- treaty dividend rate
- 5%-10%
- royalty rate
- 15%
- residency certificate needed
- 1
What a treaty does
Without a treaty, Nepal taxes payments to non-residents at domestic withholding rates, and the recipient's home country may tax the same income. A treaty allocates taxing rights and caps the rate the source country can charge. It does not remove Nepali tax automatically, and the IRD expects you to show entitlement.
Rates commonly reported for India–Nepal
| Payment | Domestic rate | Treaty rate (reported) |
|---|---|---|
| Dividends | 5% | 5% where the recipient holds at least 10% of shares; otherwise up to 10% |
| Interest | 15% | Up to 10%, with relief for certain central banks and government bodies |
| Royalties | 15% | 15% |
| Technical fees | 15% | No special article in the treaty; domestic rules apply |
These are summaries from advisory sources. The treaty text, and any later protocol, controls.
How many treaties, and which
Advisers count between seven and eleven agreements in force, with partners such as China, India, Korea, Norway, Thailand, Sri Lanka, Pakistan, Qatar, Austria and Mauritius mentioned. In 2025 the government issued a notification under section 3(4) of the Income Tax Act to seven partners with older treaties. Check the IRD's list for the country you need.
How to claim relief
Identify the treaty partner and the article that covers the payment: dividend, interest, royalty or services.
Get a tax residency certificate from the recipient's tax authority for the year.
Confirm beneficial ownership. A conduit or a shell can lose relief.
Withhold at the treaty rate only if the file supports it, and keep it with the withholding return.
Report correctly in the TDS return and the recipient's statement.
If you apply the lower rate without the file, the IRD can assess the difference with interest on the payer. See TDS on foreign vendor payments.
Practical points
The Supreme Court has looked at treaty use, and results depend on the facts; do not rely on a treaty without the documents.
Mutual agreement procedures exist but are rarely used.
Choose the structure early. A holding company in a treaty country must have real substance.
We review the structure and the payment file before money moves; see FDI support, dividend repatriation and foreign loans.
A worked example: an Indian parent receives a dividend and pays a royalty
An Indian company holds 40% of a Nepali manufacturing company and also licenses a brand to it. During the year, the Nepali company declares a dividend of NPR 2 crore in total and pays NPR 80 lakh in royalties. Illustrative figures that apply the rates reported earlier; confirm against the treaty text.
Dividend. The Indian parent's share is 40%, which is NPR 80 lakh. Under the domestic rule, 5% would be withheld, which is NPR 4 lakh. Under the treaty as reported, the rate for a holding of at least 10% is also 5%, so there is no extra benefit. The treaty position matters more where the domestic rate is higher than the treaty rate, so check the Act and the treaty for the year.
Royalty. Domestic withholding on royalties is 15%, which is NPR 12 lakh. The treaty rate reported for royalties is also 15%, so again there is no reduction. The question is whether the payment is a royalty or a service fee, since the treaty has no technical fee article as reported, and the characterisation changes the analysis.
Interest on a loan. If the Indian parent lent money to the company and received NPR 50 lakh of interest, the domestic rate is 15% and the treaty cap is 10%, so the withholding would be NPR 5 lakh instead of NPR 7.5 lakh if the conditions are met. A saving of NPR 2.5 lakh depends on the residency certificate and beneficial ownership.
The lesson is that treaty relief is worth the most for interest, and, in some cases, for dividends above the treaty rate. It is worth checking every payment instead of assuming that a treaty always helps.
Steps to claim, from the payer's side
Classify the payment. Is it a dividend, interest, royalty, a fee for services or something else?
Identify the recipient. Is it resident in a treaty country? Is it the beneficial owner or a conduit?
Collect the documents. A tax residency certificate for the year, a declaration of beneficial ownership and the contract.
Compare rates. Domestic rate, treaty rate and any conditions, such as minimum shareholding.
Decide and document. Record the rate applied and the reasoning in a memo.
Withhold and deposit. At the right rate, by the due date, with the return.
Issue a certificate to the recipient, who needs it to claim credit in its home country.
Keep the file for the years in which the IRD may review it.
