Quick answer
Paying a US company from Nepal involves navigating strict foreign exchange controls imposed by the Nepal Rastra Bank (NRB). As there is no standing tax treaty between Nepal and the United States, a default 30% withholding tax (WHT) applies to dividends and royalties, though arm's-length service payments to US companies are typically exempt from WHT. Payments are primarily facilitated through SWIFT transfers via licensed commercial banks, requiring meticulous documentation and adherence to NRB regulations.
The regulatory picture
Nepal's financial environment is overseen by the Nepal Rastra Bank (NRB), the central bank and primary financial regulator. The NRB is responsible for formulating and implementing monetary and foreign exchange policies, managing foreign exchange reserves, and regulating institutions involved in foreign exchange transactions. Its stringent foreign exchange controls are a defining feature of the Nepali economy, largely influenced by the country's remittance-heavy nature and the need to maintain macroeconomic stability.
Outbound payments in foreign currency, particularly in USD, are subject to significant scrutiny and require explicit approval or adherence to specific guidelines set by the NRB. The Foreign Exchange (Regulation) Act, 1962, and subsequent bylaws, such as the Nepal Rastra Bank Foreign Exchange Transaction Licensing and Inspection Bylaw, 2020, and the Nepal Rastra Bank Foreign Investment and Foreign Loan Management Bylaw, 2021, govern all foreign exchange activities. These regulations aim to control capital outflows, prevent illicit financial flows, and ensure that foreign currency transactions serve legitimate economic purposes. Consequently, individuals and businesses in Nepal face limitations on the amount and purpose of foreign currency they can remit abroad. Payments for imports of goods and services typically require supporting documentation such as proforma invoices, contracts, and evidence of service delivery, which must be submitted to the remitting bank for NRB approval.
Crucially, Nepal does not have a comprehensive income tax treaty with the United States. This absence means that the default US tax rules apply to payments received by US companies from Nepal. Specifically, under US tax law, payments classified as fixed, determinable, annual, or periodical (FDAP) income, such as dividends and royalties, are subject to a statutory 30% withholding tax when paid to foreign entities. However, payments for bona fide arm's-length services performed by a US company for a Nepali entity are generally not subject to this 30% WHT, provided the services are performed outside the US and do not constitute a US trade or business for the Nepali payer. It is imperative for Nepali payers to ensure proper classification of payments and maintain thorough documentation to substantiate the nature of the transaction and avoid potential tax liabilities for the US recipient.
Common mistakes
- Underestimating documentation requirements: Many entrepreneurs fail to provide the exhaustive documentation required by Nepali banks and the NRB for outbound USD payments, leading to significant delays or rejection of transfers. This includes detailed invoices, contracts, and proof of service or goods.
- Ignoring foreign exchange limits: Nepal has strict limits on foreign currency outflows. Attempting to remit amounts exceeding prescribed thresholds without prior, specific NRB approval is a common pitfall, often resulting in payment blocks.
- Misclassifying payment types: Incorrectly categorising payments (e.g., as royalties instead of service fees) can trigger the default 30% US withholding tax in the absence of a tax treaty, creating unexpected tax burdens for the US recipient.
- Lack of W-8BEN-E form: Failing to obtain a properly completed W-8BEN-E form from the US company can lead to the Nepali payer being held responsible for withholding US taxes, even on payments that would otherwise be exempt.
The practical path
- Verify invoice and documentation: Ensure the US company's invoice is comprehensive, detailing services rendered or goods supplied, payment terms, and banking information. Collect all supporting documents, such as contracts, purchase orders, and any relevant correspondence. For services, a clear description of the work performed and its value is crucial.
- Choose a licensed commercial bank: Payments from Nepal to the US are typically processed through commercial banks licensed by the NRB to deal in foreign exchange. Prominent banks in Nepal include Nepal Bank Limited, Rastriya Banijya Bank, Nabil Bank, and Himalayan Bank. These banks facilitate international transfers primarily via the SWIFT network.
- Complete the foreign exchange application: Approach your chosen bank with the invoice and supporting documents. You will need to complete a foreign exchange application form, specifying the purpose of the payment, the beneficiary's details, and the amount. The bank will scrutinise these documents to ensure compliance with NRB regulations.
- Initiate the SWIFT transfer: Once the bank approves the application and verifies all documentation, they will initiate a SWIFT (Society for Worldwide Interbank Financial Telecommunication) transfer. You will need the US company's full bank details, including their bank name, address, SWIFT/BIC code, account number, and routing number (ABA). Be prepared for potential bank charges for the international transfer.
- Retain records: Keep meticulous records of all transactions, including the foreign exchange application, bank receipts, SWIFT confirmation, invoices, and contracts. These documents are vital for audit purposes by the NRB and for demonstrating compliance with both Nepali and US tax regulations.
Edge cases
- Large amounts: Payments exceeding standard thresholds, particularly for capital transactions or significant service contracts, will require enhanced scrutiny and potentially specific prior approval from the NRB. This process can be lengthy and demand extensive justification and documentation.
- Existing USD accounts: While some entities in Nepal may hold foreign currency accounts, their usage for outbound payments is still subject to NRB regulations and often requires specific permissions, especially for non-trade-related remittances. These accounts do not bypass the need for regulatory compliance.
- Payments to individuals vs. companies: The regulatory framework can differ slightly when remitting funds to individuals versus registered companies. Payments to individuals, especially for services, might be subject to different reporting requirements or even stricter limits, depending on the nature of the service and the recipient's tax residency.
- Sanctions and OFAC considerations: Although less common for Nepal-US transactions, any payment involving entities or individuals on international sanctions lists (e.g., OFAC's SDN list) will be blocked. Banks conduct thorough due diligence to screen against such lists.
- Capital controls: Nepal's strict capital controls mean that any transaction perceived as capital flight or not directly related to approved trade or service imports will face significant hurdles. Repatriation of profits or dividends from foreign investments in Nepal is also tightly regulated and requires NRB approval under the Foreign Investment and Foreign Loan Management Bylaw, 2021.
When you don't need us
For straightforward, routine payments to US companies for clearly defined services or goods, where all documentation is readily available and the amount falls within standard banking limits, you may not require specialist assistance. If you have an established relationship with a Nepali commercial bank that is familiar with your business's international payment needs and you are confident in navigating the NRB's documentation requirements, the process can often be managed internally.
What we do
Keystone Bridge assists Nepali entrepreneurs in navigating the complexities of international payments to US companies. We provide expert guidance on invoice structuring, ensure compliance with NRB foreign exchange regulations, and optimise payment corridors to minimise delays and potential tax liabilities. General information, not tax or legal advice. Rates and rules change; verify with a qualified adviser before acting.
For the broader picture on this topic, see our guide on how to pay a US company from your country.
For the broader picture on this topic, see the Nepal banking guide.