Establishing Business in Nepal as Foreign Investors

Foreign investors looking to tap into Nepal’s growing economy need a clear understanding of the legal framework, business structures, and regulatory requirements. This comprehensive guide by Axion Partners explores everything you need to know about establishing a business in Nepal as a foreign investor, from registration processes to exit strategies.

1. Introduction to Business Establishment in Nepal

Nepal, strategically positioned between China and India, presents attractive investment opportunities for foreign investors seeking to enter the South Asian market. The country has been actively working to create a more investor-friendly environment through policy reforms and simplified procedures for business establishment.

This article provides a comprehensive overview of key issues regarding:

• Establishment and registration of business in Nepal by foreign investors
• Available forms of business vehicles
• Concessions and facilities provided to foreign investors
• Investment protection mechanisms
• Restrictions and exit procedures for foreign investors

Understanding these foundational aspects is critical for any foreign investor considering entry into Nepal’s market.

2. Major Forms of Business Vehicles in Nepal

Nepal offers various business structures, each with distinct legal characteristics, liability implications, and regulatory requirements.

2.1 Sole Proprietorship Firms

Governing Law: Private Firm Registration Act, 1958 (2014)

Category	Details
Registration Authority	– Department of Commerce and Supply Management (commerce-related firms) – Department of Cottage and Rural Industry (cottage and rural industries) – Department of Industry (DOI) (other types of industries)
Key Characteristics	– No separate legal personality – Unlimited liability for the proprietor – Common for trading, small retail, restaurants, professional services
Advantages	– Easy to establish, control, and dissolve – Prompt and flexible decision-making – Fewer corporate compliances
Drawbacks	– Unlimited liability – Requires periodical renewal – No separate legal personality

2.2 Partnership Firms

Governing Law: Partnership Act, 1964 (2020)

Category	Details
Registration Authority	– Department of Commerce and Supply Management (commerce-related firms) – Department of Cottage and Rural Industry (cottage and rural industries) – Department of Industry (DOI) (other industries)
Key Characteristics	– No separate corporate personality – Unlimited liability for partners – Minimum of two partners, no maximum limit – Common for trading activities and professional services
Advantages	– Easy to establish, control, and dissolve – Fewer corporate compliances – Flexibility in decision-making compared to companies
Drawbacks	– Unlimited liability – Requires periodical renewal – No separate legal personality

2.3 Limited Liability Companies

Governing Law: Company Act 2006 (2063)

Category	Details
Registration Authority	Office of Company Registrar (OCR)
Key Characteristics	– Limited liability for shareholders – Separate legal personality – Most common form for foreign investment
Advantages	– Limited liability – Separate legal personality – Perpetual succession
Drawbacks	– Expensive to manage – More complex to establish and dissolve – Higher level of legal compliance required

Types of Limited Liability Companies in Nepal:

a. Private Limited Companies:

• Minimum: 1 shareholder
• Maximum: 101 shareholders
• Cannot sell shares publicly
• Can start business immediately after incorporation
• Lower compliance requirements compared to public companies

b. Public Limited Companies:

• Minimum: 7 shareholders
• No maximum limit
• Minimum paid-up capital: NPR 10 million
• Higher compliance requirements
• Can sell shares to the public

c. Company Not Distributing Profit:

• Incorporated for public welfare rather than profit
• Cannot distribute profit to members
• Established for purposes such as:
  • Development and promotion of professions
  • Protection of collective rights of people in specific occupations
  • Scientific, academic, social, or public utility objectives

2.4 Local Business

Small businesses like retail shops, grocery stores, and tea shops can be directly registered at the local government level (ward office) and are governed by local municipality laws.

3. Options for Foreign Investors for Carrying Out Business Activities in Nepal

Foreign investors have several pathways to establish a business presence in Nepal, each with different requirements, limitations, and advantages.

