The Income Tax Act also imposes an obligation on the resident companies to deduct WHT on certain payments in connection with the business. Such resident company, which is required to deduct WHT, is known as withholding agent.
WHT is a final tax for the non-resident payees who do not file tax returns in Nepal.
For resident payees, the WHT can either be:
- advance tax; or
- final tax
WHT is treated as final tax if the payment falls within the list of final withholding payment. No further tax is levied in case of final WHT and therefore, such payment is not required to be included in the income of the recipient. Any expenditure incurred in relation to such income is not allowed as deduction.
Final withholding payments generally include:
- Dividend paid by a resident company;
- Rent for the lease of land or a building and associated fittings & fixtures, having a source in Nepal, and that is received by an individual other than in conducting a business;
- Payments received by natural person other than in connection to business such as gains from investment insurance, retirement benefits, interests, benefits from mutual funds etc.
- Windfall gains;
- Payments made to non-resident persons;
- Meeting fee, payments received for occasional teaching, payment received for preparation of question papers and examining answer papers.
Even if the payer fails to deduct WHT, it is regarded that the payer has deducted WHT and accordingly required to deposit the WHT at the time of filing tax returns or at the time of obtaining the tax clearance certificate from the IRD.
If the payer is unable to deposit the WHT, expenses related to such payments will not be allowed as deductions.
The following table elaborates payments, which are subject to WHT and the rates of WHT:
|S.N.||Type of payment||Rates||Final / Non-final for resident persons|
|1||Amount paid to employee/worker i lieu of employment||As per the personal income tax rates.||Non-final but the employee is exempt from submitting returns subject to certain conditions.|
|2||Interest, payment for natural resource, rent, royalty, service fee, commission, sales bonus, retirement payments or any payments of similar nature having source in Nepal||15%||Non-final|
|3||Retirement payments from government or an retirement funds||5%||Final|
|4||Commission paid by resident company to a non-resident person||5%||Final|
|5||Service fee paid to VAT registered resident service provider or resident entity which is exempt from VAT||1.5%||Non-final|
|6||Rent of premises||10%||Final|
|7||Dividend paid by resident company||5%||Final|
|8||Gain from investment insurance; payment of returns to natural person by mutual fund||5%||Final|
|9||Interest paid by resident bank and financial institutions, listed entities to natural person||5%||Final|
|10||Payment of lease rental of aircraft||10%||Non-final|
|11||Payment against lease of satellite, bandwidth, optical fibre, telecommunication equipment or transmission line||10%||Non-final|
|13||Contract exceeding NPR 50,000 (approx. USD 500) for supply of goods or labour or construction/erection/establishment of tangible assets or structure or any work prescribed as contract by IRD.||1.5%||Non-final|
|14||On contract payments made by resident person to non-resident persons on repair and other contracts of aircrafts||5%||Final|
|15||Premium paid to non-resident insurer||1.5%||Final|
The withholding agent is required to file a monthly return of WHT and accordingly deposit the applicable WHT within 25th day of next month for every deduction of WHT in each month as per the Nepalese calendar.
WHT is final if such WHT is related to payments falling within the list of final withholding payments, already discussed above. WHT is not a final tax and will be treated as advance tax in other cases. Such advance tax can be offset against the annual final tax liability. Therefore, the withholding agent is required to prepare and provide a withholding certificate to the recipient for him to claim the offsets within 25 days after the end of the month specifying the period for which the WHT is deducted.
Nepal has DTAs with 9 countries in order to provide relief from double taxation of income of foreign investors. These countries are China, Austria, South Korea, India, Mauritius, Norway, Pakistan, Qatar, Sri Lanka and Thailand. The WHT imposed on non-resident taxpayers may be impacted by such DTAs that are currently in effect.