ON the 10th of December, IBFD Tax News Service reported: Nepal Terminates Tax Treaty with Mauritius.

The tax treaty between Nepal and Mauritius was signed at Kathmandu on 3 rd August. 1999. There is nothing very special about this tax treaty that follows the more or less standard template of that time. As in most other treaties, this treaty also contains an Article [29 in this case] that stipulates the conditions for its termination:

"1. This agreement shall remain in force indefinitely but either of the Contracting States may terminate the Agreement through diplomatic channels by giving to the other Contracting State written notice of termination not later than 30 June of any calendar year starting five years after the date on which the Agreement entered into force .

2. In such event, the Agreement shall cease to have effect:

(a) in Nepal, in respect of income derived on or after the first day of the Nepalese fiscal year next following the date on which the notice of termination is given; and

(b) in Mauritius, on income for any income year beginning on or after the first day of July next following the date on which the notice of termination is given."

Since the entry into force and termination of tax treaties depends on the domestic laws of the respective Contracting States, there are no uniform rules in this regard except to ensure that the treaty remains in force at least for a certain period. The Article on termination provides that notice of termination can only be given after a certain number of years, to be fixed through bilateral agreement.

In case of this treaty, the minimum duration requirement was five years in terms of Article 29 and five years having long elapsed from the entry into force. the treaty could be terminated by giving notice of termination through diplomatic channels.

Nepalese news media reported that the notification for termination was sent by Nepal through diplomatic channels. It has been reported that Nepal has undertaken extensive reforms to its Income Tax Act, incorporating advanced provisions aimed at preventing tax abuse , which no longer align with the extant treaty. In particular, the limitation-of-benefits provision under Section 73(5) of the Nepalese Income Tax Act poses challenges to implementing the Agreement. 1

This is an interesting way of enforcing the limitation of benefits (LOB) provision. Normally, such a provision is incorporated in the tax treaty itself. For example, the India-Nepal tax treaty has the following provision in the renegotiated tax treaty (2012) between India and Nepal.

Article 28 (Limitation of Benefits)

"A resident of a Contracting State shall not be entitled to the benefits of this Agreement if its affairs were arranged in such a manner as if it was the main purpose or one of the main purposes to take the benefits of this Agreement. The case of legal entities not having bona fide business activities shall be covered by the provisions of this Article."

This is of course not an elaborate LOB provision but is in line with the BEPS Action Plan's principal purpose test. Most countries have opted for the PPT to be incorporated in the tax treaty through MLI.

Nepal is not a party to the MLI 2 and hence cannot amend its tax treaties with partner countries at one go through the MLI process. It is reported that Nepal has tax treaties with 11 countries . Apart from India, the other countries are- Austria, Bangladesh, China, Mauritius, Norway, South Korea, Sri Lanka, Pakistan, Thailand, and Qatar.3

It has been separately reported that Nepal has sent notices to seven of its treaty partners- Austria, China, Norway, Pakistan, Sri Lanka, South Korea, and Thailand informing them of its domestic tax provisions that came into force after the relevant treaties with these countries were signed long back before the domestic tax provisions were changed by the Income Tax Act, 2002. Apparently, the treaty partners have been informed that companies not majority-controlled by natural persons from the treaty partner countries will not be entitled to tax benefits under the agreement. 4

Article 2 of a tax treaty normally contains the taxes that are covered by a particular tax treaty. Substantially similar taxes that may be imposed by either one or both of the parties also come within the ambit of a tax treaty. In that context, there is an obligation expressed in the article to the effect that the Competent Authorities should inform each other of important developments. For example, Nepal's tax treaty with India provides in Article 2(4) as follows:

"The Agreement shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of the Agreement in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any significant changes that have been made in their tax laws."

Countries may however decide to broaden the remit of the Article by undertaking to exchange information relating to changes in an expanded area as well. In this regard, the UN Model Commentary (2021) on Article 2, Paragraph 4 states:

"Each State undertakes to notify the other of any significant changes made to its taxation laws by communicating to it, for example, details of new or substituted taxes . Member countries are encouraged to communicate other significant developments as well, such as new regulations or judicial decisions; many countries already follow this practice. Contracting States are also free to extend the notification requirement to cover any significant changes in other laws that have an impact on their obligations under the convention; Contracting States wishing to do so may replace the last sentence of the paragraph by the following:

The competent authorities of the Contracting States shall notify each other of any significant changes that have been made in their taxation laws or other laws affecting their obligations under the Convention."

