Income Sourced In Nepal: Definitive Analysis

System of Taxation in Nepal

General Principle

Income Tax Act 2058 Nepal, follows source and residency based principle for taxation. Income of a resident person is taxed in Nepal irrespective of the location of the source of income. And, income of a non resident is taxed only to the extent such income is sourced in Nepal.

In case of person resident in Nepal
1. If you are a person resident in Nepal then all your income from employment, business, investment or windfall gain of the year irrespective of the location of the source of the income will be treated as your assessable income.
2. The income to be inscluded in assessable income will be calcuated as per the provisions of Section 7, 8, 9 and Section 2(Ja1). Income can include both Nepal as well as foreign sourced income.
3. The tax rate as specified in the Act are applied in the taxable income assessed as above.

In case of person not resident in Nepal
1. If you are a non-resident person employment, business, investment or windfall gain will be treated as your assessable income but only to the extent the income has a source in Nepal.
2. The rate as specified in the Act (including withholding rates) will be applied in the Nepal sourced income assessed as above.

The Exceptions to the General Principle?

It is generally understood that Nepal follows source or residency based principle. However, there are some expeptions to this general rule. Some income of non resident persons that are not sourced in Nepal may be subject to tax. The instances where this might occur in case of prevailing Income Tax Act in Nepal are discussed below.

The application of advance tax withholding mechanism under Section 95A doesn’t regard to the source based principle for deduction of taxes. When Section 95A is attracted, the fact that the income is not sourced in Nepal, doesn’t provide any relief to the person who is liable to deduct the advance taxes on the gains determined.

If we observe the above provisions for advance tax deduction as provided in Section 95A, we can easily conclude that Section 95A disregards the source and residency based principle. Let’s say for example:
(1) A person supplies Wheat into Nepal. Simply by supplying goods into Nepal, it cannot be deemed to be Nepal sourced but 2.5% tax has to be withheld at the point of customs by Customs Office, disregarding the source principle of taxation to non-residents.
(2) A non-resident has interest in equity shares of an entity in Nepal. He disposes off that share. But since the disposal of that share doesn’t fall under the definition of disposal of domestic asset, it doesn’t constitute Nepal sourced income. However, it still is taxable under the provision of Section 95A and the tax applicable is withheld by the entity whose interest is being disposed of in case of unlisted shares and by the entity involved in securities market business in case of listed shares.

Pictorial Summary of: Will I be taxed in Nepal?

The above picture gives a rough idea on how taxation system works in Nepal in respect of both resident person and non-resident person. However, the above pictorial summary doesn’t take into account the DTAA reliefs that may be provided by the DTAA entered into by Nepal with these countries:

Country	DTAA Entered On	Remarks
India	1987	Entered Before Income Tax Act 2058
Norway	1996	Entered Before Income Tax Act 2058
Thailand	1998	Entered Before Income Tax Act 2058
Sri Lanka	1999	Entered Before Income Tax Act 2058
Mauritius	1999	Entered Before Income Tax Act 2058
Austria	2000	Entered Before Income Tax Act 2058
China	2001	Entered Before Income Tax Act 2058
Pakistan	2001	Entered Before Income Tax Act 2058
South Korea	2003	Entered After Income Tax Act 2058
Qatar	2007	Entered After Income Tax Act 2058
Bangladesh	2019	Entered After Income Tax Act 2058

Of course, DTAA doesn’t levy taxes but it intends to define the taxing rights of the contracting countries and provide reliefs to incomes that generally may be doubly taxed. In this context, if DTAA provides relief from taxation, and where DTAA applies, the domestic provision on application of taxes (including withholding and advance taxes) would not apply.

Payments Sourced in Nepal

Dividend Payment

Section 67(6)(a): Dividends paid by a resident entity is a dividend payment sourced in Nepal.

Section 2(Ka.Gha): Dividend means dividend of an entity as mentioned in section 53.

Interest Payment

Section 67(6)(b): Interest paid by a resident person is a interest payment sourced in Nepal.

Section 2(Ka.Gha): Dividend means dividend of an entity as mentioned in section 53.

