Quick Overview on Taxation of Permanent Establishment “PE” Of Foreign Companies in Nepal

A. General Summary

  1. Foreign company after winning the international bidding contract of Government of Nepal or the state
    owned enterprises like Nepal Electricity Authority, Nepal Telecom or directly through different ministries
    like Ministry of Irrigation, Ministry of Education, etc (All referred as “GoN” for understanding); registers
    Permanent Establishment “PE” in Nepal to execute the contract. Most of the contracts are of such a nature
    that includes two portions; 

    a) Portion of services and supply in Nepal from Nepal in Nepali (NPR) currency
    b) Portion of supply directly from parent company of PE in foreign currency
  2. Nepal PE then issues sales invoice to GoN including the Value Added Tax (VAT) for the portion of NPR i.e.
    local currency. GoN deducts
    1.5% TDS and deposit in the PAN of PE which can be claimed as advance tax
    payment for final tax settlement of PE.
  3. Currently for the foreign currency portion, GoN directly imports supplies from the parent company of PE
    and transfers foreign currency directly to parent company. GoN deducts
    5% tax of such import out of
    payment of foreign currency and pays to Income Tax Office. Similarly, applicable taxes on import like duties
    and VAT are also paid by GoN. Such taxes including duties and VAT are not allowed to claim as advance tax
    by PE due to lack of deposit of such taxes including duties and VAT in PE’s PAN. Also, GoN imports such
    supplies in its own name and does the custom clearance.
  4. Current Practice
    Due to the nature of executing contract in the above manner, PE in Nepal recognizes local currency portion only as its income of any financial year of Nepal for which it issues sales invoices to GoN. The foreign currency portion is left out

Read More…

Download PDF