Tax on Dividends in Nepal

Dividends are an important source of income for many investors in Nepal. Understanding how these payments are taxed is crucial for both individuals and businesses. This article will guide you through the key aspects of dividend taxation in Nepal, helping you navigate this complex area of finance.

What is the tax rate on dividends?

In Nepal, the tax rate on dividends is generally 5% for individual residents. This rate applies to dividends received from both domestic and foreign companies. However, it’s important to note that the tax rate can vary depending on the type of company distributing the dividend and the recipient’s tax status.

For instance:

• Dividends from listed companies are taxed at 5%
• Dividends from unlisted companies are taxed at 10%
• Non-resident individuals face a 5% withholding tax on dividends

Remember, these rates are subject to change, so it’s always wise to check the latest tax regulations or consult with a tax professional.

Who pays tax on dividend income?

In Nepal, the responsibility for paying tax on dividend income falls on the recipient of the dividends. This includes:

• Individual shareholders
• Corporate shareholders
• Non-resident shareholders

It’s important to understand that while the company paying the dividend may withhold tax at source, the ultimate responsibility for ensuring the correct amount of tax is paid lies with the dividend recipient.

As a dividend recipient, you should be aware of your tax obligations and ensure you’re complying with Nepal’s tax laws. This may involve reporting your dividend income on your annual tax return and paying any additional tax due.

How is dividend tax calculated?

Calculating dividend tax in Nepal is relatively straightforward. Here’s a step-by-step process:

1. Determine the gross amount of dividends received: This is the total amount of dividends paid to you before any tax deductions.
2. Identify the applicable tax rate: As mentioned earlier, this is typically 5% for individual residents receiving dividends from listed companies.
3. Calculate the tax amount: Multiply the gross dividend amount by the applicable tax rate.
4. Account for any tax withheld at source: If the company paying the dividend has already withheld tax, you’ll need to subtract this amount from your calculated tax.
5. Determine any additional tax due: If the amount withheld is less than your total tax liability, you’ll need to pay the difference.

For example, if you received NPR 100,000 in dividends from a listed company, your tax would be NPR 5,000 (5% of 100,000). If the company withheld NPR 4,000 at source, you would need to pay an additional NPR 1,000 to meet your full tax obligation.

When is dividend tax due?

In Nepal, the timing of dividend tax payments depends on how the tax is collected:

1. Withholding at source: When companies distribute dividends, they often withhold tax at the time of payment. This tax is then remitted to the tax authorities on behalf of the shareholders.
2. Self-assessment: If you receive dividends where tax hasn’t been fully withheld at source, you’ll need to report this income on your annual tax return. The tax year in Nepal runs from mid-July to mid-July (based on the Nepali calendar).
3. Payment deadline: Any additional tax due on dividend income should be paid by the end of the tax year, which is typically around mid-July.

It’s crucial to keep track of all dividend payments you receive throughout the year and ensure you’re setting aside enough money to cover any potential tax liabilities. Late payments can result in penalties and interest charges.

Are foreign dividends taxed differently?

Foreign dividends are subject to tax in Nepal, but the treatment can differ slightly from domestic dividends. Here’s what you need to know:

• Tax rate: Foreign dividends are generally taxed at the same rate as domestic dividends (5% for individual residents).
• Double taxation agreements: Nepal has double taxation agreements with several countries. These agreements may affect how foreign dividends are taxed, potentially allowing you to claim credit for taxes paid in the foreign country.
• Currency conversion: When reporting foreign dividends, you’ll need to convert the amount to Nepali Rupees using the exchange rate on the date of receipt.
• Additional reporting: You may need to provide extra documentation for foreign dividends, such as proof of foreign tax paid.

Remember, the rules around foreign dividends can be complex. If you’re receiving dividends from overseas investments, it’s advisable to consult with a tax professional to ensure you’re complying with all relevant regulations.

How to report dividend income?