Natural Resource Payment

Section 67(6)(c): Natural resource payments made in respect of or calculated by reference to natural resources taken from land situated in Nepal is a natural resource payment sourced in Nepal.

As per Section 2(Sha) of Income Tax Act 2058: Natural resource payment means amounts of any of the following payments:
1. Payment for the right to take water, minerals, or other living or non-living resource from the land;
2. Amount as calculated on basis of the quantity or value of a living or non-living natural resource and minerals taken in whole or part from the land.

For Example:
(a) Let’s say person A pays to person B for the right to extract some minerals present in B’s land situated in Nepal. This constitutes as nepal sourced natural resource payment.
(b) An Indian geologist discovers an ore deposit in Western Nepal and is then paid by a mining company Rs. 5 for every kilogram produced from that ore deposit. The amount paid by the mining company is a natural resource payment as the payment to the Indian geologist is based on the quantity or value minerals extracted from land situated in Nepal. This constitutes as nepal sourced natural resource payment.

Rent Payment

Section 67(6)(d): Rent paid for the use of a domestic asset is rent payment sourced in Nepal.

Section 2(Sa): Rent means all payments including premium made under a lease of a tangible asset including house rent. Provided that, the term does not include:
● a natural resource payment, and
● a house rental received by the individual other than proprietorship owned by individual

Royalty Payment

Section 67(6)(e): Royalties arising from the use of, right to use, or forbearance from using a domestic asset is royalty payment sourced in Nepal.

Section 2(Ka.Ka): Royalty means any payment made under a lease of an intangible asset and includes any payment made for the following purpose:
1. The use of, or the right to use, a copyright, patent, design, model, plan, secret formula or process, or trademark;
2. The supply of know-how;
3. (i) The use of, or right to use, a cinematography film, video tape, sound recording, or any other like medium; and (ii) The supply of information concerning industrial, commercial, or scientific experience;
4. The supply of assistance ancillary to a matter referred above; or
5. Total or partial forbearance (बन्देज) with respect to a matter referred above.
Provided that, the term does not include a natural resource payment

The source of royalty income is a tricky one. Different tax jurusdiction have different way of determining the source of royalty income.

USA for example: The theory underlying the source principle of royalty in USA is that the place in which the intangible property is used is the situs of the economic activity giving rise to the income, regardless of the place at which the intangible property was developed. Meaning, USA treats royalties as having a source in the place where the property for which the royalties are paid is used.

How is the source of royalty income determined in Nepal?
In Nepal, royalties arising from the use of, right to use, or forbearance from using a domestic asset is royalty payment sourced in Nepal. This is a narrow scope for source based taxation than for e.g. USA. In Nepal, the royalty payment for it to be sourced in Nepal, it should arise from the use of, right to use, or forberance from using a domestic asset. In this context it is imporant to note what constitutes a domestic asset in Nepal.
As per the explanation provided in Section 67 of the Act, Domestic asset means (i) land or buildings situated in Nepal, as well as
(ii) an asset of a resident person other than land or a building situated in a foreign country or
(ii) resident person’s interest in an entity that is a controlled foreign entity within the meaning in section 69 where the person is an associate of the entity.

So for an example: A royalty payment made to an entity against the use of a trademark that is based in foreign country is not a royalty payment sourced in Nepal. As per the DTAAs agreed with by Nepal, however, Nepal has reserved a right to tax in such royalty payments, but since such royalty payments do not constitute a Nepal sourced royalty payment, Nepal’s sourced based withholding should not apply in here in this specific example.

उदाहरण ३.३.९ः मानौं, कुनै नेपाली चलचित्र निर्माताले नेपालमा निर्माण गरेको चलचित्र प्रदर्शन गर्न कुनै व्यक्तिलाई अधिकार दिएकोमा यसरी अधिकार दिएबापत निज निर्माताले प्राप्त गर्ने रोयल्टीको स्रोत नेपालमा रहेको मानिन्छ ।
उदाहरण ३.३.१०ः मानौं, उदाहरण ३.३.९ का निर्माताले सो व्यक्ति बाहेक अन्य कसैलाई प्रदर्शन गर्न नदिने शर्तमा सो व्यक्तिबाट कुनै भुक्तानी पाएमा त्यस्तो भुक्तानीको स्रोत नेपालमा रहेको मानिन्छ ।

General Insurance Payment

Section 67(6)(f): Premiums for general insurance paid to and proceeds from general insurance paid by a person in respect of the insurance of any risk in Nepal; is an insurance payment sourced in Nepal.

