Digital Permanent Establishment in Nepal: A Guide for Businesses
Nepal has newly introduced the concept of Digital Permanent Establishment (“Digital PE”) in its tax framework. This brings new considerations for businesses operating digitally within Nepal’s market, even without maintaining a physical presence in the country.
Understanding Digital Permanent Establishment
Digital PE represents a fundamental shift from traditional permanent establishment concepts. Under the new framework, a non-resident entity can be considered to have a permanent establishment (“PE”) in Nepal based on its digital footprint, rather than physical presence alone. This applies particularly when an entity maintains a “substantial digital presence” within the country. As per the amendment to definition of PE under Income Tax Act, 2002, Digital PE is established when either:
a) A person has substantial digital presence in Nepal, even if operating from outside the
country; or
b) Transactions of data or services are conducted through servers located outside Nepal for at
least 90 days within the previous 12 months.
Although the law is still evolving and awaiting detailed guidelines, the key aspects that may constitute Digital PE include:
a) Digital transaction volumes within Nepal;
b) Size and scope of Nepalese user or customer base;
c) Revenue generated from Nepalese users.
The Interplay between Digital Permanent Establishment in Nepal and DST
The introduction of Digital PE alongside the existing Digital Service Tax (DST) framework has created a new dimension in Nepal’s digital taxation landscape. While the law explicitly states that DST applies to Business-to-Consumer (B2C) transactions and provides exemption from Income Tax Act, the scope and application of Digital PE provisions await further clarification from tax authorities.
Key Implications for Businesses
The introduction of Digital PE may primarily affect:
B2B Transactions: These may now fall under corporate tax obligations, requiring careful evaluation
by Non-Resident Service Providers (NRSPs).
Digital Service Providers: Companies offering digital services to Nepalese customers may need to assess their exposure under the new framework. Current State and Future Implications While Digital PE marks Nepal’s progressive step toward modern tax administration, several aspects remain under development, details of which are as follows:1
- Detailed guidelines on what constitutes “substantial digital presence”;
- Specific thresholds for digital transactions and user base; and
- Implementation procedures and compliance requirements.
Disclaimer: This article is for general informational purposes only. The information presented here should not be considered a substitute for professional legal counsel. Professional advice from relevant tax lawyers in Nepal must be sought for specific cases.
