Taxation of Non-Residents in Nepal

Nepal-source employment, business and investment income.

Section 67 determines whether income, gains, losses or payments have a Nepal source.

The way tax is collected depends on whether the non-resident:

1. has a Nepal Permanent Establishment;

2. receives a Nepal-source payment subject to final withholding;

3. earns another form of Nepal taxable income; or

4. qualifies for relief under an applicable DTAA.

Resident vs Non-Resident Is the Starting Point

Before applying tax rates, establish:

Is the person resident in Nepal for Income Tax purposes?

A foreign nationality does not automatically mean non-resident.

Likewise, a Nepalese citizen is not automatically resident for every tax year.

Tax residence is determined under the Income Tax Act.

Non-Resident Natural Person

Where a non-resident natural person has taxable income requiring ordinary assessment under Schedule 1, the statutory rate is: 25% subject to specific final-withholding and special-regime provisions.

This does not mean every payment to every non-resident individual is simply taxed at 25%.

Withholding/final-tax rules must first be checked.

Foreign Company With Nepal PE

A foreign company carrying on sufficient business in Nepal may create a Nepal Permanent Establishment.

The PE is then taxed separately on attributable Nepal business income and treated as a Nepal resident entity for relevant tax purposes.

A separate: 5% tax on income sent abroad also applies under the PE remittance framework.

Non-Resident Without a PE

Where a non-resident does not have a Nepal PE but receives a Nepal-source payment, tax can often be collected through withholding.

Section 92 specifically treats payments subject to withholding under Sections 87, 88, 88A or 89 and paid to a non-resident as: final withholding payments.

This is a fundamental distinction.

Where the payment is a final-withholding payment, the withholding generally settles the Nepal tax liability for that payment.

Nepal-Source Interest

Interest paid by a Nepal resident is generally treated as Nepal-source under Section 67.

The general domestic withholding starting point for Nepal-source interest is: 15%

subject to:

• specific statutory exceptions;

• reduced rates for particular categories;

• applicable DTAA.

Nepal-Source Royalty

Royalty having a Nepal source is generally subject to domestic withholding of: 15% under Section 88, subject to treaty relief and special statutory treatment.

A royalty payment may also require:

• DOI/TTA approval;

• transfer-pricing analysis;

• VAT/reverse-charge analysis;

• NRB repatriation compliance.

Service Fees

A Nepal resident making a Nepal-source service payment can have withholding obligations under Section 88.

The general Section 88 rate for:

• service fees;

• commission;

• royalty;

• natural-resource payments

is: 15% subject to specific statutory exceptions.

The familiar 1.5% VAT-registered service-provider rate is a resident-service-provider concession and should not automatically be applied to a foreign service provider.

Contract Payment to Non-Resident

Under Section 89, a payment under a contract/agreement to a non-resident is generally subject to: 5% withholding under the statutory non-resident contract rule, subject to specific categories and any IRD notice or treaty relief.

The payment must be classified correctly.

A payment should not be labelled “contract” merely to obtain a lower rate where its true character is royalty, interest or another category.

Dividend

A dividend paid by a Nepal resident company is Nepal-source income.

The ordinary domestic withholding rate on dividend is: 5%.

For a foreign shareholder, the interaction with:

• DTAA;

• FITTA;

• repatriation;

• tax clearance

should also be considered.

Nepal-Source Rules

Section 67 contains detailed source rules.

Examples of payments generally having a Nepal source include:

• dividends paid by a resident entity;

• interest paid by a resident person;

• payments connected with Nepal natural resources;

• payments relating to Nepal assets/liabilities;

• payments connected with activities carried on in Nepal.

The physical location of the foreign recipient's bank account does not determine source.

Paying Offshore Does Not Automatically Make Income Foreign-Source

Example: Nepal Co hires Foreign Co to perform a technical project in Nepal.

Nepal Co pays Foreign Co's bank in Singapore.

The fact that money is sent offshore does not itself make the payment foreign-source.

You must apply Section 67 to the underlying income/payment.

Treaty Can Reduce Domestic Tax

If the non-resident is a qualifying resident of one of Nepal's treaty partners, the applicable DTAA can:

• reduce withholding;

• limit Nepal's business-profit taxation where no PE exists;

• change the PE threshold;

• allocate taxing rights;

• provide double-tax relief.