Here is a counter-intuitive concept. Only general insurance payment in respect of any risk in Nepal is covered in the source of income under Section 67. What is the location of risk and how is it determined?

For the purpose of exercising the rights the location of risk is defined as

In relation to buildings or buildings and their contents (insofar as the contents and buildings are covered by the same insurance policy): the country in which the property is situated;
In relation to vehicles of any type: the country of registration;
In relation to travel policies with a duration of four months or less: the country in which the policyholder took out the insurance policy
In all other cases, the location of the risk would be the country where the policyholder habitually resides (in the case of a natural person) or where their establishment is situated (in the case of a legal person).

But what about the source of life insurance? This is covered by “Other Payments” in last heading in this section, discussed below.

उदाहरण ३.३.११ः मानौं, भारतको बीमा कम्पनीले नेपालमा रहेको कुनै कारखानाको जोखिमको बीमा गरेको रहेछ । उक्त कारखानाले सो भारतीय बीमा कम्पनीलाई भुक्तान गर्ने बीमा प्रिमियमको स्रोत नेपाल रहेको मानिन्छ ।

Payment for Shipping, Charter, Air Transport Services Embarked From Nepal

Section 67(6)(g) Payments received by a person who conducts a business of land, sea, or air transport operator or charterer, other than as a result of transshipment, from:
a. The carriage of passengers who embark; or
b. Mail, livestock, or other moveable tangible assets that are embarked.

More detailed analysis on this part here in my another blog.
How this provision impacts the recognition and basics of a permanent establishment here in my another blog.

Payment for Transmission of Messages/Information through Apparatus in Nepal

Section 67(6)(h): Payments received by a person who conducts a business of transmitting messages/information by cable, radio, optical fiber, or satellite communication in respect of the transmission of messages by apparatus established in Nepal, whether or not such messages originate in Nepal;

Here, essential parameters are:

The business relates to transmission of messages or information.
खबर वा सूचना सम्प्रेसन गर्ने व्यवसाय भएको
Transmission may occur through communication medium of cable, radio, optical fiber or satellite. The messages or information may or may not have originated in Nepal. Message or Information includes but not limited to: News Broadcast, Digital News, streaming video services, digital sale of a company’s own goods, cloud services, and the provision of software-as-a-service
The transmission is made through apparatus established in Nepal.
नेपालमा स्थापित यन्त्र मार्फत खबर वा सूचना सम्प्रेसन भएको
An important thing to be noted here is that the necessary parameter is “establishment of apparatus”. Hence, mere digital presence of a business involved in transmission of messages or information through public cloud may not qualify this parameter. However, its presence through the co-location model may quality this parameter.

How this provision impacts the recognition and basics of a permanent establishment here in my another blog.

उदाहरण ३.३.१२ः मानौं, दक्षिण अफ्रिकामा सञ्चालन भएको Cricket को प्रत्यक्ष प्रसारण सोही देशको Star Africa Channel ले गर्दोरहेछ । उक्त Star Africa Channel ले प्रसारण गरेको Cricket को प्रत्यक्ष प्रसारण गरी नेपाली दर्शकसमक्ष पुर्याउन नेपालको Fly Cable TV लाई अधिकार दिएको रहेछ । यसरी Fly Cable TV ले आफ्नो ग्राहकलाई सेवा पुर्याउने गरेको रहेछ । यसरी Cricket को प्रत्यक्ष प्रसारण गर्ने अधिकार प्राप्त Star Africa Channel लाई Fly Cable TV ले नेपालमा जडान भएको संयन्त्र प्रयोग गरी प्रसारण गरे बापत दिइने भुक्तानीको स्रोत नेपाल रहेको मानिन्छ ।

Employment Payment and Service Payment

Section 67(6)(i): Payments, including service fees, of a type not mentioned in paragraphs (g) or (h) for or attributable to employment exercised, service rendered, or a forbearance from exercising employment or rendering service:
a. In Nepal, regardless of the place of payment; or
b. Where the payer is GON, irrespective of the place of employment;

This is a tricky one. What is the meaning of “place of exercising employment / रोजगारी गर्ने कार्यको स्थान” and “place of rendering service / सेवा प्रदान गर्ने कार्यको स्थान”?

