Starting a Company in Nepal for Foreigners: FDI in Nepal

Foreign Direct Investment (FDI) in Nepal has become increasingly attractive for international businesses seeking to expand their operations. The Nepali government has implemented various policies and reforms to create a more favorable environment for foreign investors. The process of registering a foreign company in Nepal involves several steps and requires compliance with specific legal requirements.

The Department of Industry (DOI) serves as the primary authority overseeing foreign company registration in Nepal. Foreign investors must navigate through various procedures, including obtaining approval from the Investment Board of Nepal (IBN) for large-scale investments, registering with the Company Registrar’s Office, and acquiring necessary licenses and permits.

Legal Requirements for Foreign Companies in Nepal

Foreign companies intending to establish operations in Nepal must adhere to several legal requirements:

1. Foreign Investment and Technology Transfer Act (FITTA) 2075 (2019): This act governs foreign investment in Nepal and outlines the sectors open for FDI.
2. Companies Act 2063 (2006): This legislation regulates the formation, operation, and dissolution of companies in Nepal.
3. Industrial Enterprises Act 2076 (2020): This act provides guidelines for industrial enterprises, including foreign-owned businesses.
4. Labor Act 2074 (2017): Foreign companies must comply with Nepali labor laws and regulations.
5. Foreign Exchange (Regulation) Act 2019 (1962): This act regulates foreign exchange transactions and repatriation of profits.

Foreign investors must ensure their proposed business activities align with the sectors permitted for FDI as per the FITTA 2075. The act prohibits foreign investment in certain sectors, such as poultry farming, fisheries, and primary agriculture.

Process of Registering a Foreign Company

The process of registering a foreign company in Nepal involves several steps:

1. Obtain approval from the Investment Board of Nepal (IBN) for investments exceeding NPR 6 billion.
2. Submit an application to the Department of Industry (DOI) for foreign investment approval.
3. Register the company with the Office of the Company Registrar (OCR).
4. Obtain a Permanent Account Number (PAN) from the Inland Revenue Department.
5. Register with the Department of Industry to obtain an industrial license.
6. Acquire necessary industry-specific licenses and permits from relevant authorities.
7. Register with the Nepal Rastra Bank for foreign currency transactions.
8. Register with the Social Security Fund for employee benefits.
9. Obtain a business operating license from the local municipality.

Essential Documents for Foreign Company Registration

Foreign investors must prepare and submit the following documents for company registration:

• Application form for foreign investment approval
• Proposed company’s Memorandum of Association and Articles of Association
• Copy of passport and visa of foreign investors
• Board resolution of the parent company authorizing investment in Nepal
• Joint Venture Agreement (if applicable)
• Project feasibility study report
• Environmental Impact Assessment (EIA) or Initial Environmental Examination (IEE) report (if required)
• Bank statements or other proof of financial capacity
• Power of Attorney for authorized representatives
• Certificates of incorporation and other relevant documents of the parent company

Timeframe for Foreign Company Registration Process

The timeframe for registering a foreign company in Nepal can vary depending on the nature and scale of the investment. Generally, the process takes approximately 2-3 months from the initial application to final approval and registration. However, complex projects or those requiring additional clearances may take longer.

Key timelines include:

• DOI approval: 15-30 days
• Company registration with OCR: 3-5 days
• PAN registration: 1-2 days
• Industrial license: 7-15 days
• Other sector-specific licenses: Varies by industry

Costs Associated with Foreign Company Setup

The costs of setting up a foreign company in Nepal include:

1. Government fees for registration and licensing
2. Legal and professional service fees
3. Office setup and infrastructure costs
4. Minimum capital requirements (varies by sector)
5. Environmental Impact Assessment costs (if applicable)
6. Bank guarantee fees (for certain industries)

Government Fees for Foreign Company Registration

Foreign investors must pay various government fees during the registration process:

• Company registration fee: NPR 9,500 for private limited companies
• Foreign investment approval fee: 0.2% of the proposed investment amount
• Industrial license fee: Varies based on industry classification
• PAN registration fee: NPR 500
• Municipality business operating license fee: Varies by location and business type

Checklist for Foreign Company Registration Compliance

To ensure compliance with Nepali regulations, foreign companies should adhere to the following checklist:

• Obtain necessary approvals from DOI and IBN (if applicable)
• Register the company with the Office of the Company Registrar
• Acquire a Permanent Account Number (PAN)
• Obtain an industrial license from the Department of Industry
• Register with the Nepal Rastra Bank for foreign currency transactions
• Register with the Social Security Fund
• Obtain a business operating license from the local municipality
• Comply with sector-specific licensing requirements
• Adhere to labor laws and regulations
• Maintain proper accounting records and file tax returns
• Comply with foreign exchange regulations for profit repatriation

Key Laws Governing Foreign Companies in Nepal

Foreign companies operating in Nepal must comply with several key laws:

1. Foreign Investment and Technology Transfer Act 2075 (2019)
2. Companies Act 2063 (2006)
3. Industrial Enterprises Act 2076 (2020)
4. Labor Act 2074 (2017)
5. Foreign Exchange (Regulation) Act 2019 (1962)
6. Income Tax Act 2058 (2002)
7. Value Added Tax Act 2052 (1996)
8. Industrial Property Act 2074 (2017)
9. Environmental Protection Act 2076 (2019)
10. Bank and Financial Institution Act 2073 (2017)

Authorities Overseeing Foreign Company Operations

Several government authorities oversee foreign company operations in Nepal:

