FDI Repatriation Process from Nepal

Foreign Direct Investment (FDI) repatriation refers to the process of transferring returns on investments, profits, dividends, and other funds from a host country (Nepal) back to the investor’s home country. This process is a critical aspect of FDI, as it allows foreign investors to realize the financial benefits of their investments in Nepal. The repatriation process involves various legal, financial, and regulatory considerations that foreign investors must navigate to ensure compliance with Nepali laws and regulations.

Nepal has been actively promoting FDI to stimulate economic growth and development. The country has implemented several policies and legal frameworks to attract foreign investment and facilitate the repatriation of funds. Understanding the FDI repatriation process is essential for foreign investors operating in Nepal to effectively manage their investments and financial returns.

Legal Framework for FDI Repatriation in Nepal

The legal framework governing FDI repatriation in Nepal is primarily based on the following laws and regulations:

1. Foreign Investment and Technology Transfer Act (FITTA) 2075 (2019)
2. Foreign Exchange (Regulation) Act, 2019
3. Income Tax Act, 2058 (2002)
4. Nepal Rastra Bank Act, 2058 (2002)

The FITTA 2075 (2019) is the primary legislation governing foreign investment in Nepal. Section 17 of the FITTA specifically addresses the repatriation of foreign investment. It states that foreign investors are entitled to repatriate the following:

a) The amount received from the sale of shares of foreign investment b) The amount received as profit or dividend from foreign investment c) The amount received as payment of principal and interest on any foreign loan d) The amount received under an agreement for the transfer of technology e) The amount received as compensation for the acquisition of any property f) The amount remaining after the liquidation of industries or companies with foreign investment

The Foreign Exchange (Regulation) Act, 2019 provides the regulatory framework for foreign exchange transactions, including the repatriation of funds. The Nepal Rastra Bank (NRB), as the central bank of Nepal, is responsible for implementing and enforcing foreign exchange regulations.

Types of Repatriable Funds for Foreign Investors

Foreign investors in Nepal can repatriate various types of funds, including:

1. Dividends and profits
2. Capital gains from the sale of shares or assets
3. Royalties and technical fees
4. Interest on loans
5. Liquidation proceeds
6. Compensation for expropriation or nationalization
7. Salaries and earnings of expatriate employees

It is important to note that the repatriation of these funds is subject to compliance with Nepali laws and regulations, including tax obligations and foreign exchange rules.

Documentation Requirements for FDI Repatriation Process

The repatriation process requires foreign investors to submit various documents to the relevant authorities. The specific documentation requirements may vary depending on the type of funds being repatriated. However, some common documents include:

• Application for repatriation approval
• Board resolution authorizing the repatriation
• Audited financial statements
• Tax clearance certificate
• Proof of investment (e.g., share certificates, loan agreements)
• Bank statements showing the source of funds
• Foreign Investment Approval Certificate
• Company registration documents
• PAN (Permanent Account Number) certificate
• Declaration of compliance with applicable laws and regulations

Foreign investors should ensure that all documents are properly prepared and submitted to avoid delays in the repatriation process.

Central Bank Approval Procedure for Fund Repatriation

The Nepal Rastra Bank (NRB) plays a crucial role in the FDI repatriation process. Foreign investors must obtain approval from the NRB before repatriating funds. The general procedure for obtaining NRB approval is as follows:

1. Submit the repatriation application along with required documents to the NRB’s Foreign Exchange Management Department.
2. The NRB reviews the application and supporting documents for compliance with foreign exchange regulations and other applicable laws.
3. If additional information or clarification is required, the NRB may request the investor to provide supplementary documents or explanations.
4. Upon satisfactory review, the NRB issues a letter of approval for the repatriation of funds.
5. The approved amount can then be transferred through authorized banks in Nepal.

The NRB’s approval process aims to ensure that the repatriation complies with Nepal’s foreign exchange regulations and that the funds being repatriated are legitimate and properly documented.

Taxation Aspects of FDI Repatriation from Nepal

Taxation is an important consideration in the FDI repatriation process. Foreign investors must comply with Nepal’s tax laws and regulations when repatriating funds. The Income Tax Act, 2058 (2002) governs the taxation of income in Nepal, including income derived from foreign investments.

Key taxation aspects related to FDI repatriation include:

1. Withholding Tax: Dividends, interest, royalties, and technical service fees are subject to withholding tax at the time of payment or credit. The standard withholding tax rates are:
   • Dividends: 5% for resident companies, 5% for non-resident companies
   • Interest: 15% for non-resident lenders
   • Royalties and technical service fees: 15% for non-residents
2. Capital Gains Tax: Capital gains from the sale of shares or assets are subject to tax. For listed companies, the tax rate is 10% for residents and 25% for non-residents. For unlisted companies, the tax rate is 15% for residents and 25% for non-residents.
3. Double Taxation Avoidance Agreements (DTAAs): Nepal has signed DTAAs with several countries, which may provide for reduced tax rates or exemptions on certain types of income.
4. Tax Clearance Certificate: Foreign investors must obtain a tax clearance certificate from the Inland Revenue Department before repatriating funds.

