Cross-Border Taxation: Permanent Establishment, Service Fees and Digital Service Tax

A foreign company can be inside Nepal’s tax net without ever having registered anything there. Four separate mechanisms do that work. They do not talk to each other, they are administered by different parts of the system, and more than one can apply to the same payment. Knowing which is in play matters more than knowing any single rate.

Mechanism	Who bears it	Base	Applies without a Nepali entity
Permanent establishment charge	The non-resident, through its Nepali establishment	Net profit attributable to the establishment, plus 5% on repatriation	The establishment is itself the presence
Final withholding on payments to non-residents	The non-resident, by deduction at source	Gross payment	Yes
Digital service tax	The non-resident supplier	Gross transaction value above the annual threshold	Yes
VAT reverse charge	The Nepali customer	Taxable value of the imported service	Yes, but the liability is the customer’s

Three of the four charges are computed on gross amounts. For a low-margin foreign supplier, the effective burden can therefore be a multiple of what a comparison of net-basis rates would suggest.

Residence and source

The Income Tax Act 2058 (2002) taxes a resident person on worldwide income and a non-resident person on income with a source in Nepal. Everything that follows is a variation on how Nepal decides that a receipt has a Nepali source, and how it collects.

The source rules reach further than a foreign supplier usually expects. Income from services is Nepal-sourced by reference to where the service is rendered or used, regardless of where the supplier sits. Income from the use of property in Nepal is Nepal-sourced. So is a gain on the disposal of an interest in a resident entity, wherever the sale is executed, which is the point taken up in capital gains tax.

Permanent establishment

Where a non-resident’s activity in Nepal is substantial enough to constitute a permanent establishment, Nepal taxes the profits attributable to that establishment as though it were a Nepali entity, at the ordinary 25 percent rate or the applicable 30 percent sector rate. A second charge of 5 percent then applies to income of the establishment that is repatriated out of Nepal, which functions as a branch equivalent of dividend withholding.

A branch and a subsidiary carry the same first-layer rate, so the headline comparison tells an investor very little. What differs is the second layer, the compliance profile and the exit route. A subsidiary distributes dividends subject to a final withholding. A branch remits profits subject to the 5 percent repatriation charge. The paperwork Nepal Rastra Bank requires to move either out of the country depends on how the money originally came in.

We quote no threshold in days or months for a construction site or a services permanent establishment, because we could not obtain the current amended definition in section 2. Where a treaty applies its definition will usually govern anyway, and treaty thresholds differ from domestic ones.

Withholding on service payments

A Nepali payer making a payment to a non-resident for services deducts tax at source, and under section 92 that deduction is final. The consequence is arithmetic and often unwelcome. The tax falls on the gross payment. A foreign consultancy running a 20 percent net margin and a supplier network of its own bears the same charge as one earning 90 percent on the same invoice, and no return exists in which the difference can be reflected.

The withholding clause in a cross-border services contract with a Nepali customer is therefore a commercial term, and treating it as boilerplate is expensive. If the contract is silent, the supplier receives the invoice value less the deduction. If the contract grosses up, the Nepali customer bears the tax and the price rises accordingly. Either allocation can work. The disputes come from discovering the question after signature.

Two categories of non-resident are taxed on a wholly different basis. A non-resident providing water transport, air transport or telecommunication service is charged at 5 percent on income from carriage departing Nepal and at 2 percent on carriage or transmission within Nepal. These are gross-basis substitutes for a profit computation, and they exist because Nepal has no practical way of auditing an international carrier’s costs.

Digital service tax

Section 23 of the Finance Act 2083 charges digital service tax at 2 percent on electronic services provided by a non-resident person to users located in Nepal, with an exemption for annual transactions up to NPR 3,000,000. The Finance Bill text sets commencement at 1 Shrawan 2083 (17 July 2026) for the general body of the Act.

Four features set it apart from the rest of the system. It applies without any permanent establishment: a supplier with no presence, no staff and no server in Nepal falls within it once it sells electronic services to Nepali users above the threshold. It bites on transaction value rather than profit, which makes it a turnover tax wearing an income tax label. The supplier cannot credit it against Nepali income tax, and since it is not an income tax in the treaty sense it is unlikely to be creditable at home either. It also sits alongside the VAT position on the same supply, which it does nothing to displace.