Place of exercising employment / रोजगारी गर्ने कार्यको स्थान

Place of exercising employment / रोजगारी गर्ने कार्यको स्थान is the place of business activity of the economic employer to which the employment relates.
(i.e May not always be the place of formal employment relationship. But what constitutes a place of business activity is a debate on whole another level.)

The identification of economic employer depends on the following criteria (not an exhaustive list)
— who has the authority to instruct the individual regarding the manner in which
the work has to be performed;
— who controls and has responsibility for the place at which the work is performed;
— the remuneration of the individual is directly charged by the formal employer to the enterprise to which the services are provided;
— who puts the tools and materials necessary for the work at the individual’s disposal;
— who determines the number and qualifications of the individuals performing the work;
— who has the right to select the individual who will perform the work and to terminate the contractual arrangements entered into with that individual for that purpose;
— who has the right to impose disciplinary sanctions related to the work of that individual;
— who determines the holidays and work schedule of that individual.

Relevant Decisions from India

S.5 : Scope of total income – Non-resident – Employees of Indian company sent on assignments – Employees resident of those countries and liable to tax on their worldwide income in those countries for period of their assignment income did not accrue in India and not chargeable to tax in India – Indian Company is not liable to deduct tax on salaries paid in India – Once employees returned and became residents Indian Company can give credit for taxes deducted during deputation outside India – Indian company is not liable to deduct tax on split pay and perquisites received in India but accrued outside India. DTAA – India – USA [Ss. 2(45) 4, 5(2) 9(1)(ii), 15, 90, 192, Art. 4(1), 25]
Authority held that Employees of Indian company sent on assignments, employees resident of those countries and liable to tax on their worldwide income in those countries for period of their assignment income did not accrue in India and not chargeable to tax in India Indian Company is not liable to deduct tax on salaries paid in India. Once employees returned and became residents Indian Company can give credit for taxes deducted during deputation outside India. When payments were received from more than one source during a particular year, the present employer could give credit for the taxes deducted during his deputation outside India. In the absence of any other provision, recourse to the specific provision in S.192(2) alone was possible. This provision cast an obligation on the employee to furnish to the employer, the applicant, such details of the salary, etc., received by him from the other employer, the tax paid or deducted therefrom, and other particulars, and the employer would examine and take into account such details before computing the tax deductible.
Texas Instruments (India) Pvt. Ltd., In Re (2018) 401 ITR 289 (AAR)

S.192 : Salary – Deduction at source – Non-Resident – Employees rendering services on deputation at USA and Germany on assignment basis – Not liable to tax in India as services were rendered there hence not liable to deduct tax at source – DTAA – India-USA-Germany [Ss. 2(45)4, 5(2), 9(i)(ii), 90, 192, 195, Arts. 25, 23]
AAR held that, employees of Indian company sent on assignments to render services in U. S. A. and Germany to companies, income earned from services rendered in those countries chargeable to tax there, and not in India, during period of assignment hence the Indian company is not liable to deduct tax on salaries paid in India. Employees resident of those countries and liable to tax on their worldwide income in those countries for period of their assignment income did not accrue in India and not chargeable to tax in India.
Hewlett Packed India Software Operation P. Ltd. In, re/ 162 DTR 337 (2018) 401 ITR 339 (AAR) (HC)

Place of rendering service / सेवा प्रदान गर्ने कार्यको स्थान

Place of rendering service / सेवा प्रदान गर्ने कार्यको स्थान is the place of business activity of the service provider to which the service relates.
(i.e May not always be the place where service is provided. But what constitutes a place of business activity is a debate on whole another level.)

