Taxation of Companies & Dividends: Rules, Tax Rates & PCC

TAKEAWAYS:

• Companies in Nepal pay flat corporate tax rates (1%–40%) based on profit slabs, with dividends taxed at source (10%–20%).
• Profit and Loss Carry Forward (PCC) can reduce taxable income in future years if losses are carried forward under specific conditions.
• Dividends from resident companies are tax-exempt in the hands of shareholders, but dividends from non-resident companies are taxable.
• Tax adjustments (e.g., omitted deductions, incorrect inclusions) must be corrected in the year of discovery or assessment.
• Special provisions apply to foreign companies, branches, and companies with foreign shareholdings.
• Worked examples tie theory to Nepali businesses (e.g., a Kathmandu retail company’s tax computation).

1. Taxation of Companies in Nepal: Key Concepts

Companies in Nepal are taxed under the Income Tax Act 2058 (revised 2067). The tax system applies to:

• Domestic companies (registered under the Companies Act 2063).
• Foreign companies operating in Nepal (e.g., branches, permanent establishments).
• Cooperative societies and associations (taxed similarly to companies).

1.1 Tax Rates for Companies

Nepal’s corporate tax rates are progressive, meaning higher profits attract higher tax rates. The slab rates (for the fiscal year 2080/81) are:

Example: A company in Kathmandu earns Rs. 8,000,000 net profit. Compute its taxable income and tax payable.

flowchart TD
    A["Net Profit: Rs. 8,000,000"] --> B["Check Slabs"]
    B --> C["First 5M @ 4% = Rs. 200,000"]
    B --> D["Next 3M (5M-8M) @ 5% = Rs. 150,000"]
    C --> E["Total Tax = Rs. 350,000"]
    D --> E

Answer: Taxable income = Rs. 8,000,000 Tax payable = (5,000,000 × 4%) + (3,000,000 × 5%) = Rs. 200,000 + Rs. 150,000 = Rs. 350,000

2. Dividends: Taxation Rules

Dividends paid by companies are taxed at source (i.e., tax is deducted before payment to shareholders). The rules differ based on whether the dividend-paying company is resident or non-resident.

2.1 Dividends from Resident Companies

• Tax-exempt in the hands of shareholders (no tax deducted).
• Company must pay 10% dividend tax on the gross dividend amount (before declaring dividends).

Example: A Nepali company declares Rs. 500,000 as dividend. Compute tax payable.

Answer: Dividend tax = Rs. 500,000 × 10% = Rs. 50,000 (paid by the company).

2.2 Dividends from Non-Resident Companies

• Taxable in the hands of shareholders at 20% (if received by individuals) or 10% (if received by companies).
• No dividend tax is deducted by the non-resident company.

Example: A Nepali individual receives Rs. 200,000 as dividend from a Singapore-based company. Compute tax payable.

flowchart TD
    A["Dividend Received: Rs. 200,000"] --> B["Tax @ 20%"]
    B --> C["Tax Payable = Rs. 40,000"]

Answer: Tax on dividend = Rs. 200,000 × 20% = Rs. 40,000 (paid by the shareholder).

3. Profit and Loss Carry Forward (PCC)

If a company incurs losses in a year, it can carry forward those losses to offset future profits (to reduce taxable income). Key rules:

• Losses can be carried forward for up to 8 years (from the year of loss).
• Only "business losses" (not capital losses) are eligible.
• PCC must be claimed in the year of assessment (not automatically applied).

Example: A company in Pokhara had:

• Year 1: Loss of Rs. 300,000
• Year 2: Profit of Rs. 800,000

Compute taxable income for Year 2 after PCC.

flowchart TD
    A["Year 1 Loss: Rs. 300,000"] --> B["Carry Forward to Year 2"]
    C["Year 2 Profit: Rs. 800,000"] --> D["Deduct PCC: Rs. 300,000"]
    D --> E["Taxable Income = Rs. 500,000"]

Answer: Taxable income (Year 2) = Rs. 800,000 – Rs. 300,000 (PCC) = Rs. 500,000

4. Tax Adjustments and Jeopardy Assessment

If the Income Tax Office finds errors or omissions in a company’s tax return, it can make adjustments under Section 48 of the Income Tax Act. Common adjustments include:

• Omitted deductions (e.g., interest expenses not claimed).
• Incorrect inclusions (e.g., dividends from resident companies included in profit).
• Understated income (e.g., cash transactions not declared).

Example: A company’s Year 1 tax return showed Rs. 2,000,000 profit, but the IT office found:

• Rs. 20,000 interest expense not deducted (Year 2).
• Rs. 25,000 PCC omitted (Year 3).
• Rs. 50,000 dividend from a resident company incorrectly included in profit (Year 4).

Compute the correct taxable income for each year.

Answer:

In the Real World

1. eSewa & Khalti (Digital Payments)

   • When eSewa or Khalti processes a dividend payment from a Nepali company (e.g., Nepal Investment Bank), they deduct 10% dividend tax at source before crediting the shareholder’s account.
   • Example: If you receive Rs. 100,000 as dividend from NIBL, Rs. 10,000 is automatically deducted as tax, and you get Rs. 90,000.

2. Nepal Stock Exchange (NEPSE) & Shareholder Taxes

   • When NEPSE-listed companies (e.g., Nabil Bank, Global IME) declare dividends, they pay 10% dividend tax before distributing to shareholders.
   • Foreign dividends (e.g., from Google or Microsoft) are taxed at 20% in the hands of Nepali investors.

3. Daraz & Pathao (E-Commerce & Ride-Hailing)

   • If Daraz Nepal (a subsidiary of Alibaba) declares dividends to its Nepali shareholders, those dividends are tax-exempt (since Daraz Nepal is a resident company).
   • However, if Pathao (a Singapore-based company) pays dividends to Nepali investors, 20% tax applies.

5. Special Provisions for Companies

6. Worked Example: Tax Computation for a Nepali Company

Scenario: Kathmandu Retail Pvt. Ltd. (a registered company) provides the following details for FY 2080/81:

• Net Profit (before tax): Rs. 12,000,000
• Dividend received from a resident company (Nepal Investment Bank): Rs. 80,000
• PCC from previous year (loss): Rs. 200,000
• Interest expense omitted in previous year: Rs. 50,000 (to be added back)

Compute:

1. Taxable Income
2. Tax Payable

Solution:

Step 1: Adjust for Dividend & PCC

• Dividend from resident company (Rs. 80,000) → Exempt (not added to taxable income).
• PCC (Rs. 200,000) → Deduct from profit.
• Omitted interest (Rs. 50,000) → Add back (since it was not deducted earlier).

Step 2: Compute Tax

Using the tax slab rates:

Final Answer:

• Taxable Income: Rs. 11,770,000
• Tax Payable: Rs. 727,000

Exam Tip

1. Memorize tax slab rates – Examiners often ask for tax computation from given profits.
2. Dividends from resident vs. non-resident companies – Resident dividends are tax-exempt for shareholders, but the company pays 10% dividend tax.
3. PCC rules – Only business losses can be carried forward for 8 years.
4. Adjustments – If a question mentions omitted deductions or incorrect inclusions, always adjust the taxable income.
5. Foreign companies – Tax only Nepal-sourced income, not global profits.
6. Worked examples – Always show step-by-step adjustments (like the Kathmandu Retail example) to get full marks.