Permanent Establishment in Nepal — When a Foreign Business Becomes Taxable

Why Permanent Establishment Matters

A foreign enterprise may begin with:

“We have no company registered in Nepal.”

That does not answer the tax question.

The correct question is:

Does the foreign enterprise have sufficient business presence in Nepal to constitute a Permanent Establishment?

If yes, the Nepal PE becomes subject to Nepal Income Tax obligations.

Fixed Place PE

The general definition covers a place where a foreign person carries on business wholly or partly.

Examples can include:

• office;

• branch;

• project office;

• workshop;

• factory;

• site;

• other fixed business location.

The precise label used by the foreign business is not decisive.

A location called:

“liaison office”

could still create tax exposure if substantive business is actually conducted through it.

Agent PE

A PE can arise where business is conducted through an agent, except an ordinary independent agent acting independently in the ordinary course of business.

The domestic definition expressly includes business carried on through an agent other than such an independent general agent.

Issues to review include whether the Nepal person:

• habitually negotiates;

• concludes contracts;

• binds the foreign enterprise;

• operates under detailed control;

• works almost exclusively for the foreign enterprise.

Do not assume the absence of a foreign-company office eliminates PE risk.

Equipment / Machinery PE

The Income Tax Act includes a place where a person's:

• principal equipment; or

• principal machinery

is situated, used or installed.

This can be particularly relevant to businesses involving:

• construction;

• telecommunications;

• energy;

• infrastructure;

• heavy equipment;

• technical installations.

Service PE — Domestic 90-Day Rule

A PE arises under domestic law where a person provides:

• technical services;

• professional services; or

• consultancy services

through employees or otherwise for: more than 90 days in one or more locations during any: 12-month period.

The days do not necessarily have to be continuous.

How Service Days Are Counted

IRD's PE Directive explains that the test considers Nepal presence during the relevant service engagement.

Where multiple employees are present in Nepal on the same day, the Directive uses: solar days rather than person-days

so the same calendar day is not multiplied simply because several employees are present.

Example

Three foreign consultants are in Nepal for the same 30 calendar days.

That does not automatically mean: 30 × 3 = 90 PE days.

The actual day-counting methodology under the Directive must be applied.

Construction PE

Domestic law creates a PE where a foreign person is involved in:

• construction;

• installation; or

• establishment of a project

for: 90 days or more including related supervisory activities.

Construction contracts should therefore be tax-reviewed before mobilisation into Nepal.

Splitting Contracts Does Not Necessarily Eliminate PE Risk

A project should not be artificially divided among:

• associated entities;

• sequential contracts;

• related service arrangements

merely to remain below a day threshold.

The actual commercial arrangement, associated-person rules and anti-avoidance provisions should be considered.

Treaty PE May Be Different

Nepal's domestic threshold is not always the final answer.

A DTAA can provide:

• a longer construction threshold;

• a different service-PE threshold;

• specific exclusions;

• dependent-agent rules;

• preparatory/auxiliary exceptions.

IRD's PE Directive itself notes that Nepal's tax treaties contain PE thresholds different from the domestic 90-day tests.

Example — India

The Nepal–India treaty uses treaty-specific thresholds that differ from the ordinary domestic rule.

Accordingly:

Domestic PE test

and

Treaty PE test

must both be reviewed where a treaty applies.

No Treaty?

Where the foreign enterprise is resident in a country with which Nepal has no applicable DTAA: the Nepal Income Tax Act's domestic PE definition controls.

There is no treaty threshold available simply because the foreign company is internationally active.

PE Is Treated as a Nepal Resident Entity for Tax Purposes

The Income Tax Act treats the Nepal foreign permanent establishment of a non-resident person as a resident person/entity for purposes of Nepal taxation.

This is an important structural point.

The foreign head office remains non-resident, but the Nepal PE has a separate Nepal tax computation.

Income Attributable to PE

Once a PE exists, the tax issue is not simply:

“Tax every rupee earned by the foreign company's worldwide business.”

