A foreign permanent establishment (FPE) in Nepal is defined as a fixed place of business or dependent agency of a non-resident foreign entity carrying on business activities in Nepal, which is treated as a separate taxable entity under Nepalese tax law, with obligations similar to a resident entity as per the Income Tax Act, 2058 section 2 (ao).

PE in Nepal is governed by the following laws:

• Income Tax Act, 2058
• Permanent Establishment Directives, 2077
• Companies Act, 2063
• Company Directive, 2072

What is Permanent Establishment?

As per the Income Tax Act, 2058 section 2 (aab) “Permanent establishment” means a place where a person carries on business either fully or partly. This includes the following situations:

• A place where business is carried out through an agent, except if the agent is a general agent who acts independently in their usual business.
• A place where the person’s main equipment or machinery is located, used, or installed.
• One or more places in a country where the person provides technical, professional, or consultancy services through employees or others for more than ninety days in total, within any twelve-month period.
• A place where the person is involved in a construction, installation, or setting up project and supervises the work for ninety days or more.

Classification of Business Activities under Permanent Establishment (PE) in Nepal

As per Permanent Establishment Directive, 2077 Business Activities in Nepal includes the following:

Business place using through agent (Agency PE)

Agency Permanent Establishment (Agency PE) means a fixed place of business in Nepal where a person, other than an independent agent acting in the ordinary course of business, carries on all or part of the business of a non-resident person through an agent. The place where the agent performs the work is considered a permanent establishment. Work performed by an independent agent is not considered a permanent establishment. In international business, if such an agent, unauthorized to enter into contracts on behalf of the foreign entity, regularly enters into contracts in the name of the principal, that agent is treated as a dependent agent rather than an independent one.

Business Place as fixed-place

A fixed place of business (Fixed Place) refers to the location where a person carries out their business activities. This fixed place is considered a permanent establishment. For tax purposes, it is treated as a foreign permanent establishment. Any structure established by a non-resident person to carry out business in Nepal is regarded as a permanent establishment. Such structures include branches, factories, work-shops, management offices, oil wells, mines, gas wells, agricultural or botanical farms, and similar places. Business conducted from the fixed place of a non-resident in Nepal is considered a permanent establishment, and the duration of stay is not taken into account for this purpose.

Business Place as construction site (Construction-related Permanent Establishment)

When a non-resident person carries out any construction, installation, or establishment work or provides related services in Nepal, and the non-resident’s presence at the construction, installation, or establishment site lasts continuously for 90 days or more, that site is considered a permanent establishment.

Business Place as service place (Service Permanent Establishment)

When a non-resident person provides services in Nepal either by sending their own employees or through other representatives, the presence of such employees or representatives alone does not automatically create a PE if they do not have a fixed place of business or do not engage in production or sale of goods. However, if these employees or representatives stay in Nepal for a cumulative period of 90 days or more within any 12-month period, then the service-providing business is considered a permanent establishment. This applies to regulatory, commercial, consultancy, or similar types of services provided in Nepal.

Scenarios Constituting a Permanent Establishment (PE) in Nepal

A foreign company is considered to have a PE in Nepal if any of the following business activities last more than 90 days within a rolling 12-month period:

• Use of a Dependent Agent: Business activities conducted through a dependent agent on behalf of the foreign company.
• Installation or Use of Equipment: Deployment or use of machinery or equipment for business operations in Nepal.
• Provision of Technical or Consulting Services: Services rendered by employees or third parties exceeding 90 days.
• Construction or Supervision Projects: Engagement in construction, installation, or supervisory work related to projects lasting 90 days or more.

Exceptions Where Permanent Establishment (PE) Does Not Apply in Nepal

• Independent Agent Clause: Business conducted through a commercially independent agent does not create a PE.
• Short-Term Activity: Activities lasting less than 90 days within a 12-month period are exempt from PE classification.
• Importing Goods Alone: Solely importing goods into Nepal, without further business operations, does not constitute a PE.
• Individuals Excluded: PE status applies only to legal entities, not individual persons.
• Unregistered Entities: Only foreign entities properly registered in Nepal can be recognized as a PE.
• No Business Activity: If no business is conducted within Nepal, even presence of customers does not establish a PE.

Impact of Nepal’s Tax Treaties on Permanent Establishments

Nepal has so far entered into bilateral tax treaties with eleven countries and one multilateral tax treaty. In case there is any conflict between the provisions of the Income Tax Act and those in the tax treaties, the provisions of the tax treaties shall prevail and apply to the residents and entities of the respective countries.

