Foreign Direct Investment (FDI) in Nepal operates under a structured legal framework that defines permissible sectors, investment procedures, and regulatory requirements. The Foreign Investment and Technology Transfer Act, 2019 (FITTA 2019) serves as the primary legislation governing foreign investment in Nepal, replacing the earlier 1992 Act.
Legal Framework for Foreign Direct Investment in Nepal
The Foreign Investment and Technology Transfer Act, 2019 establishes the legal foundation for foreign investment in Nepal. This Act came into effect on March 14, 2020, and provides comprehensive guidelines for foreign investors seeking to establish business operations in Nepal.
The Industrial Enterprises Act, 2020 complements FITTA 2019 by regulating industrial establishments and manufacturing activities. Additionally, the Companies Act, 2006 governs the incorporation and operation of companies with foreign investment. The Foreign Exchange (Regulation) Act, 1962 regulates foreign currency transactions and repatriation of profits.
Sectors Open for Foreign Direct Investment
Nepal permits foreign investment in most sectors of the economy, with specific restrictions in certain areas. The government maintains a negative list that identifies sectors where foreign investment is either prohibited or restricted.
Permitted Sectors for 100% Foreign Investment
Foreign investors can establish wholly-owned enterprises in the following sectors:
SectorInvestment AllowedMinimum InvestmentManufacturing Industries100% FDINPR 50 millionTourism and Hospitality100% FDINPR 50 millionInformation Technology100% FDINPR 50 millionEnergy and Power Generation100% FDINPR 50 millionAgriculture and Forestry100% FDINPR 50 millionHealthcare Services100% FDINPR 50 millionEducation Services100% FDINPR 50 millionInfrastructure Development100% FDINPR 50 million
Restricted Sectors for Foreign Investment
Certain sectors require Nepali partnership or have equity limitations:
SectorMaximum Foreign EquityRequirementCottage Industries0%Prohibited for foreignersPersonal Service Business0%Reserved for Nepali nationalsArms and Ammunition0%Prohibited for foreignersRetail Business (below threshold)0%Minimum NPR 100 million requiredDomestic Courier Services49%Majority Nepali ownership requiredMass Media49%Majority Nepali ownership required
Minimum Investment Requirements for Foreign Investors
The Foreign Investment and Technology Transfer Act, 2019 establishes minimum capital requirements for foreign investment based on the nature of business operations.
Standard Minimum Investment Thresholds
For foreign investors establishing new enterprises:
- The minimum foreign investment requirement stands at NPR 50 million (approximately USD 375,000) for most sectors.
- Foreign investors must bring this capital through banking channels within the timeframe specified in the investment approval.
- The investment can be in the form of cash, capital goods, or technology transfer as permitted under FITTA 2019.
Special Investment Thresholds
For specific business categories:
- Consulting services require a minimum foreign investment of NPR 5 million.
- Export-oriented industries may qualify for reduced minimum investment requirements under specific conditions.
- Technology-based startups may receive consideration for lower thresholds subject to Department of Industry approval.
Registration and Approval Process for Foreign Investment
Foreign investors must complete a structured registration process with relevant government authorities to establish business operations in Nepal.
Step 1: Company Registration
Foreign investors must first register their company with the Office of Company Registrar under the Companies Act, 2006. The registration requires submission of constitutional documents, shareholder information, and capital structure details.
Step 2: Foreign Investment Approval
Application to Department of Industry:
- Foreign investors must submit an application to the Department of Industry for foreign investment approval.
- The application must include detailed project information, capital structure, and business plan.
- The Department of Industry processes applications within 7 working days for automatic approval sectors.
- Sectors requiring special approval may take up to 30 working days for processing.
Step 3: Industrial Registration
Obtaining Industrial Enterprise Registration:
- After receiving foreign investment approval, investors must obtain industrial registration from the Department of Industry.
- The Industrial Enterprises Act, 2020 mandates this registration for manufacturing and industrial activities.
- Service sector businesses may require different sectoral registrations based on their business nature.
Step 4: Tax Registration
Registration with Inland Revenue Department:
- All foreign-invested companies must register with the Inland Revenue Department for tax purposes.
- The company receives a Permanent Account Number (PAN) for tax compliance.
- Value Added Tax (VAT) registration is mandatory for businesses exceeding the threshold turnover.
Step 5: Additional Sectoral Approvals
Certain sectors require additional licenses and approvals from respective regulatory bodies:
- Tourism businesses must obtain licenses from the Department of Tourism.
