FOREIGN PERMANENT ESTABLISHMENTS:
Cross border transactions in Nepal mainly happen in two ways:
- A person resident in its Home Country supplies goods/services to the Host country without its direct presence in the Host Country
- A person resident in its Home Country supplies goods/services to the Host country with its direct presence in the Host Country through some agent or employee
In first case, since there is not any presence of foreign entity in Nepal, such transactions are not taxable in Nepal.
In the second case, there are questions on double taxability, rate of taxation, whether tax credit can be claimed with respect to tax paid in another country or not.
Definition of Permanent Establishment (PE) mainly comprises of four components:
- Non-resident entity as the owner
- Business of that non-resident entity
- Whole or part of business
- Business activities in Nepal
Business activities needs to qualify as a Permanent Establishment (PE) in Nepal:
The following business activities are only considered for qualifying as PE:
- Dependent Agency i.e. Activity carried out by Independent agents are not treated as Permanent Establishments
- Fixed Place of business irrespective of number of days of business activities in Nepal
- For construction related activities with presence over 90 days
- For business as a Service Provider with presence over 90 days stay in moving 365 days
Basis for determination of Permanent Establishment (PE) in Nepal:
- Import activity alone will not be sufficient for to qualify as PE
- Individual/Natural person will not be a PE i.e. PE can only be an entity
- Non-resident person’s entity should be present in Nepal
- Unregistered foreign entity cannot have a PE in Nepal
- Business should be of non-resident and such business should be carried out in Nepal
Purchase, Conversion and Sales in Business
- A mere purchase activity in Nepal without conversion and sales is not a Business Activity for the purpose of PE.
- Conversion activity in Nepal irrespective whether purchase or sales are made in Nepal is a Business Activity for the purpose of PE.
- Sales Activity whether the items are sold in Nepal or outside irrespective whether purchase or conversion activities are in Nepal is a Business Activity for the purpose of PE. However, Sales to Nepali importer is not a business activity in Nepal for the purpose of PE.
- A sale activity carried out in Nepal by establishing a Godown or a person, is a business activity in Nepal.
PE with respect to Investments, Employment and Special Business
- Business activity is compulsory for qualifying as a Permanent Establishment. For instance, ny non-resident person having investments in Nepal may not qualify as a PE established in Nepal. Since PE can only be an entity, therefore PE cannot be created for person having employment income.
- Any specific provision of Income Tax Act or a Special Treaty may provide that an activity may not be recognized as PE. As such PE is not created for International flight operation, communication including roaming charges, royalty income.
Registration of Permanent Establishment:
PE may be registered in Tax whether the PE has been registered as Branch in accordance with Companies Act.
Any foreign PE should obtain a Permanent Account Number (PAN) prior to commencing any business in Nepal as follows:
|PE Type||Basis of Registration|
|Fixed- Base PE||Registration document for business or prior to commencing business activity.|
- Permanent establishment are treated as Foreign Permanent Establishment. Foreign Permanent Establishment (FPE) is taxed same as the Resident entity in Nepal. There should be agreement between FPE and the main entity for apportionment and allocation of Overhead Expenses, Income, and Liabilities.
- It will be the responsibility of the FPE to file the Taxation Return for activities carried out in Nepal.
- Any amount sent to abroad by the FPE, the same shall be treated as dividend sent to main entity and will be taxed accordingly.
- Disposal of FPE shall be taxed as gain on disposal of FPE having source in Nepal.
- Record of all documents should be maintained by the FPE as per the prescribed format.