In the Double Tax Avoidance Agreements signed by Nepal, any location where an individual is involved in construction, installation, or establishment projects, as well as the site where supervisory activities for such projects are carried out, is defined as a permanent establishment.

Nepal has agreed that when a person provides technical, professional, or consultancy services through employees or other means at one or multiple locations within a country, it will be considered a permanent establishment. The minimum duration for which these services must be provided varies depending on the country with which the agreement has been made.

Nepal has adopted the Force of Attraction Rule with some countries for the purpose of calculating income of a permanent establishment.

Nepal’s agreements with various countries regarding Shipping and Air Transport Enterprises specify that the country where the business operates such enterprises holds the right to impose tax.

There are certain similar provisions in the tax treaties. These similar provisions are also consistent with the provisions in the Income Tax Act, 2058 (2002). The main definition of permanent establishment given in Section 2(aab) of the Income Tax Act, 2058 is similar.

In the first paragraph of Article 5 of the tax treaties with eleven countries (Double Taxation Avoidance Agreements of Nepal), it is stipulated that a fixed place of business will be considered a permanent establishment in Nepal if a non-resident entity of that country operates a business from that fixed place.

The tax treaties with these eleven countries contain similar provisions regarding permanent establishments as follows:

• A place of management
• A branch
• An office
• A factory
• A workshop
• A mine, an oil or gas well, a quarry or any other place of extraction of natural resources (in case of Pakistan and Qatar, additional word “exploitation” and in case of Mauritius and Qatar, additional word “exploration”)
• A warehouse (in case of China, India and Thailand additional phrase ” in relation to a person providing storage facilities for others”)
• A sales outlet (only with India, Pakistan and Qatar)
• A farm or plantation (except Norway)
• Insurance business if collected premium, excluding reinsurance premium

Duration Thresholds under Tax Treaties

Site-PE

• More than six months: Austria, Norway
• More than 183 days: Bangladesh, China, India, Mauritius, Qatar, Thailand
• More than 90 days: Sri Lanka
• Period or periods aggregating more than 183 days within any twelve-month period: Korea, Pakistan

Service-PE

• More than 183 days within any twelve-month period: Norway, Pakistan, Qatar, Thailand Austria, Bangladesh, China, India, Mauritius
• More than 90 days within any twelve-month period: India, Sri Lanka
• No service – PE in DTAS: Korea

According to Article 12 of the tax treaty with Pakistan, technical service fees are treated like royalties for tax purposes, so the provision of technical services by a Pakistani resident entity in Nepal is taxable. However, the provision of services related to technical service fees other than those provided by physically being present in Nepal does not create a permanent establishment.

Income Not Creating a Permanent Establishment

The following types of income shall not be considered business income and shall not create a permanent establishment for a non-resident person unless such income is earned as business income by the permanent establishment itself:

• Income from Immovable Property – Section 9 rent, natural resources
• Independent Agent – Commission, sales bonus
• International Air Transport – Section 70 International Air Transport
• Interest Income – Section 9 Interest Income
• Dividend Income – Section 9 Dividend Income
• Royalty Income – Section 9 Royalty Income
• Capital Gains – Section 9, 36 gains from non-business taxable property
• Remuneration of Manager and High-Level Executive – Considered income of the employee, not service fees

Registration of Permanent Establishment

The process of registration of permanent establishment is set forth by the chapter 10 of Permanent Establishment Directive, 2077.

There are two ways of establishing a PE in Nepal:

• By registering with IRD, on the basis of contract signed with a public enterprise in Nepal
• By registering as a branch office as per section 154 of the Companies Act, 2063. Sub-contractors of the main contractor can also be registered as a PE.

Permanent Establishment based on the place of business in Nepal (Fixed-base PE)

• If a preparatory work related to the business is conducted at a location present in Nepal, that location may be recognized as a permanent establishment based on evidence of the presence; or
• For business activities that do not require preparatory works, the permanent establishment is recognized based on the existence of such business activity; or
• If the business is registered in Nepal, that registration itself may serve as the basis for recognizing the permanent establishment.

Preparatory work refers to preliminary or auxiliary activities conducted before the main business operations begin, which by themselves do not create a permanent establishment.

Agency Permanent Establishment (Agency PE)

• Before an agent starts the agency business of a non-resident entity, it is based on the agency agreement; or
• If there is no direct agreement between the agent and the non-resident entity for such business activities but the agent practically represents the non-resident entity, it is based on the declaration submitted by the agent.

Construction Permanent Establishment (Site PE)

• Based on a signed construction or construction supervision agreement, or a request letter issued by the relevant developer/employer; or
• In the case of contracts initially shorter than ninety days, if the contract period is extended and exceeds ninety days.