- Healthcare facilities require approval from the Department of Health Services.
- Educational institutions need permission from the Ministry of Education.
- Financial services require licensing from Nepal Rastra Bank or Insurance Board.
Forms of Business Organization for Foreign Investors
Foreign investors can establish business presence in Nepal through various organizational structures permitted under Nepali law.
Private Limited Company
The private limited company represents the most common structure for foreign investment in Nepal. This structure provides limited liability protection to shareholders and allows for flexible capital structure. The Companies Act, 2006 requires a minimum of two shareholders and two directors for private limited companies.
Public Limited Company
Public limited companies can issue shares to the general public and list on the Nepal Stock Exchange. This structure suits large-scale foreign investments seeking to raise capital from Nepali markets. The minimum paid-up capital requirement is NPR 10 million for public companies.
Joint Venture Company
Foreign investors can establish joint ventures with Nepali partners, combining foreign capital and technology with local market knowledge. Joint ventures must comply with both FITTA 2019 and the Companies Act, 2006 regarding capital contribution and management structure.
Branch Office
Foreign companies can establish branch offices in Nepal for specific purposes permitted under FITTA 2019. Branch offices cannot engage in manufacturing or trading activities but can undertake liaison work, project implementation, and service delivery.
Representative Office
Representative offices serve as liaison offices for foreign companies without engaging in commercial activities. These offices can conduct market research, facilitate business contacts, and promote parent company interests without generating revenue in Nepal.
Investment Incentives and Facilities
The Government of Nepal provides various incentives to attract foreign direct investment in priority sectors and regions.
Tax Incentives
Income Tax Exemptions and Reductions:
Sector/RegionTax BenefitDurationSpecial Economic Zones100% income tax exemption10 yearsExport-oriented industries50% income tax exemption5 yearsRemote area industries50% income tax exemption7 yearsHydropower projects50% income tax exemption10 years
Customs Duty Exemptions
Foreign investors receive customs duty exemptions on the import of machinery, equipment, and raw materials for approved projects. The Industrial Enterprises Act, 2020 provides for duty-free import of capital goods for manufacturing industries during the project establishment phase.
Repatriation Rights
FITTA 2019 guarantees foreign investors the right to repatriate the following:
- Foreign investors can repatriate the amount received from the sale of shares or business closure after paying applicable taxes.
- Investors have the right to repatriate profits and dividends earned from their investment after tax payment.
- Foreign employees can repatriate their salaries and benefits as per foreign exchange regulations.
- Technology transfer fees and royalties can be repatriated subject to the terms approved in the technology transfer agreement.
Prohibited and Restricted Business Activities
The Foreign Investment and Technology Transfer Act, 2019 maintains a negative list of business activities where foreign investment faces restrictions or complete prohibition.
Completely Prohibited Sectors
Business activities closed to foreign investment:
- Cottage industries operating with traditional methods and limited capital remain reserved exclusively for Nepali citizens.
- Personal service businesses including beauty parlors, driving training, and tailoring services cannot accept foreign investment.
- Arms and ammunition manufacturing and trading are prohibited for foreign investors under national security considerations.
- Radioactive material production and handling remain restricted to government entities only.
Sectors with Equity Limitations
Business activities with foreign ownership caps:
- Mass communication and journalism businesses limit foreign equity to 49% to protect national media sovereignty.
- Domestic courier services restrict foreign ownership to minority stakes to support local service providers.
- Retail trading businesses require minimum investment of NPR 100 million for foreign participation.
- Film production and distribution companies face foreign equity limitations under cultural protection policies.
Technology Transfer Provisions
The Foreign Investment and Technology Transfer Act, 2019 establishes a comprehensive framework for technology transfer agreements between foreign and Nepali entities.
Technology Transfer Agreement Requirements
Foreign investors seeking to transfer technology to Nepal must obtain approval from the Department of Industry. The technology transfer agreement must specify the nature of technology, transfer terms, payment structure, and duration of the agreement.
Mandatory provisions in technology transfer agreements:
- The agreement must clearly define the technology being transferred and its application in Nepal.
- Payment terms for technology transfer must align with international market rates and practices.
- The duration of technology transfer agreements cannot exceed seven years without renewal approval.
- Restrictions on export of products manufactured using transferred technology require specific justification.
