Taxation for NRNs in Nepal

Introduction to Tax for NRNs

Non-Resident Nepalis (NRNs) have specific tax obligations in Nepal that differ from those of resident Nepalis. The Income Tax Act 2002 (ITA) governs the taxation of NRNs in Nepal. According to Section 2(ao) of the ITA, an NRN is defined as a person who is not a resident of Nepal. For tax purposes, a person is considered a resident of Nepal if they have resided in Nepal for 183 days or more in a 365-day period, or if their normal place of abode is in Nepal.

NRNs are subject to taxation on income derived from Nepali sources. This includes income from employment, business, investment, and other sources within Nepal. The taxation of NRNs aims to ensure that individuals who benefit from economic activities in Nepal contribute to the country’s revenue.

NRNs need to be aware of their tax obligations, applicable rates, and the procedures for filing tax returns in Nepal.

Types of Taxes Applicable to NRNs

NRNs are subject to various types of taxes in Nepal, depending on the nature and source of their income. The primary taxes applicable to NRNs include:

Income Tax: This is the most significant tax for NRNs. According to Section 3 of the ITA, NRNs are taxed on their income sourced in Nepal. The tax rates vary based on the type and amount of income.

Capital Gains Tax: NRNs are subject to capital gains tax on the disposal of assets located in Nepal. As per Section 95A of the ITA, the tax rate for capital gains on the disposal of shares in non-listed companies is 10% for natural persons and 15% for others.

Dividend Tax: Dividends received by NRNs from Nepali companies are subject to a withholding tax of 5%, as specified in Section 88(2)(a) of the ITA.

Withholding Taxes: Various payments made to NRNs are subject to withholding taxes. These include:

• Royalties: 15% withholding tax
• Interest: 15% withholding tax (5% for interest on deposits)
• Service Fees: 15% withholding tax

Value Added Tax (VAT): While not directly applicable to personal income, NRNs engaged in business activities in Nepal may need to register for and collect VAT if their turnover exceeds the threshold specified in the Value Added Tax Act 1996.

Property Tax: NRNs owning property in Nepal may be subject to property tax, which is typically levied by local authorities.

It’s important to note that these tax rates may be modified by provisions in Double Taxation Avoidance Agreements (DTAAs) that Nepal has signed with other countries. NRNs should check if a DTAA exists between Nepal and their country of residence to determine if they can benefit from reduced tax rates or exemptions.

Procedure for NRN Tax in Nepal

• Step 1: Determine tax residency status
• Step 2: Identify taxable income sources in Nepal
• Step 3: Calculate tax liability
• Step 4: File tax returns
• Step 5: Pay taxes and claim relevant benefits

The procedure for NRN tax compliance in Nepal involves several steps:

3.1. Step 1: Determine tax residency status

NRNs must first determine their tax residency status according to Section 2(ao) of the ITA. This involves assessing whether they have spent 183 days or more in Nepal during the tax year or if their habitual abode is in Nepal.

3.2. Step 2: Identify taxable income sources in Nepal

NRNs need to identify all sources of income in Nepal that are subject to taxation. This includes employment income, business profits, investment income, and capital gains from Nepali sources.

3.3. Step 3: Calculate tax liability

Based on the identified income sources, NRNs must calculate their tax liability using the applicable tax rates and any relevant deductions or exemptions.

3.4. Step 4: File tax returns

NRNs are required to file tax returns in Nepal if they have taxable income. The tax return must be filed within three months from the end of the tax year, which typically ends on July 15th.

3.5. Step 5: Pay taxes and claim relevant benefits

After filing the tax return, NRNs must pay any taxes due. They can also claim relevant benefits or credits, such as those provided under applicable DTAAs.

Documents Required for NRN Tax in Nepal

NRNs need to prepare and submit various documents for tax purposes in Nepal. NRNs should maintain these records for at least five years, as required by Section 81 of the ITA.