उदाहरण ३.३.१३ः मानौं, नेदरल्याण्डको IMGD कम्पनीले नेपालको राजस्व प्रशासनमा कार्यरत कर्मचारीहरूको क्षमता अभिवृद्धि गर्न तालिम दिने कार्य सञ्चालन गरेको रहेछ । उक्त कार्यक्रमलाई Danish Government ले आर्थिक सहयोग गरेको रहेछ । उक्त कम्पनीले नेपालमा नै कर्मचारीहरूलाई तालिम दिने गरेको रहेछ र उक्त तालिम दिए बापतको सेवा शुल्क नेदरल्याण्डमा नै भुक्तानी गर्ने प्रबन्ध रहेछ । यस अवस्थामा तालिम सञ्चालन कार्य नेपालमा भएकोले IGMD ले सेवा शुल्क बापत प्राप्त गरेको भुक्तानीको स्रोत नेपालमा भएको मानिनेछ ।
उदाहरण ३.३.१४ः फ्रान्समा नेपाल सरकारले आवासिय राजदुतावास खोलेको रहेछ । उक्त दुतावासमा रोजगारी गर्ने व्यक्तिहरूलाई नेपाल सरकारले रोजगारी बापतको पारिश्रमिक भुक्तानी गर्दछ । यसरी फ्रान्समा रहेको राजदुतावासमा कार्यरत रहेतापनि उक्त रोजगारीको भुक्तानी नेपाल सरकारले गरेकोले उक्त भुक्तानीको स्रोत नेपालमा रहेको मानिन्छ ।

Annuities Payment, Investment Insurance Proceeds Payment, and Retirement Payments

Section 67(6)(j): Amounts of annuities, proceeds of investment insurance, and retirement payments not falling within Section 67(6)(i) paid by a resident person and any premium or other payment to a resident person to secure such amounts;

उदाहरण ३.३.१५ः मानौं, कुनै व्यक्ति रोजगारीबाट निवृत्त भएछन् । निजले आफ्नो रोजगारीको समयमा नागरिक लगानी कोष (बासिन्दा व्यक्ति) मा योगदान गर्ने गरेका रहेछन्। रोजगारीबाट निवृत्त भएपछि निजलाई नागरिक लगानी कोषले अवकाश भुक्तानी गरेको रहेछ । यस अवस्थामा नागरिक लगानी कोषले गरेको अवकाश भुक्तानीको स्रोत नेपालमा रहेको मानिन्छ । यसका साथै अवकाश भुक्तानी सुनिश्चित गर्न रोजगारीको समयमा सो रोजगारकर्ताले नागरिक लगानी कोष (बासिन्दा व्यक्ति) लाई गरेको अवकाश योगदानको स्रोत पनि नेपालमा रहेको मानिन्छ ।

Gifts Received

Section 67(6)(k): Gifts to the extent received in respect of business or investment conducted with domestic assets;

As per the explanation provided in Section 67 of the Act, Domestic asset means (i) land or buildings situated in Nepal, as well as
(ii) an asset of a resident person other than land or a building situated in a foreign country or
(ii) resident person’s interest in an entity that is a controlled foreign entity within the meaning in section 69 where the person is an associate of the entity.

उदाहरण ३.३.१६ः मानौं, Fukuda and Company भन्ने जापानी कम्पनीको काठमाडौंमा एक पुष्प बाटिकामा लगानी रहेछ । उक्त पुष्प बाटिकामा बोट बिरुवाका सम्बन्धमा विभिन्न किसिमका Research समेत हुने गरेको रहेछ । नेपालमा बोट बिरुवा सम्बन्धी Research मा उल्लेखनीय योगदान पुर्याए बापत Fukuda and Company लाई जापानको Botanical Association बाट जापानमा नै १० लाख जापानी येन उपहार प्राप्त भएको रहेछ । उक्त कम्पनीले नेपालमा रहेको व्यवसायको सम्बन्धमा प्राप्त उक्त उपहारको स्रोत नेपाल भएको मानिनेछ ।

Other Payments

Provision as per Income Tax Act

Section 67(6)(l): The following payments other than referred in paragraph (a) to (k):
a. In respect of the disposal of a domestic asset or the incurring of a domestic liability; or
b. Made in respect of activity conducted in Nepal.

