Govt informs DTAA partners about scrapping 'treaty shopping'

Kathmandu, Nov. 12

The government has informed its partners in the Double Taxation Avoidance Agreement (DTAA) that it has introduced a material anti-abuse provision specifically targeting 'treaty shopping'

In a statement, the Inland Revenue Department (IRD) informed that the new provision is made to prevent the exploitation of treaty concessions by third-country residents or entities that solely seek tax advantages—a practice commonly referred to as 'treaty shopping'.

In international law, 'tax shopping' means a practice where an individual or a company, who is not a legal resident of a country which is party to a DTAA, indirectly gain from the agreement.

The IRD has formally notified seven countries that are key partners in Nepal's DTAA concerning the amendment to its domestic tax legislation. Nepal has signed DTAA with Norway, Thailand, Sri Lanka, Austria, Pakistan, China and South Korea,

According to the IRD, formal communication was sent to the authorities of the seven partner countries with whom Nepal concluded DTAAs prior to the enactment of the Income Tax Act (ITA) 2002.

"The central focus of the notification is the introduction of material anti-abuse provision which is designed to safeguard the integrity of DTAAs," read a statement issued by the IRD on Wednesday. It said that this anti-treaty shopping rule denies treaty entitlements, such as tax exemptions or reduced tax rates, to the entities where 50 per cent or more of the vested ownership is held by individuals or entities who are not resident of Nepal, or residents of both Nepal and the other contracting state for the purposes of the agreement.

The government said that the rationale behind this new provision is to reinforce the primary purpose of the DTAAs – to promote legitimate trade and investment between the contracting states. "The provision acts as a vital domestic mechanism to provent the unintended exploitation of treaty benefits and concessions by third-country residents of entities solely seeking tax advantages," read the statement.

It will maintain the integrity of bilateral tax agreements and ensure that they benefit only bonafide investors and taxpayers.

The government awaits acknowledgement from the respective treaty partners and remains open to collaborative engagement for any required clarifications.

Published in The Rising Nepal daily on 13 November 2025.