If the file is incomplete, the safer course is to withhold at the domestic rate and let the recipient seek a refund where the law allows, instead of applying a lower rate that may be challenged.
From the recipient's side
An Indian or other foreign recipient needs to:
Obtain the residency certificate from its tax authority, and renew it each year.
Confirm that the income is taxable in its home country and how credit for Nepali tax is given.
Keep the withholding certificate that the Nepali payer issues.
Reflect the income and the credit in its own return.
Check whether any limitation of benefits or anti-avoidance rule in the treaty applies to it.
Recipients who ignore this step may pay tax twice, which is what the treaty is meant to avoid.
Where disputes arise
Characterisation: whether a payment is a royalty, a technical fee, a service fee or a business profit. The label in the contract is not decisive.
Permanent establishment: whether the foreign company has a taxable presence in Nepal through a branch, project or dependent agent.
Beneficial ownership: whether an intermediary company that passes income on can claim.
Substance: whether the holding company has real activity.
Timing: which year's treaty and notification applies, given that the government issued notifications in 2025 for a group of treaties.
Procedure: whether the documents were obtained before the payment or only later.
The Supreme Court has considered the use of tax treaties and the standard of proof. Treat each claim as one that the IRD may test, and keep the evidence ready; see defending an IRD assessment.
Questions people ask
Does a treaty apply automatically? No. It applies if the conditions are met and the documents support it.
Which countries have a treaty with Nepal? Advisers cite several, such as India, China, Korea, Norway, Thailand, Sri Lanka, Pakistan, Qatar, Austria and Mauritius, but the number in force varies by source. Check the IRD's list.
Can a Nepali resident use a treaty? Treaties cover residents of the contracting states, and a Nepali resident can use them for foreign income, subject to the other country's rules.
What about capital gains? Treaties may allocate taxing rights over gains on shares. Check the article and Nepal's own rules.
Is there a deadline for the residency certificate? Practices vary, and it is safest to obtain it before payment.
We review payments abroad, prepare the treaty file and handle the withholding returns. See FDI support, TDS on foreign vendor payments and dividend repatriation. The treaty text, protocols and IRD notices are the authorities, so check them for each payment.
Planning with treaties without crossing the line
Treaty planning is legitimate when it reflects real activity. It becomes risky when it is built only to reduce tax. A few principles help.
Substance over form. A holding company that has directors who make decisions, premises, staff and bank accounts is more defensible than a company with only a registered address. Think about who really controls the investment and where.
Commercial reasons. Be able to explain, in writing, why the structure exists apart from tax: access to financing, regulatory or operational reasons, or the location of the group's management.
Consistency. The positions you take in Nepal, in the other country and in your group accounts should tell the same story.
Timing. Put the structure in place before the income is earned. Restructuring after a large dividend is declared looks like tax avoidance and invites challenge.
Documentation. Keep minutes, contracts, residency certificates and a memo on the treaty analysis. If the IRD asks, you can respond in days instead of months.
Treaty relief and the other taxes you still owe
A treaty only changes the rate on the specified income. It does not remove the other obligations.
Company tax on the Nepali company's own profits continues at the domestic rate; see corporate tax rates.
VAT on supplies, including imports of services, is separate from income tax withholding; see TDS on foreign vendor payments.
Transfer pricing applies to payments between related parties regardless of the treaty; see transfer pricing compliance.
Exchange control and approvals for remittances continue to apply; see dividend repatriation and foreign loans.
Reporting of the payment and the withholding, with certificates, is mandatory.
Which payments are most worth reviewing
If you pay abroad regularly, rank your payments by size and by the difference between the domestic and treaty rates. Start with the largest.
Interest to a foreign parent or bank, where the cap is lower than the domestic rate.
Dividends, where the treaty rate for a large holding may differ from 5%.
Royalties and licence fees, where the characterisation matters.
Technical and management fees, which are often the subject of disputes.
Payments for software and cloud services, where the nature of the payment drives the rate.
Capital gains on shares held by a foreign investor, if the treaty allocates taxing rights.
A one-day review of these payments, with the contracts in hand, often finds both savings and exposures.