As per the explanation provided in Section 67 of the Act, Domestic asset means
(i) land or buildings situated in Nepal, as well as
(ii) an asset of a resident person other than land or a building situated in a foreign country or
(ii) resident person’s interest in an entity that is a controlled foreign entity within the meaning in section 69 where the person is an associate of the entity.

The concept of Domestic Asset/Liability is pretty much clear.
Foot Note 500 from: आयकर (ऐन, नियमावली, परिपत्र, सूचना, निर्देशन) सि.ए. भवनाथ दाहाल also indicates दफा ६७ को स्पष्टीकरण अनुसार विदेशीको नेपाली कम्पनीमा रहेका शेयर लगानीको श्रोत नेपालमा नमानिने र त्यस्तो शेयर विक्रको मुनाफामा नेपालमा कर नलाग्ने ।
Payment in respect to disposla of non resident’s interest in an entity in Nepal is not an income sourced in Nepal and no source based taxes will be taxable in Nepal. However, taxes under Section 89A and 95A may be applicable on such gains and the provisions under Section 89A and 95A disregards the source based taxation principle of the Income Tax in Nepal.

More on the source based taxation principle and capital gains taxes applicable in Nepal in my another blog here.

But the concept of “payment made in respect of activity conducted in Nepal” is not much clear. No further explanation has been provided in the Income Tax Act, Rules or Directive relating to this. Here we should go with the definition of “activity” in context of taxation and “principle of taxation” in Nepal.
Activity for tax purpose should mean an economic activity. The component of an economic activity are
(i) Operating Activity: Land and Labor Decisions
(ii) Investing Activity: Entrepreneurship Decisions
(iii) Financing Activity: Capital Decisions
Based on this test it may be relevant to distinguish the employment activity, business activity and investment activity and conclude that why only “business activity” qualifies as an “economic activity”. This we will discuss in line with COMMENTARY from the THE COMMONWEALTH OF SYMMETRICA.

Commentary from The Commonwealth of Symmetrica

Section 68(5)(l): The following payments have a source in Symmetrica:
Payments not mentioned in the above paragraphs made in respect of-
(i) the acquisition of a domestic asset, incurring of a domestic liability, or realisation of such an asset or liability; or
(ii) activity conducted or a forbearance from conducting activity in Symmetrica.

“domestic asset” means- (a) an asset owned by a resident person other than land or a building that is not situated in Symmetrica; and (b) land or a building situated in Symmetrica;
“domestic liability” means a liability owed by a resident person;

Para 45: The slice by slice approach adopted in the Sample means that income is calculated separately for each activity of a person that constitutes an employment, business, or investment. It is, therefore, necessary to determine the character of a person’s activities in order to determine whether they are of these types. The definitions of “employment”, “business”, and “investment” in section 345 provide the relevant characterisation.
Para 46: “Employment” is the dominant definition and whether an employment exists is primarily determined according to general law (paragraph (a) of the definition). Employment is typically an earning activity consisting predominantly of the provision of labour by an individual. The definition of “employment” is extended, in particular, to include most “managers” of entities, e.g. directors of a company and trustees of a trust, see the definition of the latter term in section 106. The primary reason for this extension is to ensure that these managers are subject to wage withholding. An alternative approach is to treat the activities of these managers as a business and subject payments to them by their entity to withholding as service fees. Under this approach, tax withheld would be adjusted under the tax instalment system. “Employer” and “employee” are defined in terms of “employment” and all of these terms make it clear that only an individual may be the subject of employment.
Para 47: “Business” is defined broadly in section 345 to include trades, professions, vocations, and arrangements with a business character. In this way, the term is used throughout the Sample as a shorthand reference to these types of activities. If a business activity may also be characterised as employment, primacy is given to the characterisation as employment. However, unlike employment, business is an earning activity typically consisting not only of the provision of labour but of the combined provision of labour and capital.
Para 48: It is possible that a particular person conducts more than one business and, therefore, must calculate income separately for each business. There are no rules in the Sample for determining whether a particular person’s business activities constitute one or more than one business. This will depend on the facts of each case and local jurisprudence. This matter is not further elaborated in the Sample. As losses from one business of a person may be set against income from another business of the person, the issue will most often not be critical and may be dealt with in practice notes issued by the tax administration. However, the issue will become more acute if a particular country quarantines some or all business losses.
Para 49: “Investment” is also defined broadly in section 345 in terms of holding “depreciable assets” or “investment assets”. These types of assets are, in turn, broadly defined in section 76. Essentially, these definitions cover any assets unless they are held primarily for personal use and are not used in the production of gains and profits. The definition of “investment” excludes employment or business. In this way, “investment” is used as the residual manner in which income may be derived and “income from an investment” is the residual category of income. In contrast to employment and business, investment is typically an earning activity consisting predominantly of the provision of capital.
Para 50: As with the definition of “business”, the issue arises as to whether certain activities of a person constitute one or more investments. There are two tests adopted for this purpose in the definition of “investment”. The first is whether the assets held are of a similar nature. So, for example, a block of shares may constitute a single investment. The second test is whether the assets are used in an integrated fashion, on similar terms, and subject to similar conditions, including as to location. So, for example, a house that is held passively and rented out with associated furniture, will constitute a single investment. Any liabilities incurred with respect to the asset or assets held are also part of the investment.