4. Registration of Limited Liability Companies in Nepal

4.1 Permissibility of Foreign Investment

For foreign investors looking to establish a limited liability company in Nepal, the investment must meet two key conditions:

First Condition: The sector must not fall under the “Negative List of Industries” provided in Annex-1 of FITTA (Foreign Investment and Technology Transfer Act, 2019).

Second Condition: The sector must be classified under the “Positive List” in the Industrial Enterprise Act, 2020 (2076).

4.2 Capital Requirement

The minimum capital required for establishing an FDI company in Nepal is 20 million Nepalese Rupees (approximately USD 150,000).

4.3 Forms of Foreign Investment Under FITTA

Foreign investment in Nepal can take several forms:

1. Equity Investment: Investment in shares of a company established in Nepal
2. Investment in the form of loan or loan facilities
3. Investment in Technology Transfer (including franchising, trademark, goodwill, patent, and technical know-how)
4. Investment in leasing equipment
5. Investment in sectors as specified by the Government of Nepal

5. Registration of Branch Office in Nepal

5.1 Legal Framework

The Companies Act, 2006 (2063) provides for the registration of branch offices of foreign companies in Nepal. A foreign company must register a branch office if it conducts business activities in Nepal continuously for one month or more through an established office.

5.2 Requirements for Branch Office Registration

Registration of a branch office requires either:

• Approval from the relevant government authority based on the nature of the business
• An agreement with a government authority of Nepal for conducting business in the country

5.3 Key Characteristics

• No minimum capital threshold for investment
• The branch office must carry out the same business activities as the parent company
• Registration is processed by the Office of Company Registrar (OCR)

6. Registration of Liaison (Contact) Office in Nepal

6.1 Legal Framework

The Company Act, 2006 (2063) also provides for the registration of liaison offices for foreign companies that want to establish a contact point in Nepal without engaging in direct business activities.

6.2 Permitted Activities

A liaison office in Nepal is allowed to:

• Work as a contact point and maintain liaison on behalf of the foreign company
• Assist individuals to import and use the foreign company’s products without taking remuneration
• Coordinate with Nepalese agents appointed by the foreign company

6.3 Restrictions

Liaison offices cannot:

• Engage in any income-generating activities
• Conduct advertising activities
• Directly conduct business operations

7. Trading Activities for Foreign Companies in Nepal

Foreign companies cannot directly invest in trading businesses in Nepal and are not allowed to open local subsidiary companies for this purpose. However, they can appoint local agents to distribute their products by executing agency or distributorship agreements.

8. Business Activities Through Franchise Arrangement

Foreign companies can enter the Nepalese market through franchise arrangements governed by the terms of a franchise agreement. The process includes:

1. Registration of the trademark (foreign brand) with the Department of Industry
2. Execution of a franchise agreement between the foreign company and a local company
3. Approval of the franchise agreement and related agreements from the Department of Industry

There are no specific permissibility restrictions on franchise arrangements in Nepal.

9. Restricted Business for Foreign Investment

Foreign investment is restricted in sectors that fall under the “Negative List of Industries” in Annex-1 of FITTA, which includes:

1. Primary agricultural production (poultry farming, fisheries, bee-keeping, fruits, vegetables, etc.)
2. Cottage and small industries
3. Personal service businesses (hair cutting, tailoring, driving, etc.)
4. Industries manufacturing weapons, ammunition, explosives, and N.B.C. weapons
5. Real estate business (excluding construction), retail business, internal courier service, local catering service, moneychanger, remittance service
6. Tourism-related businesses such as travel agencies, guides, trekking and mountaineering guides, rural tourism including homestay
7. Mass communication media (newspapers, radio, television, online news) and national language motion pictures
8. Various consultancy services (management, accounting, engineering, legal consultancy, language training, music training, computer training)
9. Consultancy services with foreign investment exceeding 51%

10. Facilities Provided to Foreign Investors in Nepal

Nepal offers several incentives and facilities to attract foreign investment:

