Double Taxation Avoidance in Nepal (2026): Frequently Asked Questions
Doing business across borders can be lucrative but it can also lead to one major tax headache: double taxation, where the same income is taxed in two countries. For international investors, companies, freelancers, and expatriates earning cross-border income, Double Taxation Avoidance Agreements (DTAAs) are essential tools that help eliminate or reduce double taxation, promote investment, and foster economic cooperation.
This 2026 FAQ explains how DTAAs work, Nepal’s treaty network, recent developments, practical benefits, and what it means for foreign businesses operating here.
1. What is double taxation in Nepal?
Double taxation occurs when the same income is taxed in both Nepal and another country. This usually happens when income is earned in Nepal (source country) while the taxpayer is a resident of another country (residence country).
2. How does Nepal avoid double taxation?
Nepal avoids double taxation through:
Double Taxation Avoidance Agreements (DTAAs) with specific countries, and
Foreign tax credit provisions under Nepal’s Income Tax Act, 2058 (2002).
3. What is a DTAA and why is it important?
A DTAA is a bilateral treaty between two countries that allocates taxing rights and provides relief from double taxation. It is important because it:
reduces tax burden,
provides certainty in tax treatment,
lowers withholding tax rates, and
encourages foreign investment.
4. Does Nepal have DTAA agreements with many countries?
Yes. Nepal has signed DTAAs with several countries, including India, China, South Korea, Norway, Thailand, Qatar, Austria, Bangladesh, Pakistan, and Sri Lanka. However, Nepal’s DTAA network is still limited compared to many countries.
5. Is the DTAA with Mauritius still valid?
No. Nepal formally terminated its DTAA with Mauritius in December 2025. The termination will take effect from Nepal’s fiscal year beginning mid-July 2026. Investments made before this period may still enjoy transitional protections.
6. Can foreign companies operating in Nepal claim DTAA benefits?
Yes. Foreign companies can claim DTAA benefits if:
their home country has a DTAA with Nepal, and
they qualify as a tax resident under that country’s laws, and
they provide a Tax Residency Certificate (TRC).
7. What types of income are covered under DTAAs?
Typically, DTAAs cover:
business profits,
dividends,
interest,
royalties,
capital gains,
employment income, and
professional service income.
Each category has specific taxing rules under the treaty.
8. Does Nepal allow foreign tax credit if no DTAA exists?
Yes. Even without a DTAA, Nepal allows a foreign tax credit under Section 71 of the Income Tax Act, subject to limits. However, treaty relief often provides more favorable outcomes than domestic law alone.
9. How are withholding taxes affected by DTAAs in Nepal?
DTAAs usually prescribe reduced withholding tax rates on payments such as dividends, interest, and royalties. These rates are often lower than those under Nepalese domestic tax law.
10. What documents are required to claim DTAA benefits in Nepal?
Common documents include:
Tax Residency Certificate (TRC),
DTAA benefit claim application,
proof of income and tax paid,
contract or service agreement, and
PAN registration (where applicable).
11. Do freelancers and consultants benefit from DTAAs?
Yes. Independent professionals, consultants, and freelancers earning cross-border income may benefit from DTAA provisions, particularly those related to business profits or professional services, depending on the treaty terms.
12. Can Nepal tax foreign income earned outside Nepal?
Nepal taxes global income of Nepalese residents, but allows foreign tax credit or treaty relief to avoid double taxation. Non-residents are generally taxed only on Nepal-source income.
13. Are DTAAs used to prevent tax evasion?
Yes. Modern DTAAs include provisions for:
exchange of tax information,
prevention of treaty abuse, and
alignment with global anti-tax-avoidance standards such as OECD BEPS.
14. Is professional tax advice necessary for DTAA planning?
Strongly recommended. DTAA interpretation depends on:
treaty wording,
domestic tax law,
nature of income, and
residency status.
Professional advice helps ensure compliance and maximizes lawful tax benefits.
15. How can Sherpa Law Associates assist with DTAA matters?
Sherpa Law Associates provides:
DTAA eligibility analysis,
tax residency and compliance support,
withholding tax optimization,
cross-border tax structuring, and
representation before Nepalese tax authorities.