Essentially the question is that, simply because an activity can be traced in Nepal, can it be said that the activity is conducted in Nepal. For example: A non-resident may have passive investment activity in Nepal. Sure, his investing activity can be traced in Nepal but can it be said that the investing activity is conducted in Nepal? Does it fulfill the economic sense of the activity to be said that it is an activity conducted in Nepal?
As discussed above the component of an “economic activity” are
(i) Operating Activity: Land and Labor Decisions
(ii) Investing Activity: Entrepreneurship Decisions
(iii) Financing Activity: Capital Decisions
Passive investment is predominantly an capital/financing decision. It doesn’t fulfill the criteria of “economic activity” to be deemed as “activity conducted in Nepal”.

Interpretation of Income Tax Directive

उदाहरण ३.४.२ः मानौं, Golden Investment Inc. USA ले सुनाखरी प्रा.लि.नामको बासिन्दा कम्पनीलाई १ लाख अमेरिकी डलर कर्जा लगानी गरेका रहेछन् । सुनाखरी प्रा.लि.ले Golden Investment Inc. USA लाई गर्ने ब्याज भुक्तानी (आय) को स्रोत नेपाल भएको मानिन्छ ।

उदाहरण ३.४.३ः मानौं, दिवाकर थापा भन्ने नेपाली नागरिक क्यानाडाको बासिन्दा भई सोही स्थानमा व्यवसाय गरिआएका रहेछन्। निजले नेपालको एक बैङ्कबाट रु.१ करोडको व्यक्तिगत कर्जा लिएका रहेछन् । निजले लिएको उक्त कर्जा चुक्ता गर्न नसकेको कारण कर्जा असुली गर्ने सन्दर्भमा बैङ्कले रु.१० लाख मिन्हा दिई निजको कर्जा राफसाफ गरेको रहेछ । दिवाकर थापाले नेपालमा रहेको रु.१ करोडको दायित्व रु.९० लाखमा निःसर्ग गरेकोले रु.१० लाख बचत (आय) भएको र त्यस्तो आयको स्रोत नेपाल भएको मानिन्छ ।

उदाहरण ३.३.१७ः मानौं, उदाहरण ३.३.१६ मा उल्लिखित Fukuda and Co. ले पुष्प बाटिकामा गरेको शेयर लगानी अर्को जापानी कम्पनीलाई बिक्री गरेको रहेछ । Fukuda and Co. ले बिक्री गरेको उक्त शेयरको स्रोत नेपाल भएको मानिन्छ र दफा ३६ बमोजिम गणना गरिएको सो बिक्रीबाट प्राप्त आयको स्रोत नेपाल भएको मानिनेछ । 🤔

There is a problem with the last example.
(i) Non-resident’s interest in an entity in Nepal is not a domestic asset so gain arising on its disposal of their interest in an entity in Nepal is not an income sourced in Nepal.
(ii) Non-resident’s investment in an entity in Nepal is not a “activity conducted in Nepal” so gain arising on its disposal of their interest in an entity in Nepal is not an income sourced in Nepal.

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