On 12 November 2025 (26 Kartik 2082), the Government of Nepal issued its first formal notification under Section 3(4) of the Income Tax Act 2002 (‘ITA 2002’) to seven countries with which Nepal has pre-2002 Double Taxation Avoidance Agreements (“DTAAs”). The notification, transmitted through the Ministry of Foreign Affairs on behalf of the Inland Revenue Department (“IRD”), was sent to Norway, Thailand, Sri Lanka, Austria, Pakistan, China, and South Korea. This action is grounded in requirement under each respective agreements that Nepal inform treaty partners about domestic tax provisions that may affect treaty application. But this notification was delayed by no less than 24 years.
Although ITA 2002 requires Nepal to inform treaty partners about domestic tax provisions that may affect treaty interpretation or application, this statutory requirement had remained unfulfilled since 2002. There were originally eight pre-2002 DTAAs. The Nepal–Mauritius DTAA was terminated on 28 October 2025 (12 Kartik 2082), leaving the remaining seven countries to receive the notification.
1. Treaty Override Concerns and the Longstanding Controversy
Under the Treaty Act 1999 (“Treaty Act”) an international agreement prevails where it conflicts with domestic legislation. Taxpayers have relied on this rule to argue that:
Nepal cannot apply Limitation of Benefits “(LoB“) provisions in ITA 2002 to treaty claims unless the relevant DTAA contains its own Limitation of Benefits (LoB) clause like in the case of India-Nepal DTAA. Several DTAAs, including the Norway–Nepal DTAA, do not contain LoB clause. Applying domestic anti-avoidance rules in such cases would contradict the Treaty Act.
Taxpayers have also objected to the reasoning in the Ncell case, where the Supreme Court applied DoB provision from ITA 2002 to the Norway–Nepal DTAA, even though the treaty predates ITA 2002. Under Section 73(5) of ITA 2002, treaty benefits are denied to an entity that is treated as a resident of the treaty partner if 50 percent or more of its ownership is held by persons who are not residents of either Nepal or the treaty partner. As a result, a Norwegian entity was denied treaty benefits despite the absence of an LoB clause in Norway-Nepal DTAA. Many taxpayers consider this interpretation inconsistent with the Treaty Act because it allows domestic law to override a treaty.
2. Significance of the Notification
By issuing this notification after more than two decades, the Government appears to be asserting that domestic anti-avoidance provisions contained in ITA 2002, including LoB rules, are relevant in the assessment of treaty benefits.
This action aligns with the reasoning adopted in the Ncell case by full bench of the Supreme Court. This signals Nepal Government’s position that LoB rules can apply even where the DTAA does not include an LoB or explicit anti-abuse clause. Accordingly, foreign taxpayers should expect more rigorous scrutiny of treaty claims and a greater emphasis on substance over form.
3. Implications for Foreign Investors and Taxpayers
i. Immediate implications
Withholding tax positions involving dividends, interest, service fees, and capital gains may face heightened GAAR and DoB review.
Structures that rely solely on DTAA wording without commercial substance may attract challenge.
ii. Medium-term implications
Treaty partners may seek clarification or renegotiation to incorporate LOB or anti-abuse clauses.
iii. Long-term implications
The Government may continue applying a domestic-law-centric approach to interpreting older DTAAs.
Tax authorities may increasingly focus on the underlying economic substance of transactions.
4. Recommended Action Points
- Review cross-border structures involving the seven notified treaty partners.
- Reassess withholding tax positions and DTAA-based claims.
- Strengthen commercial and economic substance documentation.
- Monitor future renegotiation or amendment of the affected DTAA.
- Read the full text of the notification. It can be accessed here.
Conatct Us
Contact Niti Partners & Associates for strategic guidance on international and Nepal-related tax matters.
📍Trade Tower, Kathmandu ✉️ [email protected] 📱 +977-9803831179