Royalty and Fee Regulations
Technology transfer fees and royalties must receive prior approval from the Department of Industry. The payment of royalties and technical fees requires Nepal Rastra Bank approval for foreign currency remittance. The rates must be commercially reasonable and justified based on the technology value.
Foreign Exchange Regulations
The Foreign Exchange (Regulation) Act, 1962 and regulations issued by Nepal Rastra Bank govern foreign currency transactions related to foreign investment.
Capital Inflow Requirements
Foreign investors must bring investment capital through banking channels with proper documentation. Nepal Rastra Bank requires foreign investors to submit evidence of capital inflow for foreign investment approval validation. The capital must be converted to Nepali Rupees through authorized banks at prevailing exchange rates.
Profit Repatriation Procedures
Process for repatriating profits and dividends:
- The company must submit an application to Nepal Rastra Bank through an authorized commercial bank.
- The application must include audited financial statements showing profit calculation and tax payment evidence.
- Nepal Rastra Bank verifies tax clearance certificates from the Inland Revenue Department before approving repatriation.
- Approved amounts are remitted through banking channels at the prevailing exchange rate.
Employment and Work Permits for Foreign Nationals
Foreign investors and their employees require proper work authorization to work in Nepal under the Foreign Employment Act, 2007 and Immigration Act, 1992.
Work Visa Requirements
Foreign nationals employed by foreign-invested companies must obtain work visas from the Department of Immigration. The employer company must demonstrate that the foreign employee possesses specialized skills not readily available in Nepal.
Documents required for work visa application:
- The applicant must submit a valid passport with minimum six months validity.
- The employer must provide a letter of employment specifying position, salary, and contract duration.
- The company must submit proof of foreign investment approval from the Department of Industry.
- Educational certificates and professional qualifications require authentication from respective authorities.
Labor Quota Regulations
The Foreign Employment Regulations, 2008 limit the number of foreign employees in foreign-invested companies. Manufacturing industries can employ foreign nationals up to 10% of total workforce. Service sector companies face similar restrictions on foreign employee ratios to promote local employment.
Dispute Resolution Mechanisms
FITTA 2019 provides mechanisms for resolving disputes between foreign investors and the Government of Nepal or local partners.
Domestic Dispute Resolution
Foreign investors can pursue dispute resolution through Nepali courts under the jurisdiction established by law. The Act on Arbitration, 1999 provides for domestic arbitration of commercial disputes between parties. Mediation services are available through the Mediation Council established under the Mediation Act, 2011.
International Arbitration
Foreign investors can opt for international arbitration as specified in their investment agreements. Nepal is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). Arbitration can be conducted under rules of international arbitration institutions as agreed between parties.
Investment Protection Treaties
Nepal has signed Bilateral Investment Promotion and Protection Agreements (BIPAs) with multiple countries. These treaties provide additional protection to foreign investors from signatory countries. The agreements typically include provisions for fair and equitable treatment, protection against expropriation, and investor-state dispute settlement mechanisms.
Intellectual Property Rights Protection
Nepal provides legal protection for intellectual property rights under various laws including the Patent, Design and Trademark Act, 1965 and Copyright Act, 2002.
Patent and Trademark Protection
Foreign investors can register patents and trademarks with the Department of Industry. Patent protection extends for 15 years from the date of registration. Trademark registration provides protection for 10 years with renewal options.
Copyright Protection
The Copyright Act, 2002 automatically protects original creative works without registration requirements. Foreign investors’ copyrighted materials receive protection equivalent to works of Nepali nationals. Nepal is a member of the World Intellectual Property Organization (WIPO) and adheres to international copyright conventions.
Special Economic Zones and Industrial Estates
The Government of Nepal has established Special Economic Zones (SEZs) and industrial estates to attract foreign investment with enhanced facilities and incentives.
Special Economic Zone Benefits
Incentives available in Special Economic Zones:
- Industries established in SEZs receive 100% income tax exemption for the first 10 years of operation.
- SEZ enterprises enjoy duty-free import of raw materials, machinery, and equipment for production purposes.
- Simplified customs procedures and one-window service facilities expedite business operations in SEZs.
- Infrastructure facilities including power, water, and telecommunications are provided at competitive rates.
Industrial Estate Facilities
Industrial estates developed by the government provide ready infrastructure for manufacturing activities. Foreign investors can lease land in industrial estates at concessional rates. The estates offer shared facilities including effluent treatment plants, power substations, and security services.
