Investment Process from India to Nepal

Nepal offers numerous investment opportunities for Indian investors across various sectors. The country’s strategic location between India and China, coupled with its rich natural resources and growing economy, makes it an attractive destination for foreign direct investment (FDI). Indian investors can benefit from Nepal’s liberal economic policies, low labor costs, and potential for market expansion.

Key investment opportunities for Indian investors in Nepal include:

• Infrastructure development
• Hydropower and renewable energy
• Tourism and hospitality
• Information technology and business process outsourcing
• Agriculture and food processing
• Manufacturing and industrial production
• Financial services and banking

The Government of Nepal has implemented various policies to attract foreign investment, including Indian investors, to boost economic growth and development.

Legal Framework Governing Indian Investments in Nepal

The legal framework for Indian investments in Nepal is primarily governed by the following laws and regulations:

1. Foreign Investment and Technology Transfer Act (FITTA) 2019
2. Industrial Enterprises Act 2020
3. Companies Act 2006 (with amendments)
4. Foreign Exchange (Regulation) Act 1962
5. Labor Act 2017
6. Income Tax Act 2002

The FITTA 2019 is the primary legislation regulating foreign investment in Nepal. It provides guidelines for foreign investment approval, technology transfer, and repatriation of profits. The Act aims to create a favorable investment climate and protect the interests of foreign investors, including those from India.

Sectors Open for Foreign Direct Investment from India

Nepal has opened various sectors for foreign direct investment, including investments from India. The sectors open for FDI include:

• Agriculture and forestry
• Manufacturing industries
• Energy (hydropower, solar, wind)
• Tourism
• Mining and mineral exploration
• Information technology and business process outsourcing
• Health and education
• Construction and infrastructure development
• Financial services

However, some sectors remain restricted or prohibited for foreign investment. These include:

• Poultry farming
• Fisheries
• Primary agriculture activities
• Real estate trading (excluding construction)
• Multilevel marketing
• Arms and ammunition industries

Indian investors should consult the latest negative list published by the Government of Nepal before making investment decisions.

Investment Approval Process for Indian Companies

The investment approval process for Indian companies in Nepal involves several steps:

1. Obtain approval from the Investment Board of Nepal (IBN) or the Department of Industry (DOI), depending on the investment amount
2. Register the company with the Office of the Company Registrar
3. Obtain necessary licenses and permits from relevant government agencies
4. Open a bank account in Nepal
5. Transfer the investment amount through proper banking channels

For investments exceeding NPR 6 billion (approximately USD 50 million), approval must be obtained from the Investment Board of Nepal. For investments below this threshold, approval can be sought from the Department of Industry.

Company Registration Procedures for Indian Investors

Indian investors must follow these steps to register a company in Nepal:

1. Choose a unique company name and verify its availability
2. Prepare the required documents, including:
   • Memorandum of Association
   • Articles of Association
   • Resolution of the parent company (if applicable)
   • Passport copies of directors and shareholders
3. Submit the documents to the Office of the Company Registrar
4. Pay the registration fees
5. Obtain the Certificate of Incorporation
6. Register for VAT and PAN (Permanent Account Number) with the Inland Revenue Department
7. Register with the Social Security Fund

The entire process typically takes 2-4 weeks, depending on the complexity of the company structure and the completeness of the submitted documents.

Taxation Aspects of Indian Investments in Nepal

Indian investments in Nepal are subject to various taxes, including:

1. Corporate Income Tax: The standard rate is 25% for most businesses. However, certain industries may have different rates or tax incentives.
2. Value Added Tax (VAT): The standard VAT rate is 13%.
3. Withholding Tax: Applicable on dividends, interest, and royalties paid to non-residents. The rate is typically 5% for dividends and 15% for interest and royalties, subject to the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and Nepal.
4. Capital Gains Tax: Taxed as regular income for companies.
5. Social Security Tax: Employers must contribute 20% of an employee’s basic salary to the Social Security Fund.

Indian investors should consult with tax professionals to understand the specific tax implications of their investments in Nepal.

Repatriation of Profits and Capital to India

The Foreign Investment and Technology Transfer Act 2019 allows Indian investors to repatriate their profits and capital from Nepal. The following can be repatriated:

• Dividends from investments
• Proceeds from the sale of shares
• Payment of principal and interest on foreign loans
• Technology transfer fees, royalties, or management fees
• Proceeds from the liquidation of the company

To repatriate funds, investors must obtain approval from the Nepal Rastra Bank (the central bank of Nepal) and provide necessary documentation, including tax clearance certificates.

Land Acquisition Rules for Indian-Owned Businesses

Indian-owned businesses in Nepal can acquire land for industrial or commercial purposes. The key points regarding land acquisition are:

1. Foreign companies can lease land for up to 50 years, renewable for another 25 years.
2. Land acquisition for industrial purposes is facilitated through the Industrial Area Management Limited (IAML) or Special Economic Zones (SEZs).
3. For other purposes, land can be leased from private owners or the government.
4. Foreign individuals cannot own land in Nepal, but companies registered in Nepal with foreign investment can own land for business purposes.

Indian investors should be aware of local zoning laws and environmental regulations when acquiring land for their businesses.

