qualifying private company converting into public company:
10% exemption for three years.

Capitalisation of accumulated profit for capacity expansion of the same tourism industry:
100% exemption from the dividend tax otherwise arising on the qualifying capitalisation.

The availability of these incentives depends upon the exact taxpayer, business classification, investment amount, employment level, commencement date, expansion structure and statutory interaction rules.

They should therefore be treated as part of investment planning rather than year-end tax adjustments.

The following chapter examines Interaction, Selection and Optimisation of Section 11 Concessions. That chapter will bring Chapters 4, 5 and 6 together and show, through comparative calculations, which concession can be combined, which cannot simply be stacked, how to select between employment, listing, public-conversion and investment relief, and how management should determine the lowest legally sustainable effective income-tax rate for each fiscal year.