Reporting and Compliance Requirements
Foreign-invested companies must comply with ongoing reporting obligations to various government authorities.
Annual Reporting to Department of Industry
Companies with foreign investment must submit annual reports to the Department of Industry. The report must include financial statements, production data, employment information, and foreign exchange transactions. The deadline for submission is within six months after the end of each fiscal year.
Tax Compliance Obligations
Regular tax filings required:
- Companies must file annual income tax returns with the Inland Revenue Department by the statutory deadline.
- VAT-registered businesses must submit monthly or quarterly VAT returns depending on turnover.
- Withholding tax on payments to non-residents requires monthly reporting and remittance.
- Transfer pricing documentation is mandatory for transactions with associated enterprises exceeding specified thresholds.
Nepal Rastra Bank Reporting
Foreign-invested companies must report foreign currency transactions to Nepal Rastra Bank. Annual foreign investment status reports must be submitted showing capital inflow, profit generation, and repatriation details. Any changes in foreign shareholding require prior approval and reporting to Nepal Rastra Bank.
Recent Policy Developments
The Government of Nepal continues to refine foreign investment policies to attract more FDI and improve the business environment.
Investment Summit Commitments
Nepal has hosted investment summits to showcase investment opportunities and attract foreign capital. The government has committed to streamlining approval processes and reducing bureaucratic delays. New sectors including renewable energy, information technology, and tourism infrastructure receive priority focus.
Amendments to Investment Laws
The government periodically reviews and amends investment-related legislation to address emerging challenges. Recent amendments to FITTA 2019 have clarified certain provisions regarding minimum investment and sectoral restrictions. The Industrial Enterprises Act, 2020 introduced simplified procedures for industrial registration and licensing.
Frequently Asked Questions
What is the minimum investment required for foreign investors in Nepal?
The minimum foreign investment requirement is NPR 50 million (approximately USD 375,000) for most sectors under FITTA 2019. Consulting services require a minimum of NPR 5 million. Export-oriented and technology-based ventures may qualify for reduced thresholds.
Can foreign investors own 100% equity in Nepali companies?
Foreign investors can own 100% equity in most sectors except those on the negative list. Restricted sectors like mass media and domestic courier services limit foreign ownership to 49%. Cottage industries and personal service businesses prohibit foreign investment entirely.
How long does the foreign investment approval process take?
The Department of Industry processes foreign investment applications within 7 working days for automatic approval sectors. Sectors requiring special consideration may take up to 30 working days. Complete documentation submission expedites the approval process significantly.
What are the tax rates for foreign-invested companies in Nepal?
The standard corporate income tax rate is 25% for most industries. Special Economic Zone enterprises receive 100% tax exemption for 10 years. Export-oriented industries and remote area establishments qualify for 50% tax exemption for specified periods.
Can foreign investors repatriate profits from Nepal?
FITTA 2019 guarantees foreign investors the right to repatriate profits and dividends after paying applicable taxes. Repatriation requires Nepal Rastra Bank approval through authorized commercial banks. Tax clearance certificates from the Inland Revenue Department are mandatory for repatriation.
Which sectors are completely prohibited for foreign investment?
Cottage industries, personal service businesses, arms and ammunition manufacturing, and radioactive material handling are completely prohibited for foreign investment. These restrictions protect national security interests and reserve certain sectors for Nepali citizens.
Do foreign investors need local partners in Nepal?
Foreign investors do not need local partners for most sectors and can establish wholly-owned subsidiaries. However, restricted sectors like mass media require majority Nepali ownership. Joint ventures with local partners can provide market knowledge advantages.
What protection does Nepal offer to foreign investors?
FITTA 2019 provides legal protection against nationalization and expropriation without fair compensation. Nepal has signed Bilateral Investment Protection Agreements with multiple countries. Foreign investors can access international arbitration for dispute resolution.
Are there any sector-specific regulations for foreign investment?
Yes, sectors like banking, insurance, telecommunications, and aviation have specific regulatory requirements. Foreign investors must obtain licenses from respective regulatory bodies including Nepal Rastra Bank, Insurance Board, and Nepal Telecommunications Authority.
How can foreign investors bring capital into Nepal?
Foreign investors must bring capital through banking channels with proper documentation. Nepal Rastra Bank requires evidence of foreign currency inflow for investment approval validation. Capital can be in cash, capital goods, or technology transfer as permitted.