Labor Laws Applicable to Indian Investments

Indian investments in Nepal must comply with the Labor Act 2017, which governs employment relationships. Key aspects of Nepal’s labor laws include:

1. Working hours: 8 hours per day, 48 hours per week
2. Overtime: Maximum 4 hours per day, paid at 1.5 times the regular rate
3. Minimum wage: Set by the government and revised periodically
4. Leave entitlements: Annual leave, sick leave, public holidays, and maternity leave
5. Social security contributions: Employers must contribute to the Social Security Fund
6. Termination: Specific procedures for termination and layoffs
7. Foreign workers: Work permits required for non-Nepali citizens

Indian companies must ensure compliance with these labor laws to avoid legal issues and maintain good employee relations.

Bilateral Investment Treaties between India and Nepal

India and Nepal have signed a Bilateral Investment Promotion and Protection Agreement (BIPPA) in 2011. This agreement aims to promote and protect investments between the two countries. Key features of the BIPPA include:

1. Most Favored Nation (MFN) treatment for investors
2. Protection against expropriation
3. Free transfer of funds related to investments
4. Dispute resolution mechanisms
5. Subrogation rights

The BIPPA provides a legal framework for protecting Indian investments in Nepal and vice versa, enhancing investor confidence and promoting bilateral economic cooperation.

Foreign Exchange Regulations for Indian Investors

Indian investors must comply with Nepal’s foreign exchange regulations, primarily governed by the Foreign Exchange (Regulation) Act 1962. Key points include:

1. All foreign currency transactions must be conducted through authorized banks and financial institutions.
2. Investors must obtain approval from the Nepal Rastra Bank for repatriation of funds.
3. Foreign currency accounts can be opened with prior approval from the central bank.
4. Loans in foreign currency require approval from the Nepal Rastra Bank.
5. Foreign investors can maintain foreign currency accounts in Nepali banks for business purposes.

Compliance with these regulations is essential to avoid legal complications and ensure smooth financial operations.

Read More

1. Employment and Labor Lawyer in Nepal
2. Board of Directors in Company
3. Arbitration Act 1999/2055

Dispute Resolution Mechanisms for Indian Investments

Indian investors in Nepal have access to various dispute resolution mechanisms:

1. Nepali Courts: Disputes can be resolved through the regular court system in Nepal.
2. Arbitration: The Arbitration Act 1999 provides for domestic and international arbitration.
3. Mediation: The Mediation Act 2011 allows for mediation as an alternative dispute resolution method.
4. Investment Board of Nepal: The IBN can facilitate dispute resolution for large-scale investments.
5. Bilateral Investment Treaty: The BIPPA between India and Nepal provides for international arbitration in case of investment disputes.

Indian investors should include appropriate dispute resolution clauses in their contracts and agreements to protect their interests.

Incentives and Benefits for Indian Investors

Nepal offers various incentives and benefits to attract foreign investors, including those from India:

1. Tax holidays and exemptions for specific industries and regions
2. Duty-free import of machinery and equipment for certain sectors
3. Simplified licensing and approval procedures
4. Protection against nationalization and expropriation
5. Special Economic Zones (SEZs) with additional benefits
6. One-stop service center for large investments
7. Bilateral tax treaties to avoid double taxation

Indian investors should explore these incentives and benefits to maximize the potential returns on their investments in Nepal.

Compliance Requirements for Indian-Owned Companies

Indian-owned companies operating in Nepal must adhere to various compliance requirements:

1. Annual filings with the Office of the Company Registrar
2. Tax filings and payments to the Inland Revenue Department
3. Social Security Fund contributions
4. Compliance with labor laws and regulations
5. Environmental compliance for applicable industries
6. Sector-specific regulatory requirements
7. Foreign investment reporting to the Nepal Rastra Bank

Maintaining proper compliance is crucial to avoid penalties and ensure smooth business operations in Nepal.

Recent Policy Changes Affecting Indian Investments

The Government of Nepal has introduced several policy changes to improve the investment climate:

1. Implementation of the Foreign Investment and Technology Transfer Act 2019
2. Introduction of the Public-Private Partnership and Investment Act 2019
3. Amendments to the Special Economic Zone Act
4. Streamlining of the company registration process
5. Digitalization of government services for investors
6. Revision of the negative list for foreign investment

Indian investors should stay informed about these policy changes and their potential impact on investment opportunities and regulations.

FAQs

1. Are there any restrictions on Indian investments in Nepal? Yes, certain sectors are restricted or prohibited for foreign investment, including Indian investments. These include primary agriculture, real estate trading, and multilevel marketing.
2. What is the minimum capital requirement for Indian investors? The minimum capital requirement varies depending on the sector and type of business. For most industries, it is NPR 50 million (approximately USD 420,000).
3. Can Indian companies own 100% equity in Nepalese businesses? Yes, 100% foreign ownership is allowed in most sectors, except for those on the negative list or with specific restrictions.
4. How are profits taxed for Indian investments in Nepal? Corporate profits are generally taxed at 25%. Dividend repatriation is subject to a 5% withholding tax, as per the DTAA between India and Nepal.
5. What dispute resolution options are available for Indian investors? Indian investors can use Nepali courts, arbitration, mediation, or international arbitration as provided in the Bilateral Investment Treaty.
6. Are there any special incentives for Indian investors in Nepal? While there are no specific incentives for Indian investors, Nepal offers various tax holidays, duty exemptions, and other benefits for foreign investors in general.
7. How long does the investment approval process typically take? The approval process can take 2-4 weeks for straightforward cases, but may extend to several months for large or complex investments requiring additional clearances.