Reporting dividend income in Nepal involves several steps:

1. Keep accurate records: Maintain a detailed log of all dividend payments received throughout the year.
2. Gather documentation: Collect all dividend vouchers or statements from companies that have paid you dividends.
3. Complete the tax return: Include your dividend income in the appropriate section of your annual income tax return.
4. Calculate total dividend income: Sum up all dividends received during the tax year.
5. Apply the correct tax rate: Use the applicable tax rate (usually 5% for individual residents) to calculate your tax liability.
6. Account for tax withheld: Subtract any tax already withheld at source from your calculated tax liability.
7. Submit the return: File your completed tax return with the Inland Revenue Department by the deadline, typically around mid-October.

Remember, even if all your dividend tax was withheld at source, you still need to report this income on your tax return. Accurate reporting helps ensure you’re not overpaying or underpaying your taxes.

Is there withholding tax on dividends?

Yes, Nepal does impose withholding tax on dividends. This system, also known as Tax Deducted at Source (TDS), requires companies to deduct tax from dividend payments before distributing them to shareholders. Here are the key points:

• Rate: The standard withholding rate is 5% for dividends paid to resident individuals.
• Timing: Companies must withhold the tax at the time of dividend distribution.
• Remittance: Withheld taxes must be remitted to the tax authorities within 25 days of the end of the month in which the dividend was distributed.
• Certificates: Companies should provide shareholders with TDS certificates, detailing the amount of dividend paid and tax withheld.

While withholding tax simplifies the process for many shareholders, it’s important to remember that it may not cover your entire tax liability, especially if you receive dividends from multiple sources or have other income.

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Are any dividends tax-exempt in Nepal?

While most dividends are taxable in Nepal, there are some exceptions. Here are a few scenarios where dividends might be tax-exempt:

• Dividends between group companies: In some cases, dividends paid between companies within the same group may be exempt from tax.
• Certain cooperative societies: Dividends from some types of cooperative societies may be tax-exempt.
• Specific investment funds: Dividends from certain government-approved investment funds might qualify for tax exemption.
• Retirement funds: Dividends earned within approved retirement funds are often tax-exempt.

It’s important to note that tax exemptions can be subject to specific conditions and may change over time. Always verify the current tax status of any dividends you receive, and when in doubt, consult with a tax professional.

How to claim credit for dividend tax?

If you’ve paid dividend tax through withholding (TDS) but your total tax liability is less than the amount withheld, you may be eligible for a tax credit. Here’s how to claim it:

1. Gather documentation: Collect all TDS certificates and dividend statements.
2. Calculate total tax paid: Sum up all the tax withheld on your dividend income.
3. Determine your actual tax liability: Calculate your total tax due based on your income and applicable rates.
4. Identify the excess: If the tax withheld exceeds your liability, this is the amount you can claim as a credit.
5. Report on your tax return: Include the credit amount in the appropriate section of your annual tax return.
6. Provide supporting documents: Submit copies of your TDS certificates with your tax return.
7. Request a refund or carry forward: You can either request a refund of the excess tax paid or carry it forward to offset future tax liabilities.

Remember, claiming a tax credit requires careful documentation and accurate reporting. If you’re unsure about the process, consider seeking assistance from a tax professional.

What documents are needed for dividend tax?

Proper documentation is crucial when dealing with dividend taxes in Nepal. Here are the key documents you should maintain:

1. Dividend vouchers: These are issued by companies when paying dividends and show the amount paid and tax withheld.
2. TDS certificates: These documents detail the amount of tax deducted at source from your dividend payments.
3. Bank statements: These can serve as proof of dividend receipts, especially for smaller payments.
4. Foreign investment documents: If you receive foreign dividends, keep documents proving your ownership of foreign shares.
5. Tax returns: Copies of your filed tax returns showing reported dividend income.
6. Correspondence with tax authorities: Keep any letters or notices from the Inland Revenue Department related to your dividend income.
7. Investment account statements: These can provide a comprehensive view of your dividend-earning investments.

Maintaining these documents not only helps you accurately report your dividend income but also provides necessary evidence in case of any tax audits or inquiries. It’s advisable to keep these records for at least five years after filing your tax return.

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