The Government of Nepal has formally terminated the Double Taxation Avoidance Agreement (“DTAA”) signed with the Republic of Mauritius on 3 August 1999. The Inland Revenue Department (“IRD”) announced the decision through a press release issued on 24 Mangsir 2082 (9 December 2025). The termination will take effect from 1 Shrawan 2083 (17 July 2026).
Treaty Context and Capital Gains Clause
Article 13 of the former Nepal–Mauritius DTAA provided that gains from the sale of property other than immovable property, ships, or aircraft would be taxable only in the State of residence of the alienator. However, the same clause stated that nothing in the paragraph prevented either contracting State from taxing gains or income from the sale or transfer of shares or other securities.
This provision affirmed Nepal’s right to tax capital gains arising from the sale of shares in Nepalese companies. The subsequent controversy did not stem from the treaty itself but from a tax exemption granted under a finance act, which authorizes the government to provide exemptions by gazette notification. The exemption was criticized because beneficial ownership of the gains did not, in all instances, rest with Mauritius-resident entities as required under Nepalese law. This sparked debate about whether such exemptions were consistent with statutory limitations and the principles governing treaty interpretation.
Limitation of Benefits under Section 73 of the Income Tax Act, 2002
Nepal’s Income Tax Act, 2002 (“ITA 2002”) limits treaty benefits to entities with economic substance. Section 73 provides that the following entities are not entitled to treaty-based tax exemptions or deductions:
(a) an entity considered a resident of the other contracting state for purposes of the DTAA and
(b) where fifty percent or more of the ownership of that entity is held by individuals or entities in which no individual has an interest, and those persons or entities are not residents of both Nepal and the other contracting state (Mauritius).
Following the Ncell decision, legal commentary has diverged on whether this provision applies to treaties concluded before the ITA 2002 came into force. One view is that Ncell settled the issue by affirming substance and beneficial ownership as determining factors. The alternative view relies on the Treaty Act, 1990, which grants international agreements supremacy in case of conflict with domestic law, implying that pre-existing treaties should prevail until formally amended or terminated.
Government’s Rationale and Policy Timing
IRD has stated that the termination aims to modernize Nepal’s treaty network and align with OECD’s Base Erosion and Profit Shifting (BEPS) standards. The DTAA with Mauritius lacked contemporary anti-abuse mechanisms such as a limitation of benefits clause or principal purpose test. Future treaties, the Ministry notes, will include such provisions to promote transparency and safeguard Nepal’s taxing rights.
However, the timing of the decision has drawn concern. The absence of transitional guidance or clarity on replacement treaties creates uncertainty for investors and funds operating through Mauritius. Many of these structures were established under legitimate expectations created by the existing DTAA. A phased implementation, accompanied by clear guidance or renegotiation timelines, would have supported a more predictable investment environment while meeting policy goals.
Effect on Existing and Future Transactions
The DTAA will remain effective until 1 Shrawan 2083 (17 July 2026). The following practical implications arise:
- Gains realized or income earned before this date remain governed by the existing DTAA provisions. Lawful reliance on the treaty up to this point will continue to hold effect.
- After the effective date, Mauritius-based entities will no longer enjoy DTAA protections or exemptions. Capital gains, dividends, and other cross-border income will be taxed in accordance with domestic law.
- Ongoing or pending tax assessments related to periods prior to 17 July 2026 should continue to rely on the treaty provisions applicable at the time of transaction.
- Businesses should monitor the Ministry of Finance and IRD for updates on renegotiation or alternative treaty frameworks.
Advisory and Recommended Action Points
To ensure compliance and mitigate risks during this transition period, entities with Mauritius-based structures or cross-border exposure should consider the following steps:
- Review existing corporate structures to determine reliance on the DTAA and identify potential exposure once the treaty ceases to apply.
- Evaluate ownership and substance requirements under Section 73 of the ITA 2002 to ensure alignment with domestic law.
- Reassess investment routes into Nepal and explore jurisdictions with active DTAAs that remain in force.
- Seek advance tax rulings or clarifications where possible to confirm the applicability of treaty provisions to ongoing projects or transactions.
- Monitor government communications for any transitional provisions, renegotiations, or new bilateral agreements that may impact tax planning and structuring.
- Document beneficial ownership and economic substance to pre-empt challenges related to tax residency and treaty eligibility.
The termination of the Nepal–Mauritius DTAA signals Nepal’s move toward a more controlled and transparent tax regime. While aimed at strengthening fiscal sovereignty, the success of this policy will depend on how predictably and transparently the government manages the transition for existing and future investors.
For further guidance on tax treaty implications, restructuring options, or compliance strategies, please contact:
📍 Trade Tower, Kathmandu ✉️ [email protected] 📱 +977-9803831179