The relevant question becomes:

What income and expenses are attributable to the Nepal PE?

Section 68 requires the income of the PE to be separated from the income of the non-resident owner.

Transfer-pricing and arm's-length principles can affect:

• head-office expenses;

• management charges;

• interest;

• services;

• asset use;

• inter-branch allocations.

Corporate Income Tax

A Nepal PE generally computes taxable business income under the normal entity-tax framework.

The ordinary entity tax rate is generally: 25% subject to higher rates or special rules for particular activities/entities.

IRD currently publishes entity tax rates for FY 2083/84 as part of its current-year tax-rate materials.

Sector-specific treatment must therefore be checked.

Branch / Repatriated Income Tax

In addition to tax on the PE's taxable income, Nepal imposes tax on income deemed sent abroad by the Nepal PE.

The current statutory rate on income sent abroad by a foreign PE is: 5%.

This is broadly analogous to a branch-remittance tax.

Example

Foreign consulting company earns Nepal PE revenue: NPR 20,000,000

Allowable PE expenses: NPR 12,000,000

Taxable PE income: NPR 8,000,000

Ordinary entity tax at 25%, ignoring concessions: NPR 2,000,000

A separate 5% tax may arise on income treated as sent abroad under Section 68/Schedule 1.

The precise remitted-income calculation should be completed under the Act rather than simply applying 5% to gross revenue.

PAN Registration

IRD states that a non-resident person can apply for PAN:

• itself;

• through its Nepal PE; or

• through a representative.

Once PE exposure arises, taxpayer registration should be addressed promptly.

Tax Return

A PE should maintain sufficient Nepal records to calculate:

• Nepal-source revenue;

• expenses attributable to PE;

• depreciation;

• payroll;

• withholding;

• related-party transactions;

• foreign remittance.

Its annual Nepal Income Tax return should then reflect the PE tax computation.

VAT Is a Separate Test

Creating a PE for Income Tax and creating VAT-registration obligations are related but not identical questions.

A foreign service provider may have:

• Income Tax PE exposure;

• VAT registration/reverse-charge exposure;

• withholding tax exposure

under different tests.

Do not use PE status as the only VAT analysis.

PE vs Nepal Subsidiary

Nepal Subsidiary

Separate Nepal-incorporated company.

Permanent Establishment

Taxable Nepal presence of a foreign person.

The commercial, legal and tax implications differ significantly.

A foreign enterprise with long-term operations in Nepal should compare: Subsidiary vs

Branch/PE before commencing the project.

Common PE Risk Areas

Particular PE risk arises in:

• construction projects;

• installation contracts;

• consulting engagements;

• technical services;

• foreign engineering teams;

• long-term management support;

• dependent-agent arrangements;

• equipment-intensive projects;

• repeated short visits linked to one engagement.

PE Review Checklist

• Identify foreign enterprise

• Identify residence country

• Check applicable DTAA

• Identify Nepal business location

• Review agent authority

• Identify equipment/machinery

• Count service days

• Count construction/project days

• Aggregate relevant periods

• Review associated contractors

• Check treaty PE threshold

• Determine PE commencement date

• Obtain PAN where required

• Establish Nepal books

• Determine attributable income

• Review transfer pricing

• Compute entity tax

• Compute branch-remittance tax

• Review VAT/TDS

• File Nepal tax return

Common Errors

Assuming no Nepal company means no Nepal tax

Counting employee-days instead of applying the PE Directive's day-counting methodology

Using Nepal's 90-day rule without checking an applicable DTAA

Ignoring an agent who effectively conducts business for the foreign enterprise

Treating every payment to head office as deductible without attribution/transfer-pricing analysis

Ignoring the 5% PE remittance tax

Further guidance and practical checks

PE exposure should be assessed before the foreign enterprise begins work in Nepal. By the time 90 days have been crossed, registration, withholding, accounting and tax obligations may already require retrospective correction.