Corporate Income Tax Rates in Nepal

Introduction

Corporate Income Tax (CIT) in Nepal is the tax levied on the profits earned by companies registered under Nepalese law and foreign companies operating within Nepal. It forms a core part of Nepal’s revenue system and is governed mainly by the Income Tax Act, 2058 (2002). The tax applies to both domestic and foreign entities, with rates varying depending on the nature of the business, ownership, and sector of operation.

The Inland Revenue Department (IRD) under the Ministry of Finance administers and enforces corporate taxation in Nepal. For businesses, understanding applicable rates, compliance procedures, and sector-specific provisions is essential to remain within the legal framework and avoid penalties.

Corporate Income Tax in Nepal is not uniform. While a standard rate applies to most companies, certain industries such as banking, insurance, telecommunications, and hydropower have specific tax treatments. Furthermore, Nepal provides exemptions and incentives to promote investment in sectors like hydropower, IT, and agriculture. Medha Law and Paartners is a leading law firm in Nepal.

Legal Framework of Corporate Tax in Nepal

The legal foundation for corporate taxation in Nepal is set out in several legislative instruments:

• Income Tax Act, 2058 (2002): The principal legislation governing corporate taxation. It defines taxable income, rates, exemptions, deductions, penalties, and procedural requirements.

• Finance Acts (amended annually): Introduced with the national budget, these Acts update tax rates, introduce new exemptions, or modify compliance requirements each fiscal year.

• Inland Revenue Department Directives: Administrative guidelines issued to clarify implementation of tax laws.

• Other Regulations: Rules under the Companies Act, 2063 (2006) and Securities Act, 2063 (2006) may also apply to corporate taxpayers.

Together, these instruments ensure Nepal’s tax system aligns with international practices while addressing national fiscal priorities.

Corporate Income Tax Rate in Nepal

The corporate income tax rate in Nepal varies based on the type of company and its activities. As per the Income Tax Act, 2058 and the Finance Act for FY 2080/81 (2023/24), the following general rules apply:

• Standard Rate for Domestic Companies: 25% on taxable income.

• Foreign Companies and Permanent Establishments (PEs): 25% on taxable income attributable to Nepal.

• Special Industry Concessions: Certain industries such as export-oriented manufacturing or IT services may qualify for reduced rates.

This uniformity of the base rate at 25% provides clarity while sector-specific provisions allow flexibility.

Sector-Specific Corporate Tax Rates

Nepal imposes higher or lower rates depending on the industry:

• Banking, Financial Institutions, and General Insurance Companies: 30%

• Petroleum Industries and Cigarette/Alcohol Manufacturing Companies: 30%

• Telecommunications and Internet Providers: 30%

• Airlines, Security Printing, and Casinos: 30%

• Hydropower Companies: 25% (with exemptions in initial years for new projects)

• Export-oriented Companies: Effective tax can be reduced to 20% under certain incentives.

• Special Economic Zones (SEZs): 0% for first 10 years, then 50% of the normal rate for the next 5 years.

These rates show how Nepal uses taxation to both regulate industries and promote growth in priority sectors.

Concessions and Exemptions under Nepal’s Tax Law

The Income Tax Act, 2058 and subsequent Finance Acts provide incentives to encourage investment. Major concessions include:

• Special Economic Zones (SEZs): 100% exemption for 10 years, followed by 50% exemption for 5 years.

• Hydropower and Infrastructure Projects: Full or partial holidays for a specific number of years from commercial operation.

• Agricultural Enterprises: Reduced rates and exemptions to boost agribusiness.

• Female Entrepreneurs: Additional deductions and tax rebates for companies with women ownership.

• Information Technology Companies: Reduced tax rates in IT Parks and specific incentives for software exports.

Corporate Tax Compliance in Nepal

Corporate taxpayers must comply with specific legal requirements.

Tax Registration Requirements:

• Obtain Permanent Account Number (PAN) from the Inland Revenue Department.

• Register for VAT if turnover exceeds the threshold.

• Maintain audited financial statements.

Documents Required for Corporate Tax Filing:

• PAN Registration Certificate

• Certificate of Incorporation

• Memorandum of Association (MOA) and Articles of Association (AOA)

• Financial Statements (Audited)

• Tax Clearance Certificates (if applicable)

• Board Resolutions authorizing filing

Filing and Deadlines:

• Corporate Income Tax Return must be filed within 3 months of fiscal year-end (generally mid-October).

• Advance tax payments are required in three installments throughout the year.

Failure to meet these obligations leads to penalties.

Penalties and Non-Compliance in Corporate Taxation

The Income Tax Act outlines strict measures for non-compliance:

• Late Filing Penalty: 0.1% of turnover or NPR 100 per day, whichever is higher.

• Interest on Underpayment: 15% per annum on unpaid tax.

• Offenses: Fraudulent reporting may lead to prosecution and fines up to NPR 200,000 or imprisonment.

• Appeal Process: Taxpayers may file appeals with the Inland Revenue Department, Revenue Tribunal, or Supreme Court.

Double Taxation and International Taxation in Nepal

Nepal has signed several Double Taxation Avoidance Agreements (DTAAs) with countries such as India, China, South Korea, and Mauritius. These agreements ensure companies are not taxed twice on the same income.

Key aspects include:

• Foreign income rules under Income Tax Act, 2058.

• Withholding Tax obligations for payments to non-residents (5% to 15% depending on the nature of income).

• Transfer Pricing guidelines to regulate cross-border related-party transactions.

Corporate Tax Planning and Advisory in Nepal

Legal tax planning enables companies to optimize tax liabilities within the law. Approaches include:

• Structuring investments through SEZs and tax-favored sectors.

• Maximizing allowable deductions under Income Tax Act.

• Using DTAA provisions effectively.

Medha Law and Partners advises clients on tax compliance, structuring, and dispute resolution, serving as one of the best corporate law firms in Nepal.

Corporate Income Tax Trends in Nepal

• Tax rates in Nepal have generally ranged from 25% to 30% over the last two decades.

• Sector-specific rates were introduced to address revenue needs and discourage harmful industries.

• Recent Finance Acts emphasize promoting exports, IT services, and renewable energy projects.

• Compared to South Asia, Nepal’s rates are competitive, aligning with India (25%–30%) and Bangladesh (25%–32.5%).

Conclusion

Corporate Income Tax in Nepal is primarily governed by the Income Tax Act, 2058 and subsequent Finance Acts. The standard rate is 25% with higher rates for banking, insurance, and telecom sectors. Incentives exist for SEZs, hydropower, and IT businesses. Compliance requires timely filing, accurate reporting, and proper documentation.

For companies, especially foreign investors, partnering with experienced legal and tax advisors like Medha Law and Partners ensures compliance and effective tax planning.