Cross-border Service, Royalty and Interest Payments from Nepal

Source

Is the payment Nepal-source?

Character

Is it:

• service fee;

• royalty;

• interest;

• contract payment;

• dividend;

• another type?

Permanent Establishment

Does the foreign recipient have a Nepal PE?

DTAA

Does a treaty modify Nepal's taxing right?

VAT / Other Tax

Does VAT, DST or another tax apply?

Regulatory / FX

Does DOI/NRB approval or documentation apply?

Only then should the remittance be processed.

General Domestic TDS Rates — FY 2083/84

IRD currently publishes FY 2083/84 withholding rates and its current guidance confirms the following important starting points:

These rates are subject to:

• statutory exceptions;

• payment classification;

• DTAA treatment.

Do Not Apply the 1.5% Resident Service Rate to Foreign Providers

Nepal's familiar: 1.5% service TDS applies to qualifying payments to a resident VAT-registered service provider or qualifying VAT-exempt resident entity.

It should not automatically be used for a non-resident foreign consultant.

For a foreign service provider, begin with the:

• Nepal source rule;

• Section 88;

• Section 89;

• PE;

• DTAA

analysis.

Service Fee — General Starting Point

Section 88 generally requires a resident payer making a Nepal-source service-fee payment to deduct: 15% subject to specific exceptions and treaty relief.

Examples:

• foreign consultancy;

• management service;

• technical service;

• professional service.

But classification matters.

A payment falling within a specific contract provision may have a different domestic collection rule.

Non-resident Contract Payment

Section 89 provides a specific withholding regime for qualifying contract/agreement payments.

For payment to a non-resident under the relevant contract rule, the domestic rate is generally: 5%.

Do not use the 5% rate solely because the parties signed a document titled:

“Contract”.

The true character of the payment controls.

Royalty

Nepal-source royalty is generally subject to: 15% domestic withholding under Section 88.

Examples may include payment for use of:

• trademark;

• patent;

• copyright;

• know-how;

• technology;

• qualifying software/IP rights.

For foreign-invested/industrial arrangements, also consider:

• Technology Transfer Agreement;

• DOI approval;

• FITTA;

• royalty ceiling;

• transfer pricing;

• NRB repatriation procedure.

Interest

The ordinary Nepal-source interest withholding starting point is 15%, subject to statutory exceptions and treaty relief.

Section 88(1)proviso(9) sets 5% for a qualifying resident bank or financial institution paying interest on a foreign-currency loan from a foreign bank or other financial institution for investment in an NRB-designated sector. Confirm all those conditions; 5% is not the rate for every foreign loan.

DTAA Can Change the Result

Domestic law is only the starting point.

Where the recipient is a qualifying resident of a current Nepal treaty partner, review the treaty article covering:

• interest;

• royalty;

• business profits;

• services;

• PE.

The treaty may cap Nepal tax below the domestic rate.

CMA's current active-treaty list for FY 2083/84 contains 10 bilateral DTAAs, following termination of the Mauritius treaty for Nepal from 17 July 2026.

Treaty Documentation

Before applying a reduced treaty rate, maintain evidence such as:

• Tax Residency Certificate;

• foreign entity incorporation;

• agreement;

• invoice;

• beneficial ownership where relevant;

• PE declaration/support;

• relevant treaty article;

• tax calculation.

A foreign bank account is not treaty evidence.

PE Can Change Withholding Analysis

Suppose Foreign Co performs substantial services through a Nepal PE.

The tax analysis may shift from a simple final withholding on a non-resident payment toward:

• PE taxable income;

• attributable expenses;

• annual return;

• adjustable withholding;

• branch-remittance tax.

PE should therefore be analysed before treating all foreign supplier tax as final withholding.

Final Withholding

Section 92 generally treats specified Section 87/88/88A/89 payments to a non-resident as: final withholding payments

where the statutory conditions apply.

Therefore the tax withheld can represent the recipient's final Nepal tax on that payment rather than merely an advance payment.

But PE and treaty circumstances can alter the analysis.

Management Fee

Management fees require at least three separate tests.

Income Tax Withholding

Usually service-fee analysis.

Transfer Pricing

Was the service actually provided and is the price arm's length?

Deductibility

Is the expenditure incurred in producing business income and properly documented?

A foreign parent's invoice does not by itself satisfy all three.

Technical Service

A technical-service payment can create:

• Section 88 withholding;

• service PE;

• TTA/FITTA issue;

• VAT issue;

• transfer pricing.

A technical expert physically entering Nepal also creates:

• labour permit;

• Working Visa;

• salary/payroll issues

where the facts constitute employment.

Royalty vs Service Fee

Distinguish:

Royalty

Payment for right to use IP/technology.

Service Fee

Payment for performance of a service.

Mixed Agreement

Contains both.

For a mixed agreement:

allocation may be necessary.

Do not label all foreign technical payments as royalty merely because software or knowledge is involved.

Software Payments

Software payments require careful factual analysis.

Possible character:

• purchase of ordinary product;

• subscription/service;

• licence/right to use copyright;

• royalty;

• digital service.