1. Land Ownership: Companies with foreign investment are considered local companies and can own private land
2. Business Visas:
   • Foreign individual investors can obtain business visas for as long as they maintain their investment
   • Representatives of foreign investing companies can obtain business visas
   • Family members of foreign investors or company representatives can obtain business visas
3. Residential Visas: Available for foreign investors and their families who invest USD 1 million or more
4. Banking Facilities: Foreign investment companies and investors can open foreign currency accounts
5. Employment of Foreign Nationals: Companies can hire foreign experts for technical or managerial positions if qualified Nepali citizens are unavailable
6. Repatriation Rights: Foreign investors can repatriate their investment and returns in convertible foreign currency

11. Taxes Applicable to Foreign Investment Companies

Nepal operates a self-assessment tax system. The main taxes applicable to businesses include:

11.1 Income Tax

• General corporate tax rate: 25%
• Manufacturing and hydropower sectors: 20%
• Agriculture, forestry, and mining industries: 20%
• Banking and financial institutions: 30%
• Dividend tax: 5%

11.2 Value Added Tax (VAT)

• Standard rate: 13% on goods and services as prescribed under the VAT Act

11.3 Withholding Tax/Tax Deducted at Source (TDS)

• Royalties: 15%
• Rent: 10%
• Service fees: 15%

12. Repatriation of Investment and Returns from Nepal

Foreign investors are permitted to repatriate:

1. Earnings through dividends or proceeds from the sale of shares
2. Compensation and indemnity
3. Sale proceeds from share transfers
4. Returns of capital during liquidation
5. Technology transfer fees, royalties, and license fees earned through technology transfer
6. Lease rent under lease financing

Before repatriation, investors must ensure that the local subsidiary company has:

• Complied with all applicable laws
• Obtained all necessary approvals
• Paid required taxes
• Fulfilled all obligations

Approval from the Department of Industry (DOI) or Investment Board Nepal (IBN) and Nepal Rastra Bank (NRB) is required for repatriation. Investors can repatriate in the same currency or in another convertible foreign currency.

13. Protection of Foreign Investment in Nepal

Nepal has signed bilateral investment treaties (BITs) with six countries:

• India (not yet in force)
• Finland
• Mauritius (not yet in force)
• United Kingdom
• Germany
• France

These BITs incorporate key principles for investor protection:

1. National Treatment
2. Most Favored Nation (MFN) Treatment
3. Fair and Equitable Treatment

These principles are also recognized in Nepal’s Foreign Investment and Technology Transfer Act (FITTA).

14. Conclusion and Practical Considerations

Establishing a business in Nepal as a foreign investor requires careful navigation of the country’s legal and regulatory framework. While Nepal offers significant opportunities and has made strides in improving its investment climate, foreign investors should conduct thorough due diligence and seek expert legal advice when establishing a business presence.

Axion Partners provides comprehensive legal and business advisory services to foreign investors looking to establish operations in Nepal. Our expertise in Nepalese business law, foreign investment regulations, and cross-border transactions enables us to guide clients through every step of the business establishment process.

Frequently Asked Questions

What are the major forms of Business Vehicles in Nepal?

The major business vehicles in Nepal include:

1. Sole Proprietorship Firms
2. Partnership Firms
3. Limited Liability Companies (Private Limited, Public Limited, and Companies Not Distributing Profits)
4. Local Businesses registered at ward offices

Which is the most common form of Business Vehicle used in Foreign Direct Investment in Nepal?

Limited Liability Company, particularly Private Limited Company, is the most common form of business vehicle used for Foreign Direct Investment in Nepal due to its limited liability protection and separate legal personality.

What are the advantages and drawbacks of limited liability Companies?

Advantages:

• Limited liability protection for shareholders
• Separate legal personality distinct from its owners
• Perpetual succession ensuring business continuity

Drawbacks:

• More expensive to establish and manage
• Complex procedures for establishment, control, and dissolution
• Higher level of legal compliance requirements

What is the permissibility requirement for Foreign Investment in Nepal?

