Foreign franchises seeking to establish operations in Nepal must navigate a specific legal framework centered around Technology Transfer Agreements (TTA). The Department of Industry (DOI) oversees this process, ensuring compliance with Nepal’s foreign investment regulations. This article outlines the comprehensive procedure for registering a foreign franchise in Nepal, including the necessary documentation, legal requirements, and ongoing compliance obligations.
Understanding Foreign Franchises in Nepal
A franchise is a business arrangement where the franchisor grants the franchisee the right to use its business model, trademarks, and operational systems in exchange for fees. In Nepal, foreign franchises are regulated under the Foreign Investment and Technology Transfer Act, 2075 (2019) and its regulations. This legal framework requires foreign franchises to operate through a Technology Transfer Agreement, which must be approved by the Department of Industry.
The Act defines technology transfer as the transfer of technology through franchise agreements, trademark licensing, technical know-how, or other similar arrangements. Foreign franchises must comply with these provisions to legally operate in Nepal, ensuring that the technology transfer benefits the local economy while protecting intellectual property rights.
Legal Framework for Foreign Franchises
The registration of foreign franchises in Nepal is governed by several key pieces of legislation:
- Foreign Investment and Technology Transfer Act, 2075 (2019)
- Foreign Investment and Technology Transfer Regulation, 2077 (2021)
- Industrial Enterprises Act, 2076 (2020)
- Companies Act, 2063 (2006)
The Foreign Investment and Technology Transfer Act specifically addresses franchise arrangements under Section 2(j), which defines technology transfer to include franchise agreements. Section 17 of the Act requires all technology transfer agreements to be approved by the Department of Industry before implementation.
Additionally, the Industrial Enterprises Act provides the framework for establishing and operating business enterprises in Nepal, while the Companies Act governs the incorporation and operation of companies, including franchisees.
Key Requirements for Franchise Registration
Before initiating the registration process, foreign franchisors must ensure they meet several prerequisites:
- The franchise business must not be in sectors prohibited for foreign investment as per the negative list in the Foreign Investment and Technology Transfer Act.
- The franchisor must have a legally registered business in their home country.
- The franchise agreement must comply with Nepali laws regarding intellectual property rights, competition, and consumer protection.
- The agreement must specify the duration, territory, fees, and technical support arrangements.
- The technology or business model being transferred must be beneficial to Nepal’s economy.
The Department of Industry evaluates these factors when reviewing franchise applications. According to Section 18 of the Foreign Investment and Technology Transfer Act, the DOI must make a decision within 15 days of receiving a complete application.
Preparing the Technology Transfer Agreement (TTA)
The Technology Transfer Agreement is the cornerstone of establishing a foreign franchise in Nepal. This legal document outlines the relationship between the foreign franchisor and the Nepali franchisee. When preparing a TTA, consider the following elements:
- Detailed description of the technology, know-how, or business model being transferred
- Scope of intellectual property rights being licensed (trademarks, patents, copyrights)
- Territory and exclusivity provisions
- Duration of the agreement (typically 5-7 years, renewable)
- Royalty structure and payment terms (subject to Nepal Rastra Bank regulations)
- Training and technical support provisions
- Quality control mechanisms
- Termination conditions and dispute resolution procedures
- Compliance with Nepali laws and regulations
The TTA must be drafted in accordance with Section 17 of the Foreign Investment and Technology Transfer Act, which requires that technology transfer arrangements be fair and equitable to both parties. The agreement should be reviewed by legal experts familiar with both Nepali law and international franchise practices.
Filing Application at DOI
Once the Technology Transfer Agreement is prepared, the next step is filing an application with the Department of Industry. This process involves:
- Complete the prescribed application form for technology transfer approval
- Submit the signed Technology Transfer Agreement
- Provide a copy of the franchisor’s business registration certificate from their home country
- Submit the franchisor’s audited financial statements for the past three years
- Include detailed project proposal outlining the business plan for Nepal
- Provide proof of trademark registration or application in Nepal
- Submit a letter of authorization if the application is filed through a representative
According to Section 18 of the Foreign Investment and Technology Transfer Act, the application fee is NPR 20,000 for technology transfer applications. The DOI typically processes complete applications within 15 working days, though complex cases may require additional time for review and clarification.
Registration at DOI
After the application is submitted, the DOI conducts a thorough review to ensure compliance with Nepali laws and regulations. The registration process includes:
- Initial screening of the application and documents for completeness
- Technical evaluation of the franchise concept and technology transfer components
- Assessment of royalty rates and payment terms for compliance with foreign exchange regulations
- Verification of intellectual property rights
- Evaluation of the economic benefits to Nepal
- Issuance of approval letter or request for additional information
Upon approval, the DOI issues a Technology Transfer Registration Certificate, which is valid for the duration specified in the agreement (typically 5-7 years). This certificate serves as official recognition of the franchise arrangement and is required for subsequent business operations, including remittance of royalties and fees abroad.
Section 19 of the Foreign Investment and Technology Transfer Act stipulates that the DOI may impose conditions on the approval to ensure the arrangement benefits the Nepali economy and complies with national policies.
Incorporation of Franchisee in Nepali Company
After obtaining DOI approval for the Technology Transfer Agreement, the franchisee must be incorporated as a Nepali company. This process involves:
- Select a unique company name and verify its availability with the Office of the Company Registrar
- Prepare company documents including:
- Memorandum of Association
- Articles of Association
- Consent letters from proposed directors
- Resolution appointing authorized representative
- Submit registration application to the Company Registrar’s Office
- Pay the registration fee based on authorized capital
- Obtain the Certificate of Incorporation
- Register with the Inland Revenue Department for PAN/VAT
- Register with the local municipality for business operation permit
The Companies Act, 2063 (2006) governs this process, with Section 5 outlining the requirements for company formation. The incorporation process typically takes 2-3 weeks, depending on the complexity of the company structure and the completeness of the documentation.
