Tax Clearance Certificate Application Process in Nepal

Introduction

A Tax Clearance Certificate (TCC) in Nepal is an official document issued by the Inland Revenue Department (IRD) that confirms a taxpayer—whether an individual or a company—has cleared all outstanding tax liabilities up to a particular fiscal year. It serves as proof of compliance with Nepalese tax law and is a prerequisite for a wide range of financial, administrative, and legal activities.

The Income Tax Act, 2058 (2002), read together with various annual Finance Acts and directives from the IRD, provides the legal foundation for tax clearance in Nepal. The requirement to obtain a Tax Clearance Certificate extends not only to corporate entities but also to individuals in specific circumstances.

In practice, the TCC functions as a compliance checkpoint. Companies cannot renew their registration with the Office of the Company Registrar (OCR) without a tax clearance. Similarly, individuals leaving Nepal for long-term employment, foreign investors seeking profit repatriation, and businesses applying for government contracts must present a valid clearance.

The process is administrative but deeply rooted in statutory compliance. Failure to secure a TCC may result in penalties, denial of licenses or approvals, and in some cases, legal actions under the Income Tax Act. Medha Law and Partners Is a leading law firm in Nepal.

Legal Framework for Tax Clearance Certificate in Nepal

The requirement and process for obtaining a Tax Clearance Certificate in Nepal are grounded in statutory law. The following are the principal legal instruments:

• Income Tax Act, 2058 (2002):

  • Section 96 and related provisions outline tax clearance obligations.

  • Defines the duties of taxpayers to submit returns and obtain clearance.

  • Establishes the role of the Inland Revenue Department in issuing the certificate.

• Finance Acts (amended annually):

  • Each year, the Finance Act may introduce changes in compliance deadlines, penalties, or filing procedures that directly affect the clearance process.

• Companies Act, 2063 (2006):

  • Requires companies to present a Tax Clearance Certificate to renew registration, file annual returns, or proceed with liquidation.

• IRD Directives and Rules:

  • Administrative circulars and directives from the IRD specify formats, procedures, and requirements for issuing the TCC.

  • These may change annually to align with digital filing systems or new tax measures.

Together, these instruments create a structured compliance system. While the Income Tax Act provides the substantive law, Finance Acts and IRD directives ensure that the process is updated annually in line with fiscal policies.

When Tax Clearance Certificate is Required

A Tax Clearance Certificate is mandatory in several business and personal contexts in Nepal. The most common situations include:

• Annual Filing Requirement for Companies:
  All companies registered under the Companies Act, 2063 must obtain tax clearance every fiscal year before renewing their registration with the Office of the Company Registrar.

• Individual Taxpayers:
  Certain individuals, especially those with taxable income above the defined threshold, are required to obtain clearance annually.

• Business Closure or Company Liquidation:
  A company cannot close its operations or liquidate without first obtaining final tax clearance. The IRD verifies that all tax liabilities are settled before liquidation is approved.

• Mergers and Acquisitions:
  In business restructuring, both transferor and transferee entities are required to present TCCs to proceed legally.

• Foreign Exchange Approvals:
  Banks and financial institutions require a valid tax clearance before approving foreign exchange transactions for remittance of dividends, repatriation of investment, or import-export settlements.

• Visa and Immigration Processes:
  For foreign employees or expatriates leaving Nepal after working, a TCC is mandatory to confirm that taxes on earned income have been cleared.

• Government Contract Bidding:
  Companies applying for government tenders must present a current Tax Clearance Certificate as part of the eligibility documents.

• Tax Clearance for Expatriates Leaving Nepal:
  Under the Income Tax Act, individuals leaving Nepal permanently or for employment abroad must obtain tax clearance to demonstrate that no tax dues remain.

The scope of situations requiring tax clearance demonstrates that the certificate is not only a fiscal compliance tool but also a legal necessity that integrates into corporate governance, foreign exchange, and public procurement.

Types of Tax Clearance Certificates in Nepal

The Inland Revenue Department (IRD) issues different types of Tax Clearance Certificates depending on the purpose, the type of taxpayer, and the stage of compliance. Each type has a specific legal implication.