Nepal has substantially changed its income tax law through the adoption of the Income Tax Act 2002. This law contains some anti-avoidance provisions. It seems that Nepal has taken recourse to Article 2 of the respective tax treaties to inform its treaty partners of the changes in its domestic law. In fact, the letter from the Inland Revenue Department states as such:

"This formal communication, issued pursuant to Article 2(4) of the respective DTAAs, fulfils the solemn responsibility of appraising partner countries of material changes in their respective taxation statutes. The correspondence informs treaty partners regarding the enactment of the Income Tax Act (ITA 2002), which superseded the previous Income Tax Act, 1974, and introduces new legislative provisions, aiming to combat tax avoidance through treaty shopping." 5

But, as some commentators have pointed out, this has come somewhat late by over two decades. 6

As indicated earlier, Nepal has 11 DTAAs at present. Out of these only the treaty with India has a Limitation of Benefits (LOB) provision. The Nepal- Bangladesh tax treaty does not itself contain any LOB provision. But, in Article 2, reference is made to ‘Income tax imposed under the Income Tax Act, 2058 (2002 AD)'. The treaty with South Korea (2001) also does not have a specific LOB provision. In Article 2, reference is made to income tax imposed under the Income Tax Act without specifying the year. Same is the case of the treaty with Qatar that was made in 2007.

Therefore, it is interesting to note that Nepal Chose to terminate the tax treaty with Mauritius while some of its other treaty partners were only informed of the change in the domestic law provision. Web search indicates that Nepal experienced treaty shopping involving the Mauritius tax treaty.

Article 13(4) of the Nepal-Mauritius tax treaty stated:

"Gains from the alienation of any property other than that referred to in paragraphs 1,2 and 3 shall be taxable only in the Contracting State of which the alienator is a resident."

The formulation is in line with the pre-amended India-Mauritius tax treaty and was the main attraction for foreign investors from capital exporting countries to route investments through Mauritius. It is good to see that Nepal has taken the route of terminating such a problematic tax treaty to deal with the treaty shopping rather than prevaricate endlessly. At the same time, as news reports indicate, it has also expressed its interest in entering into a new tax treaty in line with the international standards.

Interestingly, Nepal also experienced arbitration proceedings under its bilateral investment protection agreement with the UK in the Ncell case wherein the tax authorities had levied capital gains tax when there was a change in the ownership of a Norway- based foreign holding company as in the Vodafone case. Interestingly, although Nepal did not initially participate in the arbitration proceedings, the ICSID arbitral tribunal finally held in favour of the Nepal government.

In that case, the Nepalese Supreme Court also upheld the action of the tax authorities by invoking the domestic anti-abuse provision in section 73 of the Income Tax Act 2002.

It will therefore be useful to have a look at this particular section 73 of the Income Tax Act, 2058 (2002), states as follows: (Unofficial translation) 7

International agreements:

1) In cases where any income of any person is taxable pursuant to this Act or the laws in force and the same income is also taxable in a foreign country, Government of Nepal may conclude an international agreement with the foreign country for the avoidance of double taxation.

2) This Sub-section shall be applicable in cases where, pursuant to any international agreement concluded with Nepal, the competent authority of the other country requests the Department to collect in Nepal the amount payable by any person who is in arrears of that amount, pursuant to the taxation law of that other country.

3) In cases where Sub-section (2) is applicable, the Department may, for the purpose of sending that amount to that competent authority, send a notice in writing to the person who is in arrears of tax and require him to pay such amount to the Department within the date mentioned in that notice.

4) This Sub-section shall be applicable in cases where any international agreement contains a provision under which Nepal has to exempt income or payment or has to apply the reduced tax rate to income or payment .

5) In cases where Sub-section (4) is applicable, any of the following entity shall not be entitled to enjoy tax exemption or tax deduction facility: -

a) An entity who is considered as a resident of the other party of the agreement for purposes of the agreement, and

b) Where Fifty percent or more portion of the vested ownership of that entity is owned by natural persons or by the entities in which any natural person has no interest and, for purposes of the agreement, the persons or entities are residents of both Nepal and of the other country party to the agreement .

Explanation: For purposes of this Section, "international agreement' means any treaty or agreement containing the following provisions, concluded with any foreign government and applicable to Nepal:

(a) To avoid double taxation and prevent fiscal evasion, or

(b) To render reciprocal administrative assistance in the implementation of tax liability.

Thus, an entity is not entitled to treaty benefits if 50% or more of its vested ownership is held by natural persons or entities that are not residents of either Nepal or the respective treaty partner country.