It is advisable for foreign investors to consult with tax professionals to ensure compliance with Nepal’s tax laws and to optimize their tax position when repatriating funds.

Foreign Exchange Regulations for Repatriation of Funds

The repatriation of funds from Nepal is subject to foreign exchange regulations as stipulated in the Foreign Exchange (Regulation) Act, 2019. Key aspects of these regulations include:

1. Currency Conversion: Funds must be converted into foreign currency through authorized banks in Nepal.
2. Documentation: Investors must provide documentation proving the legitimacy of the funds and compliance with applicable laws.
3. Reporting Requirements: Banks are required to report foreign exchange transactions to the NRB.
4. Repatriation Limits: While there are no specific limits on the amount that can be repatriated, the NRB may impose restrictions based on the country’s foreign exchange reserves and economic conditions.
5. Mode of Transfer: Funds must be transferred through official banking channels using methods such as telegraphic transfer or demand draft.

Compliance with foreign exchange regulations is essential to avoid penalties and ensure smooth repatriation of funds.

Timeframe for Processing FDI Repatriation Requests

The timeframe for processing FDI repatriation requests can vary depending on several factors, including the complexity of the transaction, the completeness of the documentation provided, and the workload of the relevant authorities. Generally, the process may take:

1. NRB Approval: 2-4 weeks
2. Tax Clearance: 1-2 weeks
3. Bank Processing: 1-3 business days

However, these timeframes are approximate and can be longer if there are any issues or if additional information is required. It is advisable for foreign investors to initiate the repatriation process well in advance of their desired transfer date to account for potential delays.

Restrictions and Limitations on FDI Repatriation

While Nepal has liberalized its FDI policies, there are still some restrictions and limitations on FDI repatriation:

1. Sector-specific Restrictions: Certain sectors may have specific restrictions on repatriation, particularly those considered sensitive or strategic.
2. Minimum Investment Period: Some investments may require a minimum holding period before repatriation is allowed.
3. Foreign Exchange Availability: The NRB may impose temporary restrictions on repatriation if there is a shortage of foreign exchange reserves.
4. Compliance with Laws: Repatriation is subject to compliance with all applicable laws, including tax laws and foreign exchange regulations.
5. Government Approvals: In some cases, additional approvals from relevant government agencies may be required for repatriation.

Foreign investors should be aware of these potential restrictions and plan their investments and repatriation strategies accordingly.

Repatriation of Capital Gains and Dividend Income

The repatriation of capital gains and dividend income is a common form of fund transfer for foreign investors in Nepal. The process for repatriating these types of income involves the following steps:

1. Calculation of Capital Gains or Dividend Income: Accurately determine the amount of capital gains or dividend income to be repatriated.
2. Tax Compliance: Ensure that all applicable taxes have been paid or withheld. For dividends, the company declaring the dividend is responsible for withholding tax. For capital gains, the investor must calculate and pay the tax.
3. Documentation: Prepare all necessary documents, including:
   • Board resolution approving the dividend distribution or share sale
   • Audited financial statements
   • Tax payment receipts or withholding tax certificates
   • Share transfer documents (for capital gains)
4. NRB Approval: Submit the repatriation application to the NRB along with all required documents.
5. Bank Transfer: Once NRB approval is obtained, initiate the fund transfer through an authorized bank in Nepal.

It is important to note that the repatriation of capital gains and dividend income is subject to the same regulatory and compliance requirements as other types of fund repatriation.

Process for Repatriation of Royalties and Fees

Repatriation of royalties and technical service fees involves a specific process due to their nature as payments for intellectual property or services. The steps for repatriating royalties and fees include:

1. Agreement Registration: Ensure that the agreement for royalties or technical services is registered with the Department of Industry.
2. Tax Withholding: The Nepali entity paying the royalties or fees must withhold tax at the applicable rate (usually 15% for non-residents, subject to DTAA provisions).
3. Documentation: Prepare the following documents:
   • Copy of the registered agreement
   • Invoice for royalties or fees
   • Withholding tax certificate
   • Proof of services rendered (for technical service fees)
4. NRB Approval: Submit the repatriation application to the NRB with all required documents.
5. Bank Transfer: Upon NRB approval, transfer the funds through an authorized bank.

Compliance with transfer pricing regulations is particularly important for royalties and technical service fees paid to related parties.

