Inland Revenue Department (IRD) has recently issued Permanent Establishment (PE) Directive 2077 (2021 AD). An excerpt from such Directive related to Fixed Place of Business Permanent Establishment is discussed below.
In case of non-resident entity doing business in Nepal and conducting business from such place then such business presence is considered as Permanent Establishment. For this purpose, fixed place and business are compulsory factor. In other words, such business should be carried out from such place of presence. It does not matter whether the business of the non-resident entity in Nepal is complete or partial.
In case of ‘Fixed Place’, non-resident entity shall be present in Nepal to carry out the business.
Place might include:
- Premises, facilities, installation, equipment
- Owned, rented, or otherwise in the disposal of enterprise
- Exclusive use to the enterprise or not
- Physical presence of employees or automated
‘Place of Presence’ should be permanent based on nature of business. For example, Office of non-resident entity, related entities or unrelated domestic or foreign entity is permanent in nature. Business activities such as factory, workshop, warehouse or plantation or agriculture farm are of permanent nature based on their source.
Business activities carried out through employees in fixed base constitutes PE
The following business activities performed shall constitute PE.
- Employee’s residence (if treated similar to an office or similar location of employees,
- Co-working places at the disposal of foreign entity,
- Movable place as per the nature of business,
- Local employee, if they are hired temporarily
Business activities carried out through employees is permanent establishment. In some cases, the activities carried out by former employee of non-resident entity is also a permanent establishment. In particular, in a multinational company, the parent company operationalizes its own and related entities’ staffs and when staff from one entity is sent to another entity, legally, they seem to be ex-employee for the time being. The business activities carried out by such employee shall be deemed to be the work of such entity and shall be considered permanent establishment.
Work carried out by temporary employees shall be treated as that of normal employees for the purpose of permanent establishment.
The business of a non-resident entity shall be permanent establishment in case the business of a non-resident entity in Nepal is carried out by either a Nepali service provider or Nepali or foreign sub-contractor.
Based on the nature of the business operation of automated equipment without human presence is also permanent establishment as it is business and has presence in Nepal.
Permanent establishment on the basis of duration of presence and available space
For consideration of fixed base, duration of presence and availability of space is irrelevant. Legal or illegal right over the space is treated similar for determining permanent establishment.
Permanent Establishment even though business does not have fixed place
According to the nature of business even if there is no fixed place of operation in case of vehicle, moving sales outlet or similar business, it is a permanent establishment.
Allowing someone else to use the structure as warehouse is permanent establishment
- Own goods in own warehouse is not PE
- Own goods in thirty party warehouse is not PE
- Third party goods in own warehouse is PE
Figure: Instance of warehouse or storage as PE
Storage of raw materials or finished goods alone does not constitute permanent establishment
Processing of goods, which is owned by non-resident entity, by a resident entity of Nepal and storing as raw material or finished goods in the warehouse of the resident entity or someone else, it does not constitute permanent establishment. Such processing of goods is treated as storage or exhibition and not permanent establishment.
Figure: Storage for the conversion by third party is not a PE
Establishment of procurement office by non-resident entity for the purchase of goods for own use does not constitute permanent establishment
Figure: Purchase only is not a business nor a PE
Preparatory work carried on for own business is not permanent establishment
Production or advertisement or promotion activities carried out are preparatory work for business, so it does not constitute permanent establishment. Similarly, liaison office established for such purpose also does not constitute permanent establishment. However, advertisement or promotion activities carried out on behalf of someone else or establishment of Liaison office (not for own purpose) for such purpose constitutes permanent establishment.
Collection of information for own use carried out directly or through Liaison office is not permanent establishment
Collection of information by non-resident entity for own use carried out directly or through Liaison office does not constitute permanent establishment. However, collection of information for own use as well as for someone else constitutes business research or sale of service and thus is permanent establishment.
Figure: Information gathering or data collection issues
If the ancillary work that is not related to business in Nepal is done in Nepal, it is not permanent establishment
Only preparatory or ancillary work of non-resident entity that is not related to the business in Nepal does not constitute permanent establishment.
Calculation of period of taxation of PE based in fixed place of business
The beginning of PE based on a fixed place of business is calculated from the date of completion of preparatory or ancillary works. Such business is considered to have ended on the day the business is closed from such place. Therefore, the first income year of PE of this group is from the day of starting the business till the end of Ashadh (Mid-July). In case of business closure, the period from Shrawan 1 (Mid-July) to the date of business closure is the last income year. The calculation is the same as the current business even in case of temporary closure.