Renewal of Franchise
Franchise agreements in Nepal typically have a fixed term and require renewal to continue operations. The renewal process includes:
- Submit renewal application to the DOI at least 30 days before expiration
- Provide updated Technology Transfer Agreement if terms have changed
- Submit performance report showing compliance with previous agreement terms
- Pay renewal fee (currently NPR 10,000 as per the regulations)
- Obtain renewed Technology Transfer Registration Certificate
Section 20 of the Foreign Investment and Technology Transfer Act addresses the renewal process, stating that the DOI may refuse renewal if the franchisee has failed to comply with the terms of the agreement or if the arrangement no longer serves Nepal’s economic interests.
The renewal application should include evidence of the franchise’s contribution to the local economy, such as employment generation, tax contributions, and technology transfer achievements.
Taxation and Royalty Considerations
Foreign franchises operating in Nepal face specific tax implications that must be carefully considered:
- Withholding Tax: Royalty payments to foreign franchisors are subject to a withholding tax of 15% as per Section 88 of the Income Tax Act, 2058 (2002), unless modified by applicable Double Taxation Avoidance Agreements.
- Value Added Tax (VAT): Franchise services are subject to 13% VAT under the Value Added Tax Act, 2052 (1996).
- Corporate Income Tax: The franchisee company is subject to corporate income tax at the rate of 25% on net profits.
- Repatriation Restrictions: The Nepal Rastra Bank regulates the repatriation of royalties and fees, requiring documentation of DOI approval and tax clearance certificates.
Foreign franchisors should structure their agreements with these tax implications in mind, potentially leveraging Double Taxation Avoidance Agreements that Nepal has signed with various countries to minimize tax burdens.
Intellectual Property Protection
Protecting intellectual property is crucial for franchise operations. In Nepal, this involves:
- Trademark Registration: Apply for trademark protection with the Department of Industry’s Industrial Property Office under the Patent, Design and Trademark Act, 2022 (1965).
- Copyright Registration: Register relevant copyrighted materials with the Nepal Copyright Registrar’s Office under the Copyright Act, 2059 (2002).
- Enforcement Mechanisms: Include clear provisions in the franchise agreement for addressing intellectual property infringements.
- Monitoring and Compliance: Establish systems to monitor the franchisee’s use of intellectual property to ensure compliance with quality standards.
The Patent, Design and Trademark Act provides protection for registered trademarks for 7 years, renewable indefinitely for additional 7-year periods. Registration is territorial, so franchisors must specifically register their marks in Nepal, even if they hold international registrations.
FAQs about Foreign Franchise Registration in Nepal
What is a Technology Transfer Agreement in the context of franchising?
A Technology Transfer Agreement (TTA) in franchising is a legal document that outlines the terms under which a foreign franchisor transfers business knowledge, operational systems, trademarks, and other intellectual property to a Nepali franchisee. As per Section 2(j) of the Foreign Investment and Technology Transfer Act, this agreement must specify royalty rates, duration, territory, and technical support arrangements.
How long does it take to register a foreign franchise in Nepal?
The registration process typically takes 2-3 months from start to finish. According to Section 18 of the Foreign Investment and Technology Transfer Act, the DOI should process the TTA application within 15 working days. However, the entire process, including company incorporation and obtaining additional permits, generally requires 60-90 days, depending on the complexity of the franchise and the completeness of documentation.
What are the restrictions on royalty payments for franchises in Nepal?
Royalty payments are subject to certain restrictions under Nepal Rastra Bank regulations. Generally, royalties for trademarks and know-how are capped at 5% of net sales, while technical assistance fees are limited to 2% of net sales. These payments are subject to 15% withholding tax under Section 88 of the Income Tax Act, and all remittances require approval from the central bank.
Can a foreign franchisor own 100% of the franchisee company in Nepal?
Yes, 100% foreign ownership is permitted in most sectors under the Foreign Investment and Technology Transfer Act, 2075 (2019), except for those on the negative list. However, certain sectors like retail trading, travel agencies, and some service industries have ownership restrictions. The franchisee company must be incorporated under the Companies Act, 2063 (2006) with appropriate foreign investment approvals.
What documents are required for TTA registration at the DOI?
The required documents include:
- Completed application form
- Draft Technology Transfer Agreement
- Franchisor’s company registration certificate (apostilled)
- Franchisor’s audited financial statements for three years
- Business plan for Nepal operations
- Proof of trademark ownership
- Letter of intent between franchisor and franchisee
- Authorization letter if submitted through a representative
How are franchise disputes resolved in Nepal?
Franchise disputes in Nepal can be resolved through:
- Negotiation and mediation as specified in the franchise agreement
- Arbitration under the Arbitration Act, 2055 (1999), which recognizes international arbitration awards
- Litigation in Nepali courts if specified in the agreement
Most TTAs include arbitration clauses designating neutral venues like Singapore or Hong Kong under international arbitration rules, which are enforceable in Nepal as a signatory to the New York Convention.
What are the renewal requirements for franchise agreements in Nepal?
Franchise agreements must be renewed before expiration by submitting a renewal application to the DOI at least 30 days prior to the expiration date. The application must include performance reports, an updated agreement if terms have changed, and a renewal fee of NPR 10,000. The DOI evaluates the franchise’s compliance with the original agreement terms and its contribution to Nepal’s economy before granting renewal under Section 20 of the Foreign Investment and Technology Transfer Act.