Nepal Energy Sector Tax Guide 2026: Tax, Concessions and Royalties

Nepal's energy sector — led by hydropower, with growing investment in solar, wind and biomass — is one of the fastest-growing and most strategically important parts of the country's economy. As both domestic electricity demand and cross-border electricity trade expand, the Government of Nepal has built a legal and regulatory framework that combines standard tax obligations with sector-specific incentives designed to attract investment.

This guide sets out the tax and other financial payments that apply to Nepal's energy sector, based on the Income Tax Act, 2058 (2002), the Finance Act, 2083 (2026), the Value Added Tax Act, 2052 (1995), the Excise Duty Act, 2058 (2002), the Custom Duty Act, 2081 (2024), and the Electricity Act, 2049 (1992). It covers three areas: (i) general tax rules applicable to businesses in Nepal, with a focus on income tax and VAT; (ii) tax treatments specific to the energy sector; and (iii) licensing fees and royalties relevant to project development.

A. What Counts as the "Energy Sector"

For this guide, "Energy Sector" refers to businesses classified as "Energy-Based Industries" under Schedule-3 of the Industrial Enterprises Act, 2076 (2019) ("IEA"):

Separately, Schedule 5 of the IEA classifies the construction, management and operation of powerhouses and transmission lines as "Infrastructure Industries." Although this overlaps with Energy-Based Industries, it is treated as outside the scope of this guide. Energy-Based Industries are also designated a "Nationally Prioritized Industry" under Schedule 9 of the IEA.

B. General Income Tax Provisions

Governing Law and Administration

Corporate income tax is governed by the Income Tax Act, 2058 and administered by the Inland Revenue Department (IRD) on a self-assessment basis. Every business must register for a Permanent Account Number (PAN), maintain proper books of account, calculate taxable income, file its annual return, and pay tax through withholding tax (TDS), advance instalments, and final settlement.

Resident vs. Non-Resident Companies

Corporate Tax Rate

The standard corporate income tax rate for resident companies is 25% (Section 2, Schedule-1, Income Tax Act).

Determination of Taxable Profit

• Capital gains, including gains from the sale of energy, are treated as ordinary taxable income at the applicable corporate rate.
• Dividends paid by a resident company attract a 5% final withholding tax at distribution.
• Interest, service fees and royalties attract withholding tax at applicable rates (below).
• A non-resident company with a Nepal permanent establishment is taxed at the normal corporate rate on attributable net income; without a permanent establishment, withholding tax on Nepal-sourced payments is generally its final tax.

Withholding Tax (TDS) System

All withheld tax must be deposited with the Government generally within 25 days after the end of the month of payment, accompanied by a withholding statement. Recipients should receive a tax withholding certificate under Section 91.

Relief from Double Taxation: Nepal's Double Taxation Avoidance Agreements (DTAAs) can override domestic withholding rates on dividends, interest and royalties paid to treaty-country residents. Resident taxpayers may also claim credit for foreign tax paid on income earned abroad.

C. Filing and Compliance

Nepal's fiscal/tax year runs from Shrawan 1 to Ashad 31 (Bikram Sambat calendar, roughly mid-July to mid-July). Energy companies must generally file their income tax return within three months after the fiscal year-end, under Nepal's self-assessment system.

Advance tax instalments:

Companies must maintain audited financial statements, and disputes over assessments can proceed through administrative review before the IRD, appeal to the Revenue Tribunal, and, on questions of law, to the Supreme Court of Nepal.

D. Tax Provisions Specific to the Energy Sector

Corporate Tax Rate for Energy Companies

The general 25% rate applies, but Section 11(3)(Q) of the Income Tax Act provides a 20% rebate on tax payable for companies that, in any income year, either (i) build and operate public infrastructure later transferred to the Government of Nepal, or (ii) build, generate and transmit electricity. This effectively reduces the tax burden to 20% of taxable income for qualifying energy-based industries, absent any other applicable concession.

Dividend Tax on Capitalization of Profit

Under Section 24(5) of the IEA, where an energy-based industry capitalizes profit into share capital (i.e., issues bonus shares), the dividend tax on that capitalization is 100% exempt. A parallel provision, Section 11(3)(l) of the Income Tax Act, grants the same exemption to "special industries," but energy-based industries are not expressly defined as a special industry — creating ambiguity over whether this exemption clearly extends to them. Cash dividends remain subject to the standard 5% withholding tax.

Stabilization Provisions

Section 11A of the Income Tax Act and Section 33 of the IEA both offer forms of stabilization protection against future regulatory changes, but each appears limited in scope — the former to infrastructure projects generally, the latter to IEA-specific incentives — leaving uncertainty over comprehensive protection for energy-based industries.

E. Incentives and Concessions for Energy Companies

Income Tax Holiday — Section 11(3)(D)

License holders who had already started commercial production before this provision applied continue under the rules in force when their license was issued; the updated timelines are not retrospective. Note: these holiday periods were reintroduced by the Finance Act, 2080, and have not been extended or altered by the current Finance Act, 2083 — though future Finance Acts may do so.

Additional 15% Rebate for Listed Hydropower Companies — Section 11(3)(G)

Hydropower generation, distribution and transmission companies listed on the stock exchange qualify for a 15% rebate on chargeable corporate income tax.