1. Annual Tax Clearance Certificate

• This is the most common type of TCC.

• It is issued to companies and individuals after they file their annual income tax return and clear all dues.

• Under Section 96 of the Income Tax Act, 2058, annual tax clearance is required for all registered taxpayers.

• Companies must submit this certificate to the Office of the Company Registrar (OCR) to renew their registration.

2. Provisional Tax Clearance Certificate

• Issued when a taxpayer has filed a return and provisionally cleared liabilities, but final assessments are pending.

• It is often used in situations where transactions are ongoing, such as while bidding for contracts or applying for certain licenses.

• The IRD provides this certificate with the condition that any additional liabilities discovered later must be settled.

3. Final Tax Clearance Certificate

• Required when a business is permanently shutting down or being liquidated.

• The IRD confirms that all outstanding taxes, including corporate income tax, VAT, excise duties, and withholding taxes, have been settled.

• Without this certificate, liquidation or deregistration of a company under the Companies Act, 2063 cannot proceed.

4. Tax Clearance Certificate for Foreign Nationals and Expatriates

• Issued to foreign nationals who worked or earned income in Nepal.

• Before leaving Nepal, expatriates must apply for tax clearance to confirm that all taxes on their income in Nepal have been paid.

• Employers often assist in preparing documents for this clearance.

These categories ensure that the tax system covers annual compliance, provisional obligations, final settlement, and foreign taxpayer responsibilities.

Documents Required for Tax Clearance Certificate Application in Nepal

The Inland Revenue Department requires specific documents to process an application for a Tax Clearance Certificate. These documents vary slightly for individuals, companies, and foreign nationals but generally include:

• Application Form: Prescribed by the IRD, either in hard copy or through the IRD online system.

• Permanent Account Number (PAN) Certificate: Proof of registration under the tax system.

• Tax Return Filing Acknowledgment Receipts: Evidence that annual tax returns have been filed.

• Audited Financial Statements: Certified by a registered auditor for companies, as required under Income Tax Act, 2058 and Companies Act, 2063.

• Tax Payment Receipts: Proof of payment of income tax, VAT, excise duties, and other applicable taxes.

• Tax Withholding Records: Where applicable, showing deduction of taxes at source.

• VAT Clearance Certificate: For VAT-registered businesses, confirmation that VAT obligations have been settled.

• Board Resolution (for Companies): Authorizing an individual (such as a director or company secretary) to submit the application.

• Clearance of Tax Arrears (if any): Payment receipts of any past tax arrears.

• For Foreign Nationals: Passport copy, employment contract, salary details, and withholding records from the employer.

These documents provide the IRD with a complete picture of the taxpayer’s compliance and enable issuance of the certificate without delay.

Step-by-Step Process of Applying for Tax Clearance Certificate in Nepal

The application process for a Tax Clearance Certificate in Nepal involves several administrative and compliance steps. The process is uniform across the country, though timelines can vary based on the volume of cases at each Inland Revenue Office.

1: Obtain the Prescribed Application Form

• Taxpayers can download the form from the IRD official website or obtain it from the nearest Inland Revenue Office.

• Many applications are now processed digitally through the IRD’s online system.

2: Prepare Required Documents

• Gather all necessary documents, including PAN certificate, tax returns, financial statements, and tax payment receipts.

• For companies, ensure the application is authorized by a Board Resolution.

3: Submit the Application

• Submit the completed form and supporting documents to the concerned Inland Revenue Office.

• For companies with multiple tax obligations (such as VAT and excise), clearance may require submission at multiple sections within the IRD.

4: Review by IRD Officer

• The IRD officer reviews the application and cross-verifies records with the department’s database.

• If discrepancies are found, the applicant is notified and required to correct errors or submit additional documents.

5: Rectify Discrepancies (if any)

• Taxpayers may have to pay additional tax, penalty, or interest if underreporting or errors are identified.

• Resubmission of corrected documents is required before proceeding.