Compliance Requirements for Regular Fund Transfers

For foreign investors engaged in regular fund transfers from Nepal, maintaining ongoing compliance is essential. Key compliance requirements include:

1. Maintaining Proper Records: Keep detailed records of all financial transactions, investments, and repatriations.
2. Regular Audits: Conduct regular audits of financial statements and ensure compliance with Nepali accounting standards.
3. Tax Filings: Submit timely and accurate tax returns and other required filings to the Inland Revenue Department.
4. Foreign Investment Reporting: Provide periodic reports on foreign investment to relevant authorities as required by law.
5. Exchange Control Compliance: Adhere to all foreign exchange regulations and reporting requirements set by the NRB.
6. Corporate Governance: Maintain good corporate governance practices and comply with all applicable corporate laws.
7. Sector-specific Compliance: Adhere to any sector-specific regulations or reporting requirements.

Regular compliance not only facilitates smooth fund transfers but also helps maintain a good standing with Nepali authorities.

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Dispute Resolution Mechanisms for Repatriation Issues

In case of disputes or issues related to FDI repatriation, Nepal provides various dispute resolution mechanisms:

1. Administrative Appeals: Investors can appeal decisions of regulatory bodies through administrative channels.
2. Mediation and Conciliation: The Investment Board Nepal offers mediation services for investment-related disputes.
3. Arbitration: The Arbitration Act, 2055 (1999) provides a framework for commercial arbitration in Nepal.
4. Court System: Disputes can be resolved through Nepal’s court system, with the possibility of appeals up to the Supreme Court.
5. International Arbitration: Some bilateral investment treaties allow for international arbitration of investment disputes.

Foreign investors should carefully consider the dispute resolution provisions in their investment agreements and be aware of the available mechanisms for resolving repatriation-related issues.

Impact of Bilateral Investment Treaties on Repatriation

Nepal has signed Bilateral Investment Treaties (BITs) with several countries, which can have a significant impact on the repatriation process. Key aspects of BITs related to repatriation include:

1. Guarantee of Repatriation: BITs typically include provisions guaranteeing the right to repatriate investment returns and other funds.
2. Non-Discrimination: BITs often ensure that foreign investors are treated no less favorably than domestic investors in matters of repatriation.
3. Protection Against Expropriation: BITs provide protection against expropriation and ensure prompt, adequate, and effective compensation.
4. Dispute Resolution: Many BITs offer international arbitration as a dispute resolution mechanism for investment-related issues, including repatriation.

Foreign investors should review the provisions of any applicable BIT when planning their investment and repatriation strategies in Nepal.

Recent Policy Changes Affecting FDI Repatriation

Nepal has been continuously updating its policies to create a more favorable environment for foreign investment. Recent policy changes affecting FDI repatriation include:

1. Streamlined Approval Process: The government has worked to simplify and expedite the approval process for FDI and repatriation.
2. Online Systems: Introduction of online systems for various regulatory filings and approvals, including those related to repatriation.
3. Expanded Repatriation Rights: The FITTA 2075 (2019) expanded the types of funds that can be repatriated by foreign investors.
4. Increased Investment Thresholds: Changes in minimum investment thresholds for various sectors, which can affect repatriation strategies.
5. Tax Reforms: Ongoing tax reforms aimed at simplifying the tax system and enhancing compliance.

Foreign investors should stay informed about these policy changes and their potential impact on repatriation processes.

FAQs:

1. What types of funds can be repatriated by foreign investors? Foreign investors can repatriate dividends, profits, capital gains, royalties, technical fees, interest on loans, liquidation proceeds, and compensation for expropriation or nationalization.
2. Is there a limit on the amount that can be repatriated? There is no specific legal limit on the amount that can be repatriated. However, repatriation is subject to NRB approval and may be affected by the country’s foreign exchange reserves.
3. How long does the repatriation approval process typically take? The approval process typically takes 3-6 weeks, including NRB approval and tax clearance. However, this can vary depending on the complexity of the transaction and the completeness of documentation.
4. Are there any sectors with special repatriation rules? Some sectors considered sensitive or strategic may have specific repatriation rules. It’s advisable to check sector-specific regulations before investing.
5. What documents are required for repatriation of dividends? Key documents include board resolution, audited financial statements, tax clearance certificate, and proof of investment. The exact requirements may vary based on the specific circumstances.
6. Can profits be reinvested instead of repatriated? Yes, foreign investors have the option to reinvest their profits in Nepal instead of repatriating them. This may be subject to certain approvals depending on the nature and sector of reinvestment.
7. Are there any tax implications for repatriating funds? Yes, repatriated funds may be subject to various taxes, including withholding tax on dividends, interest, and royalties, and capital gains tax on the sale of assets or shares. The specific tax implications depend on the type of income being repatriated and any applicable double taxation agreements.