Foreign investment in Nepal must meet two key conditions:

1. The sector must not fall under the “Negative List of Industries” in Annex-1 of FITTA
2. The sector must be classified under the “Positive List” in the Industrial Enterprise Act

What is the minimum capital requirement for establishment of Foreign Investment Company in Nepal?

The minimum capital requirement for establishing a Foreign Investment Company in Nepal is 20 million Nepalese Rupees (approximately USD 150,000).

What are the forms of foreign investment pursuant to FITTA?

According to FITTA, foreign investment can take the following forms:

1. Equity investment in Nepalese companies
2. Investment through loans or loan facilities
3. Investment through technology transfer
4. Investment in leasing equipment
5. Investment in sectors specified by the Government of Nepal

What is the process of registration of foreign direct investment company in Nepal?

The process includes:

1. Obtaining foreign investment approval from DOI or IBN
2. Company registration at the Office of Company Registrar
3. PAN/VAT registration with tax authorities
4. Industry registration with relevant department
5. Local registration at municipality/ward office
6. Additional sectoral approvals as needed

What conditions are required to be fulfilled for the registration of Branch Office in Nepal?

Registration of a branch office requires either:

• Approval from the relevant government authority related to the business sector
• An agreement with a government authority of Nepal for conducting business

What is the process of Registration of Branch Office in Nepal?

The process involves:

1. Obtaining approval from relevant government authority or having an agreement with a government entity
2. Submitting application to the Office of Company Registrar with required documents
3. Completing registration formalities including payment of fees
4. Obtaining necessary permits and licenses based on the business sector

What activities can liaison office carry in Nepal?

A liaison office in Nepal can:

1. Work as a contact point and maintain liaison on behalf of the foreign company
2. Assist individuals to import and use foreign company’s products without taking remuneration
3. Coordinate with Nepalese agents appointed by the foreign company

What is the process of registration of Liaison Office in Nepal?

The process includes:

1. Submitting application to the Office of Company Registrar
2. Providing documentation about the parent company
3. Designating authorized representatives
4. Completing registration formalities and fee payment

How can foreigners franchise foreign brands in Nepal?

The process for franchising foreign brands in Nepal involves:

1. Registration of the trademark (foreign brand) with the Department of Industry
2. Execution of a franchise agreement with a local Nepalese company
3. Obtaining approval of the franchise agreement from the Department of Industry

What are the sectors restricted for Foreign Investment in Nepal?

Restricted sectors include:

1. Primary agricultural production
2. Cottage and small industries
3. Personal service businesses
4. Arms and ammunition manufacturing
5. Real estate (excluding construction) and retail businesses
6. Tourism-related services like travel agencies and guides
7. Mass media and national language motion pictures
8. Various consultancy services
9. Consultancy services with over 51% foreign investment

What can a foreign investor repatriate from Nepal after investment?

Foreign investors can repatriate:

1. Dividends and earnings from investments
2. Compensation and indemnity
3. Proceeds from share transfers
4. Capital returns during liquidation
5. Fees from technology transfer, royalties, and licenses
6. Lease rent under lease financing

How are Branch Offices different from liaison offices?

Branch Offices:

• Can conduct direct business activities
• Operate as a direct extension of the foreign company
• Need specific government approvals or agreements
• Can generate revenue

Liaison Offices:

• Cannot conduct direct business or generate income
• Serve only as contact points for coordination
• Cannot engage in advertising activities
• Limited to facilitation and communication roles

How are Branch Offices different from local subsidiary companies?

Branch Offices:

• Not separate legal entities from the parent company
• Foreign parent company bears direct liability
• Operate under the same name as the parent company
• Limited to the same business activities as the parent company
• No minimum capital requirement

Local Subsidiary Companies:

• Separate legal entities with limited liability
• Minimum capital requirement of 20 million NPR for FDI
• Can operate different business activities as permitted
• Have greater operational flexibility
• Local shareholders can participate in ownership

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This comprehensive guide on establishing business in Nepal as foreign investors is brought to you by Axion Partners, a leading legal and business advisory firm specializing in foreign investment, corporate law, and cross-border transactions in Nepal.