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6.5. Deduction of Cross-Border Payments and Non-Deductible Expenses

Expenses incurred for the purpose of business are deductible unless they are specifically disallowed. The following general expense types are not deductible or have limited deductibility for tax purposes in Nepal:

  • Personal expenses and non-business expenses are not deductible;
  • Capital expenditure is not deductible;
  • Corporate income tax is not deductible;
  • Fines and penalties levied by state bodies are not deductible;
  • Expenses incurred in generating exempt income or for final withholding payments are not deductible;
  • Dividend distributions are not deductible;
  • Interest payment made by a resident entity to its controlling entity exceeding the total interest income derived plus 50% of the taxable income of the company are not deductible. For this purpose, ‘controlling entities’ include non-residents owning or controlling at least 25% of the resident entity;
  • Expenditure incurred not relating to the relevant income year are not deductible;  
  • Cash payments exceeding NPR 50,000 by entities having an annual turnover over NPR 2 million are not deductible;
  • Donations exceeding the prescribed limits are not deductible;
  • Repair and improvement costs exceeding 7% of the value of depreciable assets in any income year are not deductible. The excess expenditure is capitalized and depreciated in the next income year. This limitation is not applicable to the aviation industry;
  • Expenditure incurred on research and development (R&D) and pollution control exceeding 50% of adjusted taxable income is not deductible. The excess expenditure is capitalized and depreciated in the next income year; and
  • Expenditure for which the PAN of the payee is not available is generally not deductible, except for certain minor expenditures such as one-time payment of salaries or wages to workers not exceeding NPR 3,000 and other general expenses not exceeding NPR 2,000.