The tax result depends on the rights acquired.

Do not apply one tax rate to every payment described as:

“Software”.

VAT

Income Tax TDS does not settle VAT.

Cross-border services may require a separate VAT analysis based on:

• place of supply;

• recipient;

• nature of service;

• non-resident digital-service rules;

• imported service framework.

IRD maintains a specific VAT procedure for electronic services supplied by non-resident persons, currently through the Third Amendment 2082.

Therefore:

15% TDS paid ≠ VAT issue completed.

Digital Services

Non-resident electronic services can fall within special Nepal:

• VAT registration/compliance;

• Digital Service Tax

regimes.

Examples can include qualifying:

• online advertising;

• streaming;

• cloud services;

• digital platforms;

• downloadable services;

• electronic subscriptions.

IRD maintains dedicated current procedures for these non-resident digital-service regimes.

Transfer Pricing

Where the foreign recipient is related to the Nepal payer, also determine whether the payment satisfies: arm's-length pricing under Sections 33/33 A/33 B and IRD's Transfer Pricing Directive.

This applies particularly to:

• royalty;

• management fee;

• interest;

• group support services.

Deductibility

Tax withholding does not automatically make the expense deductible.

Example: Nepal Co pays foreign parent:

NPR 10 million management fee.

Nepal Co deducts 15% TDS.

That does not automatically establish:

• service received;

• business purpose;

• arm's-length amount;

• documentation.

IRD can still challenge the deduction.

Foreign-exchange / NRB

Before remittance abroad, the bank may require evidence supporting:

• agreement;

• invoice;

• tax payment;

• tax clearance;

• DOI approval;

• TTA;

• foreign-loan approval;

• other foreign-exchange documentation.

The required file differs by payment type.

Royalty Repatriation

Foreign technology royalty ordinarily requires:

• approved TTA where applicable;

• royalty calculation;

• tax payment;

• DOI/IMIS process;

• current NRB/authorised-bank process.

Do not process royalty simply as an ordinary supplier invoice.

Foreign Loan Interest

Interest payment should reconcile with:

• NRB-approved loan;

• principal balance;

• permitted interest rate;

• loan agreement;

• tax withholding;

• repayment schedule.

If the loan is related-party: add transfer pricing.

Gross-up Clause

Foreign contracts often contain clauses such as:

“All Nepal taxes shall be borne by the Nepal customer.”

This can create a tax gross-up.

Example

Foreign supplier must receive net: NPR 850,000

Nepal withholding: 15%.

If contract requires Nepal payer to bear the tax, gross payment may need to be calculated as: NPR 850,000 ÷ 85% = NPR 1,000,000

TDS: NPR 150,000.

Contract drafting therefore directly affects transaction cost.

Example — Foreign Consultancy

Foreign consultant fee: NPR 2,000,000.

No treaty assumed.

No PE assumed.

Payment characterised as ordinary Nepal-source service fee.

Domestic starting withholding: 15% = NPR 300,000

Net payment: NPR 1,700,000

Then separately check:

• VAT;

• foreign-exchange documentation;

• deductibility.

Example — Royalty

Approved royalty: NPR 5,000,000.

Domestic withholding starting point: 15% = NPR 750,000.

Before remittance also verify:

• TTA approval;

• treaty;

• transfer pricing;

• VAT;

• DOI/NRB process.

Example — Foreign Loan Interest

Foreign loan interest: NPR 4,000,000.

Do not automatically choose the special 5% rate.

First identify:

• borrower type;

• lender type;

• loan category;

• DTAA.

If ordinary Section 88 treatment applies: 15% = NPR 600,000 before treaty relief.

Payment Approval Sheet

CMA recommends requiring a cross-border tax sheet before every material foreign payment:
Recipient:

Country:

Tax residence:

Payment type:

Nepal source?

PE?

Domestic rate:

DTAA rate:

Final rate:

VAT:

Transfer pricing:

DOI/NRB requirement:

Supporting documents:

Approver:

This reduces misclassification at the bank-payment stage.

Cross-border Payment Checklist

• Identify recipient

• Determine tax residence

• Determine source

• Classify payment

• Check PE

• Check domestic TDS

• Check DTAA

• Obtain TRC

• Determine final withholding

• Calculate gross-up

• Review VAT

• Review digital-service tax

• Review transfer pricing

• Check deductibility

• Check TTA/DOI

• Check foreign-loan approval

• Check NRB/bank documents

• Deposit/file TDS

• retain remittance evidence

Common Errors

Applying 1.5% resident-service TDS to foreign consultants

Calling royalty a contract payment to use 5%

Applying the special 5% BFI foreign-loan rate to every foreign lender

Applying treaty rates without residency evidence

Paying TDS but ignoring VAT

Paying related-party charges without transfer-pricing documentation

Ignoring PE

Discovering NRB/DOI documentation requirements only after the bank rejects the remittance

Further guidance and practical checks

Every cross-border payment should be reviewed as a single transaction across Income Tax, treaty, PE, VAT, transfer pricing and foreign exchange. Solving only the withholding rate is not enough.