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How to find out your residential status for Income Tax?

The income tax liability of a person depends on the residential status in Nepal. What we need to understand is that it has nothing to do with the actual citizenship of an individual. A person who is a citizen of Australia or a green card holder of the USA might be resident in Nepal for taxation purposes for a particular Income Year. Similarly, a citizen of Nepal might end up as a non-resident. It all depends on the criteria specified by the Nepalese Income Tax Act.

So, the question important question, 

How to determine residential status?

Nepalese Income Tax has defined resident person under Sec. 2(kanga). In other words, persons meeting the criteria listed below will be taxed in Nepal as a resident person and all the rest will be treated as a non-resident person.

Residential Status for Natural Person

First Criteria: Whose Normal Place of Abode is in Nepal

Income Tax Act has not defined what is a normal place of abode means so we are taking a reference from the double taxation avoidance agreement (DTAA). According to DTAA, any individual having his domicile or residence in Nepal will be treated as a resident of Nepal. This can bring complexity especially in the situation where a Nepal citizen with the house is also a resident of some other country. E.g. Ram is Nepali Citizen and also, holds Permanent Resident status for Australia and has homes in both countries. In such case, he shall be deemed a resident of the country where his economic activities are closer or where he generally stays (habitual abode)

Second Criteria: An individual who is present in Nepal for 183 days or more during the period of 365 consecutive days

It doesn't matter if a person stays intermittently or in a different place within Nepal or the consecutive 365 days falls in two different Income Year. Criteria is straightforward, one should be physically present in Nepal for the period of 183 days or more, and in the case of two different Income Year, the Income year when 183 days was met will be counted. 

For example, Mr. Elon Musk, an entrepreneur, often visits Nepal to manage his resort out in Pokhara. He came in Shrawan 15, 2076, and returned on Ashoj 15, 2076. Then, he had stayed in Nepal for about 130 days between Mangsir 2076 to Ashad 2077. In this case, he will be resident for Nepal for Income Year 2076/77. Income Year for 2076/77 started from 1st Shrawan 2076 and ended on 31 Ashad 2077. Let us now count the no. of days as of 31 Ashad 2077.

Mangsir to Ashad 2077 - 130 days

Ashoj 2076 - 15 days

Bhadra 2076-18 days

Shrawan 2076-18 days

Total - 194 days

Third Criteria: An employee of the Nepal Government

In the case of an employee of the Nepal Government, whether S/he is inside or abroad on diplomatic missions they will always be treated as residents of Nepal for tax purpose.

Residential Status for Entity

First Criteria: Registered in Nepal

Any entity incorporated by the laws of the land, in this case, Nepal is considered a resident for the purpose of income tax.

Second Criteria: Effective management in Nepal

Any entity is deemed a resident of Nepal provided its effective management i.e. control is from Nepal. We can argue that if the board members reside in Nepal and they are the ones making the strategic decisions for the company then, such a company would be deemed as a resident.

Note: We know from the previous blog that entity includes not only companies registered under the Companies Act but also, partnership firms, trust, local authorities, central govt., provincial govt., foreign govt., and permanent establishment. 

Non-resident

An individual or entity satisfying neither of the conditions stated above would be a non-resident for the Income Year.

The biggest question that remains now is what is the tax implication for the resident and non-resident person. We have covered those below:

Taxability

Resident Person: A resident will be charged tax in Nepal on his global income i.e. income earned in Nepal as well as income earned outside in Nepal.

Non-Resident Person: Their tax liability will be restricted only to the income they earn in Nepal. They need not pay any tax in Nepal on their foreign income.

Please note that Nepal has signed a DTAA agreement with some of the countries and for those, there might be certain flexibility in order to avoid paying taxes twice so one should refer to those clauses as well while determining the tax liability.

Summary: Residential Status for Nepal per Income Tax Act
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Location: Pokhara, Nepal

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