Inland Revenue Department (IRD) has recently issued Permanent Establishment (PE) Directive 2077 (2021 AD). An excerpt from such Directive related to Agency Permanent Establishment is discussed below.
In case the business of a non-resident entity in Nepal is operated through an agent, such a structure is an Agency Permanent Establishment. The duration of a business is not counted in case the business is operated through agency permanent establishment of a non-resident entity. The concept of an agency for a permanent establishment includes only a dependent agent, not an independent agent.

Dependent agents can be created in the following four ways:

a. As per the agreement (actual authority) with the parent company, if the business of the parent company (or associated entity) is operated.
b. Despite the agreement does not authorize all the business activities, if the parent company of Nepal has the right (explicit actual authority) to enter into a business agreement.
c. If the agreement does not give the main company (or associated entity) the right to conclude a business agreement in Nepal, such agreement may be entered into in case it is in practical (apparent authority) to do so.
d. In the case of a collection of Purchase Order for the parent company (or associated entity), even if there is no agreement of any kind or even if there is no right to do business.

Individuals who work independently in the course of their business are not considered dependent for permanent establishment purposes. Agents in the following cases are independent agents for tax purpose:

1. Working in the ordinary course of business
2. Not working wholly or mainly for principal
3. Not under common control with principal

If the subsidiary or someone else assists in directing the work of the parent company, such activity is the activity of the agency.

Import Agency or Business

In the business between non-resident sellers and resident importers, the income of the foreign seller is not considered to be in Nepal despite the resident is the importer and the transaction is also not considered as an agency business. Rather the transaction is considered free trade or free import. For this, following conditions must be met in the transaction between the non-resident exporter and the resident importer.

1. Imported by the importer for his own possession
2. Trading at market price (arm’s length price)
3. There is no control of non-resident exporter once export has been made
4. The marketing of imports has been done by itself, the exporter does not assist marketing activities
5. The payment is made by the importer on the basis of export documents and the payment is not related to sale or use of the importer.

If the importer imports in his own possession, any of the following business agencies will be a permanent establishment.

1. Even if traded at a price different from the market price (arm’s length price) or traded at the market price, the importer receives a fee or refund at a commission or agreement or at a practically fixed rate
2. Even after being imported into Nepal, the non-resident exporter has economic, legal, commercial or similar control
3. If the exporter assists the marketing or both the exporter and the importer are involved in the marketing process and the exporter is looking for the customer or both together, or
4. Even after the payment made by the importer during the import or in relations to use other than warranties, future exports of expired goods through quantitative discount or price discount (trade discount) or other arrangements

In case of import and selling goods from the parent company, the importer has the legal right (tittle) in such imported goods, the vested ownership remains with the exporter, it creates permanent establishment of the agency though there is no pricing risk.

The agency will not be permanent establishment on the basis of the second registration in Nepal of the same goods which trade mark has been registered in foreign.

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