The Revenue Department understands this provision of section 73(5) as an anti-Treaty shopping provision as is evident from the letter of 12 November, 2025 from the Inland Revenue Department, Ministry of Finance, Government of Nepal. 8

"The central focus of the notification is the introduction of a material anti-abuse provision, specifically Article 73, Sub-article 5 of the ITA 2002. This domestic legislative provision is designed to safeguard the integrity of DTAAs. This anti-treaty shopping rule denies treaty entitlements , such as tax exemptions or reduced tax rates, to the entities where 50% or more of the vested ownership is held by individuals or entities who are not residents of Nepal, or residents of both Nepal and the other contracting state for the purposes of the agreement.

(…)

The Government of Nepal emphasizes that the policy rationale behind Article 73(5) is to reinforce the primary purpose of DTAAs: to promote legitimate trade and investment between contracting states. The provision acts as a vital domestic mechanism to prevent the unintended exploitation of treaty benefits and concessions by third-country residents or entities solely seeking tax advantages . (commonly referred to as ‘treaty shopping).

"Nepal is firmly committed to maintaining the integrity of its bilateral tax agreements and ensuring that they benefit only Bonafide investors and taxpayers of the respective countries," read the notification letters issued by the Director General and Competent Authority for Nepal. This notification highlights Nepal's dedication to preventing fiscal evasion and upholding a fair, stable, and transparent international tax environment."

While the treaty with Mauritius was terminated, critics have pointed to the timing of the action. Apparently, a particular investment fund – Dolma Impact Fund registered in Mauritius was granted a special exemption (possibly an advance ruling) by the government to the effect that the fund will not be liable to pay capital gains tax in terms of Article 13(4)) of the tax treaty with Mauritius before terminating the tax treaty with Mauritius. Considering the fact that this treaty will remain valid for 6 more months even after termination, it has been alleged that the Fund will get exemption from capital gains tax worth about 880 million NPR or even more. 9

It is, however understood that Nepal has a separate Treaty Act, 1990 which grants supremacy to international agreements over the domestic law. Section 9(1) of the Act states:

"In case of the provisions of a treaty, to which Nepal or Government of Nepal is a party upon its ratification accession, acceptance or approval by the Parliament, inconsistent with the provisions of prevailing laws, the inconsistent provision of the law shall be void for the purpose of that treaty, and the provisions of the treaty shall be enforceable as good as Nepalese laws." 10 Nevertheless. as discussed earlier, the Nepalese Supreme Court gave priority to the domestic anti-abuse provision in the Ncell case. 11 So, the issue may not be that straightforward.

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1 https://thehimalayantimes.com/nepal/nepal-notifies-mauritius-of-dtaa-termination

2 The Evolving Landscape of Double Taxation Avoidance Agreements- Sachi Aryal- https://nepaleconomicforum.org/the-evolving-landscape-of-double-taxation-avoidance-agreements/#:~:text=So%20far%2C%20Nepal%20has%20signed,Austria%2C%20Pakistan%2C%20and%20Bangladesh

3 Note 2, ibid

4 https://english.biznessnews.com/posts/nepal-informs-partner-nations-of-restrictions-on-shell-companies-#:~:text=Therefore%2C%20Nepal%20has%20notified%20the,entered%20Nepal%20through%20this%20route

5 https://ird.gov.np/public/pdf/725546505.pdf

6 Nepal Issues longstanding notification to seven tax treaty partners - Niti Partners and Associates.

7 https://actnepal.com/en/section/261/0/section-73-international-agreements-of-income-tax-act-2058-2002#:~:text=1)%20In%20cases%20where%20any,the%20avoidance%20of%20double%20taxation.

8 https://ird.gov.np/public/pdf/725546505.pdf

9 Exemption to Dolma Impact Fund Before Terminating Mauritius Treaty; Revenue Loss Risks Raise Alarm- https://nepsetrading.com/blog/government-grants-major-tax-exemption-to-dolma-impact-fund-before-terminating-mauritius-treaty-revenue-loss-risks-raise-alarm

10 https://faolex.fao.org/docs/pdf/nep206152.pdf

Also see- Nepal Ends DTAA with Mauritius: Legal Implications And Treaty Policy Outlook- Niti Partners and Associates

11 For more on Dolma Impact Fund's tax waiver see-https://kathmandupost.com/money/2025/11/05/dolma-impact-fund-gets-tax-waiver-under-scrapped-pact-with-mauritius