Domestic tax should therefore be computed: Income Tax Act

→ then

1. applicable DTAA
2. then

anti-abuse/treaty eligibility.

Treaty Does Not Automatically Apply

A foreign invoice showing an overseas address does not establish treaty entitlement.

The taxpayer may need to demonstrate matters such as:

• treaty residence;

• beneficial ownership where relevant;

• legal ownership;

• business substance;

• satisfaction of anti-abuse conditions.

Section 73(5) contains a domestic restriction intended to deny treaty relief in specified ownership structures where 50% or more of vested ownership is held by persons/entities outside Nepal and the treaty partner.

Permanent Establishment Changes the Analysis

Without a PE:

a treaty may restrict Nepal from taxing foreign enterprise business profits except through specified withholding/source rules.

With a PE:

Nepal may tax business profits attributable to that PE under the treaty and domestic law.

PE determination should therefore precede the final tax computation for substantial foreign-service arrangements.

Non-Resident Employment

A foreign individual working in Nepal can have Nepal-source employment income.

Tax treatment should consider:

• Nepal tax residence;

• days in Nepal;

• employer;

• place of employment;

• DTAA employment article;

• payroll withholding.

Working Visa and tax residence are separate legal concepts.

Foreign Digital Service Provider

Foreign digital service providers may also be subject to Nepal's separate:

• Digital Service Tax;

• VAT on digital services

framework even where traditional PE rules do not create a physical taxable presence.

IRD currently operates a Digital Service Tax Procedure 2082 and updated VAT procedures for non-resident digital service providers.

See the separate DST and nonresident digital-service VAT guides for their definitions, registration and filing rules.

International Transport / Telecommunications

The Income Tax Act contains special taxation rules for specified non-resident:

• water transport;

• air transport;

• telecommunications

income under Section 70.

These special regimes should be analysed separately rather than applying ordinary corporate-tax rules automatically.

Capital Gains

A non-resident disposing of Nepal assets or an interest in a Nepal entity can have Nepal capital-gains exposure.

Relevant transactions can include:

• unlisted Nepal shares;

• listed shares;

• land/buildings;

• indirect/offshore ownership changes.

For foreign investors, FITTA reporting and repatriation requirements may apply in addition to Income Tax.

PAN

IRD's guidance states that a non-resident can apply for PAN itself or through:

• its Nepal PE; or

• its representative.

Whether registration is necessary depends on the nature of Nepal activity and tax compliance.

Final vs Adjustable Tax

This distinction must be checked before preparing a return.

Section 92 provides that withholding on qualifying payments to a non-resident under Sections 87, 88, 88A or 89 is generally: final withholding.

Where tax is not final, the amount may instead be credited against assessed tax according to Section 93.

Example — Foreign Consultant Without PE

Foreign consultant provides a short Nepal-source consultancy that does not create PE.

Gross service fee: NPR 1,000,000.

Domestic-law starting point: 15% Section 88 withholding

= NPR 150,000

before considering:

• DTAA;

• payment character;

• source;

• any specific statutory exception.

If the payment is covered by Section 92 as final withholding, that withholding generally settles the Nepal tax on that payment.

Example — Foreign Contractor

Foreign contractor receives qualifying contract payment: NPR 10,000,000.

Section 89 non-resident contract starting point: 5%

= NPR 500,000 subject to:

• exact transaction classification;

• PE;

• DTAA;

• any IRD determination.

Non-Resident Tax Checklist

• Determine tax residence

• Identify Nepal-source income

• Determine payment character

• Check PE

• Check DTAA

• Verify treaty residence

• Check anti-abuse provision

• Determine domestic withholding

• Apply treaty rate where eligible

• Determine final vs adjustable tax

• Obtain PAN where required

• Review VAT/DST

• Review transfer pricing

• Review FITTA/NRB where relevant

• Deposit/file withholding

• retain treaty evidence

Common Errors

Assuming every foreign payment is outside Nepal's tax system

Applying 1.5% resident-service TDS automatically to a non-resident

Using 5% contract tax for a payment that is actually royalty

Ignoring PE because invoices are issued offshore

Applying treaty rates without verifying treaty eligibility

Treating all non-resident withholding as merely an advance tax

Further guidance and practical checks

For non-resident payments, use a four-step test: Source → Character → PE → Treaty.

Only after those four questions are resolved should the final withholding or assessed tax rate be selected.