The threshold itself is unsettled. Secondary accounts of the digital service tax, which was introduced by the Finance Act 2079/80, give the annual threshold as NPR 2,000,000. The Nepali text of the Finance Bill 2083 reads as NPR 3,000,000. We could not establish from the material obtained whether the figure was raised for FY 2083/84 or whether the lower number in circulation was never right. A supplier close to either figure should get the Act text before deciding it is outside the charge.

We also make no statement about how a non-resident registers, files or pays. That mechanism exists in some form, and we could not verify it.

VAT reverse charge

Section 8(2) of the Value Added Tax Act 2052 (1996) requires a person in Nepal who receives services from an unregistered person outside Nepal to assess and collect VAT on the taxable value, whether or not that recipient is itself registered for VAT.

The obligation sits with the Nepali customer, so the provision creates no Nepali VAT liability for the foreign supplier. What it creates is a customer whose true cost of purchase runs 13 percent above the invoice, and whose procurement function will notice. Add a final income tax withholding on the same payment and a single cross-border services contract carries two Nepali charges borne by two different parties, before the digital service tax is considered at all.

Treaty relief

Nepal has a small treaty network, reported at 11 comprehensive double taxation agreements in a 2019 survey by NBSM & Associates. Where a treaty covers the supplier’s jurisdiction, it may restrict Nepal’s right to tax business profits absent a permanent establishment and may cap withholding on defined categories of payment. Relief has to be claimed. Until it is, the Nepali payer’s obligation to withhold stands. The procedure is set out in Nepal’s double taxation treaties and how relief is claimed.

Where no treaty covers the supplier, no relief mechanism exists at all and the Nepali charge is simply a cost of the contract. A supplier deciding whether to sell into Nepal directly, through a local distributor or through a subsidiary should establish that binary first, because it determines whether the analysis has one layer or two.

Sources

1. आर्थिक विधेयक, २०८३ (Finance Bill 2083), full text

   Government of Nepal, as published by the Nepal Law Commission · Presented 15 Jestha 2083 (29 May 2026); commencement 1 Shrawan 2083 (17 July 2026) · Tier 1 — Primary legal instrument

   Supports: Section 23, digital service tax at 2 percent on electronic services supplied by non-residents to users in Nepal, with an annual transaction threshold of NPR 3,000,000; section 1(2) commencement.

   Accessed 26 August 2026

2. आर्थिक ऐन, २०८३ (Finance Act 2083)

   Nepal Law Commission · 2083 (2026); published in the Nepal Gazette 31 Ashad 2083 (15 July 2026) · Tier 1 — Primary legal instrument

   Supports: The status of the Finance Act 2083 as an enacted instrument for FY 2083/84.

   Accessed 26 August 2026

3. Client Briefing — Income Tax Rates 2083-84 (2026-27 AD)

   Pradhan & Associates · 20 July 2026 · Tier 6 — Professional or news source

   Supports: The 5 percent charge on income of a foreign permanent establishment repatriated out of Nepal, and the 5 percent and 2 percent rates for non-resident transport and telecommunication services.

   Accessed 26 August 2026

4. Value Added Tax Act, 2052 (1996), English translation as amended to 2011

   Government of Nepal (translation published via the Nepal Law Commission) · 1996, as amended; in force · Tier 1 — Primary legal instrument

   Supports: Section 8(2), the reverse charge on services received from an unregistered person outside Nepal.

   Accessed 26 August 2026

5. Tax Deducted at Source in Nepal — TDS Rates for FY 2083/84

   Shankar Associates, Chartered Accountants (author Shankar Thapa) · 4 June 2026 · Tier 6 — Professional or news source

   Supports: That payments to non-resident persons under sections 87 to 89 of the Income Tax Act 2058 are treated as final withholding under section 92.

   Accessed 26 August 2026

6. Synopsis of DTAA of Nepal with 11 countries

   NBSM & Associates, Chartered Accountants · June 2019 · Tier 6 — Professional or news source

   Supports: That Nepal's treaty network stood at 11 comprehensive double taxation agreements as at the date of that survey.

   Accessed 26 August 2026