6: Issuance of Tax Clearance Certificate

• Once all dues are cleared and documents are verified, the IRD issues the Tax Clearance Certificate.

• Certificates are issued either in physical copy or through the IRD’s online portal.

This systematic process ensures that clearance is based on verified compliance rather than self-declaration alone.

Timeframe and Validity of Tax Clearance Certificate in Nepal

The processing time and validity of a Tax Clearance Certificate (TCC) are not uniform for all cases. They depend on the type of taxpayer, the complexity of the return, and the completeness of submitted documents.

Processing Time

• In most cases, the IRD issues a Tax Clearance Certificate within 7 to 15 working days of submission.

• If discrepancies are found, such as unpaid tax arrears or errors in filing, the process may take longer.

• For companies undergoing liquidation or restructuring, final clearance may take several weeks to months, since multiple years of tax filings and liabilities must be reviewed.

• Applications filed through the online tax system generally move faster due to automated checks and digital verification.

Validity

• Annual Tax Clearance Certificate: Valid for one fiscal year and must be renewed annually.

• Provisional Tax Clearance Certificate: Valid only until final assessment or until the IRD specifies.

• Final Tax Clearance Certificate: Permanent, used during liquidation or deregistration.

• For Foreign Nationals: Valid until the individual permanently departs from Nepal or as specified in the clearance notice.

The validity system ensures that taxpayers remain updated with their annual compliance, while final clearance certificates provide long-term closure of liabilities.

Penalties and Consequences of Not Obtaining Tax Clearance Certificate

Failure to obtain a Tax Clearance Certificate has both financial and legal consequences. The Income Tax Act, 2058, and IRD directives outline specific penalties.

Penalties under Income Tax Act, 2058

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

• Interest on Tax Arrears: 15% annual interest on unpaid taxes.

• False Statements: Submission of incorrect information may result in fines up to NPR 200,000 or criminal prosecution.

Consequences of Non-Compliance

• Company Registration Renewal: The Office of the Company Registrar will not renew a company’s registration without a valid TCC.

• Restriction on Banking Transactions: Banks may deny foreign exchange approvals, remittances, or loan processing without tax clearance.

• Disqualification from Government Contracts: Companies cannot bid for government tenders or contracts if they fail to provide a current TCC.

• Legal Action Against Directors: Under Section 99 of the Income Tax Act, directors and key officers of non-compliant companies may be personally liable for tax defaults.

• Foreign Employees: Expatriates cannot exit Nepal legally without a tax clearance certificate, and immigration authorities may impose exit restrictions.

These consequences show that tax clearance is not optional but a statutory obligation that directly impacts business operations and individual mobility.

Tax Clearance Certificate for Foreign Nationals and Expatriates

Foreign nationals working or conducting business in Nepal are also subject to tax clearance requirements.

Requirement for Foreign Nationals

• Foreign employees and expatriates must obtain a Tax Clearance Certificate before permanently leaving Nepal.

• The certificate confirms that all tax obligations on income earned in Nepal are cleared.

Application Procedure

• Submit application form to the IRD along with:

  • Passport copy

  • Work permit (if applicable)

  • Employment contract

  • Salary details

  • Proof of tax withholding by employer

  • PAN registration (if registered)

• The employer is responsible for deducting tax at source and assisting with clearance filing.

Special Situations

• Foreign Investors: Those who have invested in Nepalese companies and seek to repatriate dividends must first secure tax clearance to ensure taxes on distributed profits have been settled.

• Diplomatic and International Staff: Employees of international organizations with tax-exempt status are generally not required to obtain TCCs, but must comply with conditions under relevant treaties.

This ensures foreign individuals and entities comply with Nepal’s tax obligations before departure or fund repatriation.

Tax Clearance Certificate in Business Transactions

In corporate practice, tax clearance is not just an annual requirement but also a condition in major transactions.

Mergers and Acquisitions (M&A)

• Companies involved in mergers must present TCCs to verify that they have no pending tax liabilities.

• The IRD requires both entities to show compliance before approving the merger.

