Kathmandu-The Government of Nepal has sent a notice to seven countries that have Double Taxation Avoidance Agreements (DTAA) and agreements on the Prevention of Fiscal Evasion, informing them about Nepal’s domestic laws.

The Department of Inland Revenue, the main implementing agency of these agreements, sent the notice to all the concerned countries. It outlined the provisions included in the agreements and Nepal’s domestic legal framework, urging them to begin processes for necessary amendments.

In the notice issued by Director General Madan Dahal, the Government of Nepal reiterated its commitment to the agreements and expressed readiness to provide facilities to any company investing or engaging in trade to promote economic growth.

Nepal’s Income Tax Act 2058 (2002) includes provisions to prevent individuals from creating shell companies in treaty partner countries solely to obtain tax exemptions.

However, such provisions were absent in agreements signed before the Act was enacted.

Therefore, Nepal has notified the seven countries with which agreements were signed before the Income Tax Act 2058 that companies of any kind will not receive such tax benefits, regardless of whether the agreements explicitly mention such provisions.

According to the Act, companies not majority-controlled by natural persons from the treaty partner country are not entitled to tax benefits under the agreement.

However, Nepal had signed such agreements earlier with Norway, Thailand, Sri Lanka, China, Austria, Pakistan, and South Korea. Nepal had also signed a similar agreement with Mauritius, but the government has already decided to terminate it.

The notice clarifies that only genuine investors from the treaty partner country will be eligible for the benefits under Nepal’s Income Tax Act. The government’s communication ensures that partner countries are informed and can adjust their practices accordingly. Such provisions are standard in tax treaties to ensure implementation consistency.

The Department noted that the essence of any tax treaty is not to promote tax evasion but to avoid double taxation and prevent the misuse of such treaties for tax avoidance. Hence, the notice was issued.

Dolma Fund entered Nepal through this route

Dolma Fund had entered Nepal through this same channel. A British national had established a shell company in Mauritius to bring investment into Nepal. Based on this, Dolma Fund claimed an exemption from capital gains tax in Nepal.

The Department of Inland Revenue had previously issued a directive under the treaty provisions. Following this, the government decided to terminate the agreement with Mauritius.

Although Dolma Fund was not an investor from Mauritius, it used the agreement with Mauritius to claim tax exemption.