Service Permanent Establishment (Service PE)

• Based on a concluded service agreement or a request letter issued by the related service recipient; or
• If the presence in Nepal is for ninety days or more within the past twelve months, based on the service agreement or a request letter issued by the related service recipient.

Registration of Permanent Account Number of Permanent Establishment

Subcontractor PAN Registration

There is no distinction for tax purposes between main contracts and subcontracts, so non-resident entities performing subcontract work must register for a PAN like regular taxpayers. The tax department verifies the subcontractor’s relationship with the main contractor and the main contractor’s PE status.

Single PAN for Non-Resident Entities

Each non-resident entity is issued one PAN for all its permanent establishments, simplifying tax identification.

Multiple Permanent Establishments

If multiple PEs exist under the directive, each must be treated separately for income calculation, and tax attributes of one cannot be offset against another.

PAN Cancellation and Continuation

If a business linked to a PAN is closed or completed, the PAN must be canceled. However, if the person undertakes a new business, they may continue using the existing PAN after submitting required details and approval. Separate income statements must be filed for each approved business under the Income Tax Act, 2058.

Tax Credit Certification

Permanent establishments can request certification for tax paid or relief obtained in Nepal to claim credit in the resident country using formats specified in the directive; the tax department provides the certification.

Non-Registration Does Not Exempt Tax

Failure to register as a permanent establishment does not exempt a person from tax liability.

Calculation of Duration of Presence for Permanent Establishment Registration

Fixed Place of Business

No need to calculate presence duration in Nepal; business is considered present from the start of operations.

Business through Agency

No presence duration calculation required; PE exists only if the agent actually conducts business activities; only dependent agents are classified as PE.

Construction and Supervision

Presence duration must be calculated; continuous presence over 90 days or more in Nepal constitutes a PE.

Service Rendering

Presence duration must be calculated; presence of employees or representatives rendering services totaling 90 days or more within 12 months establishes a PE.

Occasional Presence

Small or occasional presence (e.g., installation of equipment without separate business) is not considered a PE.

Suspension of Permanent Account Number (PAN) for Permanent Establishment

A person or entity can apply to suspend their PAN under Section 78A (1) by submitting an application within 30 days from when the suspension condition arises.

The application must include a reason for suspension.

All income statements and tax return up to the date of application must be filed.

The tax department will review the application and notify the applicant within 30 days whether the suspension is approved or denied.

Taxation of Permanent Establishments

Pursuant to Section 3 of the Income Tax Act, 2058, tax shall be imposed on foreign permanent establishments operating in Nepal. This provision mandates that foreign entities with a permanent establishment in Nepal are subject to taxation in accordance with the Act.

Section 68 of the Income Tax Act, 2058 states:

Any foreign permanent establishment (PE) of a non-resident person located in Nepal shall be liable to pay tax on the income earned by such establishment, subject to the provisions of the Act.

The income of the owner of the foreign PE shall be separated from the income of the PE.

Tax shall be imposed on income sent abroad by the foreign PE.

The income sent abroad by the foreign PE in any income year shall be treated as dividends distributed by that PE in that year.

This means foreign PEs are taxed separately on their Nepal-sourced income, and any repatriated income to the foreign owner is treated as dividends for tax purposes.

As per schedule 1 (2) (6) Tax shall be imposed at a rate of five percent (5%) on the income remitted abroad by any foreign permanent establishment of a non-resident person located in Nepal during any income year.

Difference between Permanent Establishment and Branch Office

Permanent Establishment (PE)

• A fixed place of business through which the business of a non-resident person is wholly or partly carried on in Nepal. Includes offices, factories, workshops, warehouses, construction sites, or services over a period of time.
• Defined under Section 2(aab) of the Income Tax Act, 2058.
• No separate legal entity; strictly a tax concept.
• Subject to Nepalese tax on business profits attributable to the PE.
• Does not require formal registration or commercial registration.
• Examples include construction site lasting more than 90 days, providing consultancy for 90+ days, having fixed equipment in Nepal.

Branch Office

• A legal extension of a foreign company operating in Nepal.
• Regulated by Companies Act, 2063 (2006), Foreign Investment and Technology Transfer Act (FITTA, 2019), Industrial Enterprises Act, 2020, and relevant regulations.
• No separate legal entity; operates as part of parent company with registered status.
• Must be registered with OCR and other regulatory authorities before operation.
• Pays tax on profits generated in Nepal.
• Parent company liable for branch office actions and debts.
• Formal incorporation, registration, and possibly appointing local branch manager required.
• Once registered, branch office operates continuously with no specific minimum time requirement.