A New Chapter in Nepal's Tax Policy
A high-profile debate over a foreign investment fund has triggered a major clarification in Nepal's international tax policy. The Inland Revenue Department (IRD) has taken a decisive step to combat "treaty shopping," signaling a new era for foreign investors. This page breaks down the case, the complex legal arguments, and the significant new developments.
The Catalyst
Dolma Impact Fund Case
The Conflict
DTAA vs. Domestic Law
The Response
IRD Formal Notification
The Outcome
New Tax Landscape
The Catalyst: The Dolma Impact Fund Case
The entire debate was sparked by one central question: could Nepal tax the capital gains of the Dolma Impact Fund, a fund registered in Mauritius, from its investments in Nepal? This created a direct conflict between the fund's claims and Nepal's domestic law.
Dolma Impact Fund's Position
The fund claimed exemption under the Nepal-Mauritius Double Taxation Avoidance Agreement (DTAA). They argued that the treaty clearly gives the taxing rights for capital gains to the country of residence, which is Mauritius. Therefore, Nepal had no jurisdiction to tax the gains.
Nepal's Counter-Argument
Nepal's authorities pointed to Section 73(5) of the Income Tax Act, 2002. This domestic law restricts treaty benefits if 50% or more of the entity is owned by persons who are not residents of either Nepal or Mauritius. The implication was that Dolma's ownership structure disqualified it from the exemption.
The Legal Framework: A Conflict of Laws
The Dolma case exposed a deep legal ambiguity stemming from three key pieces of legislation. This created a "loophole" that was central to the debate. Explore the conflicting arguments by clicking the tabs below.
Nepal-Mauritius DTAA (1999)
This was the primary legal basis for the investor's claim. The agreement was designed to prevent double taxation and encourage investment. Its provisions explicitly state that capital gains are to be taxed in the country where the investor (the fund) is a resident. Since Dolma Fund is registered in Mauritius, this treaty provision, on its face, exempts it from capital gains tax in Nepal.
The Resolution: IRD's Formal Notification
In response to this ambiguity, Nepal's Inland Revenue Department (IRD) took a formal, decisive step on November 12, 2025. This action, detailed in a press release, is designed to close the perceived loophole and clarify Nepal's legal position for all future investments.
Key Takeaways from the IRD Notice:
- ✔ Formal Notification: The IRD has formally notified seven of its DTAA partner countries, including Mauritius, of a "substantive change" in its domestic tax laws.
- ✔ The "Change" is Sec 73(5): The notification explicitly identifies the Income Tax Act, 2002, and its anti-abuse provision (Section 73(5)) as this substantive change.
- ✔ Combating "Treaty Shopping": The IRD stated the policy rationale is to prevent "the unintended exploitation of treaty benefits" by third-country residents and to stop "treaty shopping."
- ✔ Closing the Loophole: This formal communication serves as Nepal's official assertion that Section 73(5) is a valid and enforceable part of its tax framework, effectively overriding the previous legal ambiguities.
"Nepal is firmly committed to maintaining the integrity of its bilateral tax agreements and ensuring that they benefit only Bonafide investors and taxpayers of the respective countries... This notification highlights Nepal's dedication to preventing fiscal evasion and upholding a fair, stable, and transparent international tax environment." — IRD Press Release, Nov 12, 2025
Impact & The New Landscape
The IRD's action, combined with related developments, has fundamentally altered the landscape for foreign investment in Nepal. The era of relying on older treaty structures for tax exemption is ending.
Imminent: DTAA Suspension
Compounding the IRD's notice, the Nepal-Mauritius DTAA—the very treaty at the heart of the Dolma case—is reportedly set to be suspended within a six-month period. This move effectively removes the primary legal instrument used for such tax exemptions.
A New Era for Investors
For all foreign investors, private equity funds, and advisors, the message is clear: Nepal is prioritizing the enforcement of its domestic anti-abuse laws. Tax structures must now be re-evaluated to ensure compliance with provisions like Section 73(5), as treaty benefits will only be extended to *Bonafide* investors.
Sources & Official Documents
This analysis is based on the following key documents and reports:
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IRD Press Release (Primary Source)
"Press Release Regarding the Formal Notification of Amendment in Domestic Tax Legislation..." (Ref: IRD Notice Regarding DTAA Amendment.pdf)
Date: November 12, 2025
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Nepal–Mauritius DTAA (1999)
The bilateral treaty whose provisions on capital gains were central to the debate.
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Income Tax Act, 2002
Specifically Section 73(5), the domestic anti-treaty-shopping provision.
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Treaty Act, 1990
Specifically Section 9, concerning the supremacy of ratified treaties over domestic laws.