20% Rebate for BOOT/Powerhouse Projects — Section 11(3)(Q)

Companies that build and operate public infrastructure for transfer to Government, or that build, generate and transmit electricity, qualify for a 20% rebate on income tax charged on taxable income. Note: source material suggests this rebate may apply only for a specific fiscal year and may not be available on a recurring basis.

Limitation on Concessions — Section 11(5)

An energy-based industry may claim only one Section 11 concession per item of income. Recommended priority order:

1. Step 1: Claim the income tax holiday under Section 11(3)(D) first — generally the most beneficial, subject to eligibility and deadline.
2. Step 2 (after the holiday period): Choose between the 15% rebate (Section 11(3)(G)) or the 20% rebate (Section 11(3)(Q)) — most companies opt for the 20% rebate since it does not require stock exchange listing.

Loss Carry-Forward — Section 20(1)(b)

The standard 7-year loss carry-forward period is extended to 12 years for public-infrastructure and powerhouse projects.

Depreciation on Replaced or Transferred Assets — Section 19(2)

• Replacing worn-out assets: the written-down value of replaced plant/equipment/machinery may be deducted as an expense in the year of replacement.
• Transfer to Government: on transfer of the project, any remaining written-down value of non-replaced assets may be deducted in the year of transfer.

Withholding Tax on Interest — Sections 88(1) and 88(2)(9A)

Note: this deadline has now passed and has not been extended by the Finance Act, 2083 — the concessional rate is currently inapplicable.

Tax Treatment of Deemed Disposal on Change in Control

Section 57 (linked to Section 40) treats gain from a deemed disposal of property/liabilities as business income under Section 7(2)(c). Because Section 57 does not expressly exclude Section 11 concessions, there is a reasonable basis that income from a deemed disposal should remain eligible for the applicable tax holiday or rebate — though this remains subject to judicial interpretation.

F. Value Added Tax (VAT)

VAT is governed by the VAT Act, 2052, at a standard rate of 13%, applying to taxable supplies and imports unless exempt under Schedule-1, with Schedule-2 supplies zero-rated.

• Registration threshold: NPR 5 million (goods) / NPR 3 million (services or mixed) in preceding 12 months; importers of goods above NPR 10,000 per transaction must also register.
• Returns: filed monthly, within 25 days of month-end, with VAT paid in the same period.
• Input tax credit: available on VAT paid for goods/services used in taxable supplies — particularly relevant to construction and development costs.
• Refunds: available where export sales exceed 40% of monthly total sales; otherwise, excess input VAT carries forward.

VAT Specific to Electricity (Directive 2083/2026)

Under the IRD's Directive on Collection of Value Added Tax on Electricity Services, 2083 (2026):

VAT Exemptions for Project Equipment

• Import exemption (Schedule 1, Group 11(b), Point 11): VAT exempt on construction equipment, machinery/tools, high-capacity storage batteries and spare parts, and steel-sheet raw materials for hydropower, solar and wind projects — on IBN recommendation/approval, AEPC approval, or DOED recommendation as applicable.
• Zero-rating for domestic supply (Schedule 2, Point 6): locally manufactured machinery, equipment, construction materials and penstock pipes supplied domestically to qualifying projects are zero-rated, on the relevant authority's recommendation.

G. Excise Duty and Customs Duty Concessions

• Excise duty exemption: applies to the same categories of imported project equipment (construction equipment, machinery, storage batteries, steel sheets) for hydropower, solar and wind projects, subject to IBN/AEPC approval or DOED recommendation.
• Customs duty — 1% concessional rate: applies to construction equipment, machinery, tools, spare parts, storage batteries and related goods for generation, storage, transmission and distribution, subject to the same approval routes. Recommendations are limited to quantities listed in the project's Detailed Engineering Design Report.

H. Licensing Fees and Royalty

Energy projects require licenses via either the normal route (DOED) or the PPP route (Investment Board of Nepal, under the Public-Private Partnership and Investment Act, 2075).

Hydropower Survey License Fees (DOED, Normal Route)

Generation, Transmission and Distribution License Fees

Solar, Wind and Other Renewable Survey License Fees

Survey License Fees Under IBN Approval (PPP Route)

Capitalization of Interest During Construction (IDC)

Nepal Rastra Bank's Unified Directive, 2082 (Section 45, Directive No. 2) permits — and in some cases requires — licensed banks and financial institutions to capitalize interest accruing during a loan's moratorium period, allowing that interest to be added to project cost rather than paid immediately.

Royalty Payable

I. Conclusion

Nepal's tax and financial regime for the energy sector balances revenue collection with the need to attract capital-intensive investment. While the general 25% corporate tax rate applies, qualifying hydropower, solar and wind projects can access tax holidays, rebates, extended loss carry-forwards and depreciation benefits. VAT, excise and customs concessions reduce equipment import costs, while a dedicated VAT directive governs electricity consumption and B2B trading. Developers must also budget for licensing fees and royalty obligations across the life of the project. Together, these measures aim to make Nepal's energy sector attractive to investors while ensuring the Government captures an appropriate share of the value generated.