1. Permanent Account Number (PAN) Card: NRNs engaging in taxable activities in Nepal must obtain a PAN card from the Inland Revenue Department (IRD).
2. Income Statement: A detailed statement of all income earned from Nepali sources during the tax year.
3. Tax Residency Certificate: If claiming benefits under a DTAA, NRNs must provide a tax residency certificate from their home country.
4. Bank Statements: Statements showing transactions related to Nepali income.
5. Property Ownership Documents: For NRNs owning property in Nepal.
6. Investment Documents: Proof of investments made in Nepal, including share certificates or investment agreements.
7. Employment Contracts: For NRNs employed in Nepal.
8. Business Registration Documents: For NRNs operating businesses in Nepal.
9. Receipts and Invoices: Supporting documents for claimed expenses and deductions.
10. Previous Year’s Tax Returns: If applicable, for reference and continuity.

GFCS Tax Services for NRNs

Green Financial Consultancy Services (GFCS) offers tax services tailored for NRNs. Our services include:

1. Tax Residency Determination: We assist NRNs in determining their tax residency status in accordance with Nepali tax laws.
2. Tax Liability Calculation: We calculate accurate tax liabilities based on current tax rates and applicable exemptions or deductions.
3. Tax Return Preparation and Filing: Our team prepares and files tax returns on behalf of NRNs, ensuring compliance with Nepali tax regulations.
4. DTAA Benefit Analysis: We analyze applicable DTAAs to identify potential tax benefits for NRNs.
5. Tax Planning: We provide strategic tax planning advice to optimize tax liabilities within legal boundaries.
6. Representation before Tax Authorities: Our professionals represent NRNs in dealings with Nepali tax authorities.
7. Document Management: We assist in organizing and maintaining necessary tax-related documents.

Timeframe for NRN Tax Processes

The timeframe for NRN tax processes in Nepal typically follows this schedule:

1. Tax Year: The Nepali tax year runs from July 16th to July 15th of the following year.
2. Tax Return Filing: Tax returns must be filed within three months from the end of the tax year, i.e., by October 15th.
3. Tax Payment: Any taxes due should be paid at the time of filing the tax return.
4. Extension Request: If needed, a three-month extension for filing tax returns can be requested from the IRD.
5. Advance Tax Payments: For business income, advance tax payments are required in three installments during the tax year.
6. Withholding Tax Remittance: Withholding taxes must be remitted to the IRD within 25 days from the end of the month in which the payment was made.
7. Tax Refund Processing: Tax refund processing typically takes 2-3 months from the date of application.

Cost of NRN Tax Services

The cost of NRN tax services provided by GFCS varies based on the complexity of the tax situation and the specific services required. Our fee structure is transparent and competitive, designed to provide value for our clients. We provide detailed quotes after an initial consultation to understand the specific needs of each NRN client.

1. Basic Tax Return Preparation: Starting from NPR 10,000
2. Comprehensive Tax Planning and Return Filing: NPR 20,000 – 50,000
3. DTAA Benefit Analysis: NPR 15,000 – 30,000
4. Tax Representation Services: Hourly rate of NPR 5,000 – 10,000

NRN Tax Practices in Nepal

NRN tax practices in Nepal are governed by the ITA and related regulations. Key practices include:

1. Source-Based Taxation: NRNs are taxed only on income sourced in Nepal, as per Section 6 of the ITA.
2. DTAA Benefits: NRNs can claim benefits under applicable DTAAs, subject to providing necessary documentation.
3. Online Tax Filing: The IRD provides an online platform for tax return filing and payment.
4. Advance Tax Payments: For business income, NRNs may need to make advance tax payments.
5. Tax Clearance Certificate: NRNs may need to obtain a tax clearance certificate when leaving Nepal after completing a contract or assignment.
6. Penalties for Non-Compliance: Failure to comply with tax obligations can result in penalties and interest charges.
7. Tax Audit: The IRD may conduct tax audits on NRN tax returns within four years from the date of assessment.
8. Appeals Process: NRNs have the right to appeal tax assessments through administrative review and the Revenue Tribunal.

Conclusion

The Nepali tax system for NRNs is designed to ensure fair contribution while avoiding double taxation through DTAAs. NRNs should be aware of their tax residency status, identify their taxable income sources in Nepal, and fulfill their tax filing and payment obligations in a timely manner.

GFCS offers expert assistance to NRNs in navigating the complexities of Nepali tax laws. Our comprehensive services cover all aspects of NRN taxation, from determining tax residency to filing returns and claiming DTAA benefits.

FAQs