Tax Treatment of Preference Share Transfers: IRD Clarifies Applicability of Change in Control under Income Tax Act, 2058 (2002)

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 preference 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

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:

1. Exclusion from Change in Control (Section 57):

Preference shares shall not be considered for the purpose of determining change in control if:

1. They do not carry voting rights; or
2. They carry voting rights only in matters relating to preference shares; and
3. 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).

2. Inclusion in Certain Cases:

Where preference shares:

1. Carry broader voting rights; or
2. 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 preference 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.

Conclusion

This clarification provides important interpretative guidance for taxpayers and companies issuing or transferring preference 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.