Nepal: ‘Permanent Establishment’ -Nepalese Aspect

Section 2(ka daa) of Income Tax Act, 2002 of Nepal defines “Permanent Establishment” as follows 

“Permanent Establishment (PE)” means a place where a person wholly or partly carries on a business, and includes the following places; 

(1) a place where a person wholly or partly carries on a business through an agent, other than a general agent of independent status acting in the ordinary course of business as such, 

(2) a place where a person has, is using, or is installing substantial equipment or substantial machinery, 

(3) one or more places within a country where a person furnishes (whether through employees or otherwise) related services (including technical, professional, or consultancy services) for a period or periods aggregating more than 90 days within any 12 months’ period, or 

(4) a place where a person is engaged in a construction, assembly, or installation project for 90 days or more, including a place where a person is conducting supervisory activities in relation to such a project. 

Key Points 

1. A fixed place where a person does his business is called Permanent Establishment (PE). 

2. If a non-resident person establishes a place to perform his business transaction, such place is called Permanent Establishment. Such establishment includes branch, factory, workshop, management place, extraction of minerals, agriculture, vegetable firm etc. It is to be noted that it is not necessary to take into consideration the residential status of such establishment in order to test whether the establishment of such non-resident is PE. 

3. PE is an establishment where a person wholly or partly carries on a business through an agent, when the agent is not a general agent of independent status. The work performed by any independent agent is not considered as PE. 

4. If one or more establishments within a country where a person furnishes, whether through employees or otherwise, technical, professional or consultancy services for a period or periods aggregating more than 90 days within 12 months, such establishment is called PE. This is also called as “Service PE”. 

5. An establishment where a person is engaged in a construction, assembly, or installation project for 90 days or more, including a place where a person is conducting supervisory activities in relation to such a project. This is also called as “Construction PE”. 

6. PE is further defined in ‘Avoidance of Double Taxation and Prevention of Fiscal Evasion Treaties’ which Nepal Government has entered into with different countries. The definition and other provisions of charging income tax on a Foreign Permanent Establishment (FPE) covered by the treaties are governed by the provisions in the treaties with the country of which the FPE relates. 

An Illustration of PE 

Singapore Construction Company has been awarded 100 man-days for drying the soil in a project in Nepal. Such company has sent 5 employees in order to perform such task and the employees have completed such task within 90 days. Singapore Construction Company has provided service more than 90 days onsite through its employees and hence, shall be considered as “Permanent Establishment”.

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