Nepal to Reassess Double Taxation Agreements Amid Tax Avoidance Concerns

After deciding to terminate the double taxation avoidance agreement (DTAA) with Mauritius, the government has announced plans to study the impact of similar treaties signed with other countries before entering into any new agreements.

The government said it initiated the review after observing a growing trend of companies registering in so-called tax haven countries, investing in Nepal, and avoiding taxes in both jurisdictions.

Citing the Mauritius agreement, the government has already sent formal notice to terminate the treaty after allowing Dolma Impact Fund—a private equity fund registered in Mauritius and operating in Nepal—to repatriate profits earned in Nepal without paying capital gains tax. Mauritius is widely regarded as a tax haven economy.

Nepal has signed double taxation avoidance agreements with around a dozen countries. Ram Bahadur KC, director at the Inland Revenue Department (IRD), said the department has begun a detailed assessment of the benefits and losses arising from these treaties.

“We are conducting an in-depth study on how much Nepal has gained or lost from double taxation agreements, how much investment they have attracted, and their overall impact on the economy,” KC said. “Only after completing this review will we decide whether to revise existing agreements or sign new ones.”

He added that the government will also examine the tax concessions typically offered by least developed countries under such agreements. Based on the findings, the department will determine whether Nepal should enter into additional double taxation treaties.

Nepal has signed such agreements with Norway, Thailand, Mauritius, Sri Lanka, Austria, South Korea, Pakistan, Bangladesh, Qatar, China and India. However, in December, the government formally notified Mauritius through diplomatic channels of its decision to terminate the agreement signed on August 3, 1999.

Inland Revenue Department Director General Madan Dahal sent the termination notice to the Mauritian government under Article 29(1) of the agreement. The government described the move as a strategic decision aimed at aligning Nepal’s tax regime with recent changes in domestic tax laws and the evolving global tax framework.

According to the department, Nepal introduced significant reforms to its tax system through the Income Tax Act, 2058, including modern provisions to curb tax abuse. As a result, some provisions of existing double taxation agreements no longer align with domestic law, prompting the government to review and, in the case of Mauritius, terminate the agreement.

The department said it had already informed countries with which Nepal has tax treaties about changes in domestic tax laws in December, in line with Section 73(5) of the Income Tax Act, 2058. Previously, failure to provide such notification had restricted Nepal’s ability to impose taxes under amended laws.

What is a double taxation avoidance agreement?

Tax officials explain that individuals or entities conducting business, employment or investment activities in more than one country within the same income year may be required to pay taxes both in their country of residence and in the country where the income is generated.

Such situations can lead to double taxation of the same income—based on residency in one country and source of income in another. To relieve taxpayers of this burden and create an investment-friendly environment, countries allow tax credits or deductions for taxes paid abroad through domestic tax laws or international agreements.

However, differences in domestic income tax laws—such as definitions of taxable income, residency, permanent establishment and tax scope—often make it impossible to eliminate double taxation through domestic legislation alone. As a result, countries worldwide enter into bilateral or multilateral double taxation avoidance agreements.

Under Section 73 of Nepal’s Income Tax Act, 2058, if income is taxable both in Nepal and in a foreign country, the government may enter into international agreements to prevent double taxation. Nepal has signed double taxation and fiscal evasion prevention agreements with 11 countries so far, in addition to a multilateral agreement among SAARC nations in 2005.

Nepal signed its first double taxation avoidance agreement with India in 1987, which was replaced by a new agreement in 2012.