1. Department of Industry (DOI)
2. Investment Board Nepal (IBN)
3. Office of the Company Registrar (OCR)
4. Inland Revenue Department
5. Nepal Rastra Bank
6. Department of Labor
7. Department of Immigration
8. Ministry of Industry, Commerce and Supplies
9. Ministry of Finance
10. Social Security Fund

Legal Services for Foreign Company Registration

Foreign investors often require legal assistance during the company registration process. Legal services typically include:

• Guidance on FDI policies and regulations
• Preparation and review of legal documents
• Assistance with government approvals and licenses
• Advice on corporate structuring and governance
• Labor law compliance
• Intellectual property protection
• Tax planning and compliance
• Dispute resolution and litigation support

Tax Implications for Foreign Companies in Nepal

Foreign companies operating in Nepal are subject to various taxes:

1. Corporate Income Tax: 25% for most industries, with variations for specific sectors
2. Value Added Tax (VAT): 13% on goods and services
3. Customs Duties: Vary based on imported goods
4. Withholding Tax: Applicable on dividends, interest, and service fees
5. Social Security Tax: 31% of basic salary (11% employee contribution, 20% employer contribution)
6. Capital Gains Tax: 25% on gains from sale of assets or shares

Foreign companies must also comply with transfer pricing regulations and maintain proper documentation for related-party transactions.

Employment Laws Applicable to Foreign Companies

Foreign companies must adhere to Nepali labor laws, including:

1. Labor Act 2074 (2017): Governs employment relationships, working conditions, and employee rights
2. Social Security Act 2074 (2017): Mandates social security contributions for employees
3. Trade Union Act 2049 (1992): Regulates trade union activities and collective bargaining
4. Foreign Employment Act 2064 (2007): Applies to the recruitment of Nepali workers for overseas employment

Key provisions include:

• Maximum 48-hour workweek
• Minimum wage requirements
• Paid leave and public holidays
• Overtime compensation
• Termination procedures and severance pay
• Occupational health and safety standards

Read More

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Repatriation of Profits and Foreign Exchange Regulations

Foreign companies can repatriate profits, dividends, and other earnings subject to Nepal Rastra Bank regulations:

1. Profits and dividends can be repatriated after paying applicable taxes
2. Loan repayments and interest to foreign lenders require NRB approval
3. Royalty and technical service fee payments are subject to NRB guidelines
4. Capital repatriation upon liquidation or sale of the company requires DOI and NRB approval

Foreign companies must comply with the Foreign Exchange (Regulation) Act 2019 (1962) for all foreign currency transactions.

Recent Changes in Foreign Investment Policies

The Nepali government has introduced several policy changes to attract FDI:

1. Revised Foreign Investment and Technology Transfer Act 2075 (2019): Streamlined approval processes and expanded sectors open for FDI
2. Public-Private Partnership and Investment Act 2075 (2019): Encourages private sector participation in infrastructure development
3. Special Economic Zone Act 2073 (2016): Provides incentives for export-oriented industries
4. Industrial Enterprises Act 2076 (2020): Offers tax incentives and simplified registration procedures
5. Amendments to the Companies Act: Simplified company registration and compliance requirements

These changes aim to create a more investor-friendly environment and boost foreign investment in Nepal.

FAQs:

1. Can foreign companies fully own businesses in Nepal?

Yes, foreign companies can fully own businesses in most sectors in Nepal. However, certain industries have ownership restrictions or are closed to foreign investment. The Foreign Investment and Technology Transfer Act 2075 (2019) outlines the sectors open for FDI and any applicable restrictions.

2. What are the minimum capital requirements for foreign companies?

Minimum capital requirements for foreign companies vary by sector:

• Manufacturing industries: NPR 100 million
• Service industries: NPR 50 million
• Energy-based industries: As per project requirements
• Specific sectors may have higher capital requirements

3. How long does it take to register a foreign company?

The registration process typically takes 2-3 months from initial application to final approval. However, complex projects or those requiring additional clearances may take longer.

4. Are there restrictions on foreign company operations?

Yes, some restrictions apply to foreign company operations in Nepal:

• Certain sectors are closed to foreign investment (e.g., poultry farming, fisheries)
• Some industries have foreign ownership caps
• Repatriation of profits and capital is subject to Nepal Rastra Bank approval
• Employment of foreign nationals is regulated and requires work permits

5. What taxes do foreign companies pay in Nepal?

Foreign companies in Nepal are subject to various taxes, including:

• Corporate Income Tax: 25% (with variations for specific sectors)
• Value Added Tax (VAT): 13%
• Customs Duties
• Withholding Tax
• Social Security Tax
• Capital Gains Tax

6. Can foreign companies own land in Nepal?

Foreign companies cannot directly own land in Nepal. However, they can lease land for business purposes for up to 50 years, with the possibility of renewal. Foreign-invested companies registered in Nepal as domestic entities may own land subject to certain restrictions.

7. What are the main challenges for foreign companies in Nepal?

Foreign companies in Nepal may face several challenges:

• Complex regulatory environment and bureaucratic procedures
• Infrastructure limitations, including power shortages and transportation issues
• Political instability and frequent policy changes
• Limited skilled workforce in certain sectors
• Foreign exchange restrictions and currency fluctuations
• Cultural and language barriers
• Intellectual property protection concerns

Despite these challenges, Nepal offers significant opportunities for foreign investors in various sectors, including hydropower, tourism, agriculture, and information technology.