Preference shares can have different tax implications depending on their voting rights and effect on corporate control under Nepal’s income tax framework.
Introduction To Preference Shares
The Ministry of Finance Nepal, through the Inland Revenue Department (the “IRD”), has issued a public circular clarifying the applicability of change in control provisions under the Income Tax Act, 2058 (2002) in relation to changes in ownership of preferred shares.
This circular was published on 2082/10/13 (27 January 2026), pursuant to a decision dated 2082/10/09 (23 January 2026), under Section 75(1) of the Income Tax Act, 2058 (2002).
Key Clarification on Preference Shares
The circular provides guidance on whether a change in ownership of preference shares constitutes a “change in control” under Section 57 of the Income Tax Act, 2058 (2002).
Based on an analysis of the Income Tax Act, 2058 (2002), the Companies Act, 2063 (2006), and the Nepal Financial Reporting Standards (NFRS), the IRD has clarified the following:
Exclusion from Change in Control Under Section 57
They shall not be considered for the purpose of determining change in control if:
- They do not carry voting rights; or
- They carry voting rights only in matters relating to it; and
- They are of a nature that does not affect the control of the entity.
This interpretation is aligned with Section 65(3)(e) of the Companies Act, 2063 (2006).
When Are Preference Shares Included?
Inclusion in Certain Cases:
- Carry broader voting rights; or
- Have the effect of influencing or altering control of the entity,
such shares must be taken into account for the purpose of determining change in control under Section 57 of the Income Tax Act, 2058 (2002).
Practical Implications for PE/VC Transactions
This clarification is particularly relevant in the context of private equity and venture capital investments in Nepal, where preferred shares (including instruments such as CCPS and redeemable preference shares) are commonly used to structure investments.
The IRD’s position reinforces that purely economic preference instruments, where investors are granted preferential dividend or liquidation rights without substantive control or voting rights, should not, in principle, trigger “change in control” implications under Section 57.
Conversely, where such instruments are structured with enhanced voting rights, board influence, or other control-linked features, they may be taken into account for determining change in control. From a structuring perspective, this underscores the importance of carefully calibrating investor rights in preference share instruments to avoid unintended tax consequences.
Where Can You Learn More?
Related Resources from Gandhi & Associates
Official Government Resources
- Inland Revenue Department – Official Website
- IRD – Notice on Changes in Ownership of Preference Shares
Conclusion
This clarification provides important interpretative guidance for taxpayers and companies issuing or transferring preferred shares, particularly in assessing tax implications arising from restructuring or ownership changes.
The circular has been made publicly available on the official website of the Inland Revenue Department (www.ird.gov.np), and stakeholders are advised to take note accordingly.
Frequently Asked Questions
What are preference shares under Section 57 of the Income Tax Act?
They are considered under Section 57 based on their voting rights and whether they affect control of the entity.
When are preference shares excluded from change in control?
They may be excluded when they lack voting rights or have limited voting rights relating only to preference shares.
When are preference share included for change in control?
They may be included when they carry broader voting rights or influence or alter control of the entity.
How does the clarification affect PE/VC transactions?
The clarification is relevant to PE/VC transactions using preference shares, including CCPS and redeemable preference shares.
Why are voting rights important for preference shares?
Voting rights can determine whether it affect control and therefore their treatment under Section 57.