Company Liquidation and Deregistration

• The Companies Act, 2063 mandates final tax clearance before the Office of the Company Registrar can deregister or liquidate a company.

• This ensures no liabilities remain unresolved when a business closes.

Foreign Direct Investment (FDI) and Repatriation of Profits

• Foreign investors seeking to repatriate profits, dividends, or capital must obtain tax clearance.

• The Nepal Rastra Bank and commercial banks require TCCs before permitting outward remittance.

Government Bidding and Licenses

• Bidders for government contracts, licenses, and concessions must include a valid TCC as part of their application package.

• This requirement ensures that only tax-compliant entities receive public contracts.

Thus, the role of TCC extends beyond taxation and becomes a regulatory checkpoint in corporate transactions.

Digital Tax Clearance System in Nepal

The Government of Nepal has introduced an electronic tax filing and clearance system through the Inland Revenue Department (IRD) e-Tax Portal. This system modernizes compliance and reduces paperwork.

Features of the e-Tax System

• Online Filing: Taxpayers can file income tax, VAT, and excise duty returns online.

• Digital Application: Tax clearance certificates can be requested through the portal without physically visiting tax offices.

• Tracking Status: Applicants can track the progress of their TCC requests.

• Document Upload: All necessary supporting documents can be uploaded digitally in PDF format.

• Instant Receipts: Once approved, the clearance certificate can be downloaded directly.

Process for Digital Application

1. Log in to the IRD e-Tax Portal with PAN and password.

2. Select the option “Apply for Tax Clearance Certificate.”

3. Fill in required details, including fiscal year, income details, and tax paid.

4. Upload supporting documents.

5. Submit the application and receive an acknowledgment receipt.

6. Track the status online until approval.

7. Download the certificate once issued.

The move to digitalization has simplified compliance for both companies and individuals, reducing processing delays and minimizing errors.

Role of Legal Advisors and Law Firms in Tax Clearance

Tax clearance is not always straightforward. Businesses and individuals often encounter disputes regarding tax assessments, arrears, or interpretation of provisions in the Income Tax Act, 2058.

Key Roles of Law Firms

• Advisory Services: Law firms provide tax planning advice to minimize liability within legal frameworks.

• Representation: Legal representatives appear before tax authorities and tribunals in disputes over assessments or penalties.

• Document Preparation: Law firms ensure all required documents are complete and error-free before filing applications.

• Compliance Support: Continuous compliance services help businesses remain updated with annual tax clearance requirements.

• Corporate Transactions: In M&A, liquidation, and investment transactions, law firms ensure clearance certificates are obtained before approvals.

Medha Law and Partners

As one of the leading corporate law firms in Nepal, Medha Law and Partners provides extensive support in tax compliance and clearance. The firm assists in:

• Filing tax clearance applications.

• Resolving disputes with the IRD.

• Advising foreign investors on profit repatriation clearance.

• Representing clients in tax tribunals and courts.

• Supporting corporate compliance for company renewals and liquidation.

This makes law firms an essential partner in ensuring smooth compliance with Nepalese tax laws.

Conclusion

The Tax Clearance Certificate (TCC) in Nepal is a mandatory compliance document under the Income Tax Act, 2058, ensuring that taxpayers—whether individuals, companies, or foreign nationals—have settled all tax liabilities. It plays a decisive role in:

• Annual compliance for companies and individuals.

• Approval of mergers, acquisitions, and liquidations.

• Government contract bidding and foreign investment transactions.

• Employment and departure procedures for expatriates.

The application process requires careful submission of forms, payment receipts, financial statements, and PAN details. With the introduction of the IRD’s e-Tax system, applications can now be filed digitally, making compliance easier. However, penalties for non-compliance remain significant, including fines, interest on arrears, and restrictions on business operations.

For businesses, individuals, and foreign investors, obtaining a TCC is not just a legal requirement but also a gateway to conducting uninterrupted transactions in Nepal. Professional guidance from experienced law firms such as Medha Law and Partners ensures compliance with all statutory requirements, thereby protecting both financial interests and legal standing.