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Foreign Direct Investment, commonly known as FDI, means investment of capital, technology and expertise by foreign individuals and companies in Nepal businesses.
A foreign investor can either establish a new company, enter into a joint venture, purchase shares in an existing Nepalese company or transfer technology to a local business. However, the investor needs to verify that the proposed activity is permissible for foreign investment and complete the necessary approvals, register a company, apply for taxes and industry procedures.
This article the major FDI laws, minimum investment requirement, restricted sectors, approval process, benefits and legal requirements for foreign investors in Nepal.
Laws Governing FDI in Nepal
Foreign Direct Investment in Nepal is regulated by a Foreign Investment and Technology Transfer Act, 2075 (2019), commonly known as FITTA.
Other pertinent legislation include:
- Foreign Investment and Technology Transfer Rules, 2077
- Industrial Enterprises Act, 2076
- Companies Act, 2063
- Foreign Exchange Regulation Act
- Public-Private Partnership and Investment Act
- Income-tax and VAT laws
- Legislation and regulations applicable to each of the various sectors, such as banking, tourism, energy, telecommunications and other regulated industries.
FITTA governs the approval of foreign investment, investment structures, restricted sectors, transfer and repatriation of technology. Foreign-invested companies are also required to follow the corporate, tax, labour, environmental and industry regulations.
Forms of Foreign Investment
In general, there are four routes of foreign investment in Nepal.
Establishing a New Company
Foreign investors can incorporate a wholly foreign owned company or form a company in partnership with one or more Nepalese investors.
For further information, see the company registration process in Nepal.
Joint Venture
A foreign investor can establish a company along with one or more people or company of Nepal. Ownership, management rights, profit sharing, decision making, transferring shares and settling disputes should be explicitly discussed in a joint-venture or shareholders' agreement.
Investment in an Existing Company
A foreign investor may purchase shares of a pre-existing company in Nepal. Typically, this would involve obtaining FDI approval, a share-purchase agreement, company resolutions, valuation and updates of the company and industry records.
Legal and financial due diligence should be completed before acquiring shares.
Technology Transfer
A foreign business may transfer the trademark, patent, technical knowledge, software and management systems or manufacturing methods to a Nepalese company as a part of an approved technology transfer agreement.
Minimum FDI and Foreign Ownership
Note on figures: The investment threshold and ownership ceiling has been changed multiple times in Nepal through budget ordinances and Gazette notifications. The figures mentioned below are as per the general rule at the time of writing and it is advisable for investors to confirm the current threshold with the Department of Industry or Industry and Investment Board Nepal (DIIB) before relying on them.
The general minimum amount of foreign-investment is NPR 20 million per foreign investor and investment project. There is no general upper limit on the amount that may be invested.
Certain information-technology-based industries approved by the automatic procedure can be exempt from the general minimum threshold. Investors should check if the activity proposed is included in the current and updated notified categories.
In addition, Nepal allows 100% foreign equity in a range of sectors. A Nepalese partner is therefore not mandatory in all foreign-invested companies.
However, there are some regulated sectors which have maximum ownership limits or require local involvement. For instance, foreign investment in some of the consultancy services is restricted to 51 percent. There might be other restrictions that apply to aviation, telecommunications, casinos and other regulated businesses.
Restricted Sectors for Foreign Investment
Foreign investment is accepted in most industries in Nepal but is limited in a few industries by FITTA.
Restricted or specially controlled sectors are:
- Cottage industries
- Personal-service businesses
- Arms, ammunition and explosives
- Atomic and radioactive-material industries
- Real-estate trading, excluding construction industries
- Internal courier services
- Local catering services
- Rural tourism
- Poultry, fisheries and beekeeping
- Certain retail businesses
- Certain foreign-owned professional consultancy services other than the maximum limit.
Restrictions on the list may be altered as a result of changes in law or Gazette notifications. Investors should therefore check the eligibility of the sector before entering into agreements and transferring investments.
FDI Approval Authorities in Nepal
The approving authority is typically determined by the size of the investment.
Department of Industry
Foreign-investment proposals of under NPR 6 billion are in the general purview of the Department of Industry. It also controls industry registration, technology-transfer permits and other post-investment issues.
Investment Board Nepal
Generally, projects worth NPR 6 billion or more are approved by Investment Board Nepal, as well as a few big projects in the field of infrastructure and energy.
Automatic Approval Route
Qualifying sectors are eligible for foreign investment to be granted on a case by case basis. But,automatic approval does not eliminate any requirement for company incorporation, tax registration, industry registration, banking documentation or industry-specific licences.
Step-by-Step FDI Registration Process in Nepal
A typical foreign-investment project follows these steps.
Step 1: Confirm Sector Eligibility
Before investing in a business,the investor should first determine if the proposed business is open to FDI, if there are foreign-ownership limits and if any sector-specific licence is required.
Step 2: Select the Investment Structure
The investor must determine whether to establish a new company, enter a joint venture or buy shares in an existing company or start a technology-transfer arrangement.
Step 3: Prepare the Project Documents
A project report is required to describe the proposed activity, investment amount, ownership structure, project cost, products or services and the employment plan and operating needs.
Step 4: Obtain FDI Approval
Depending on the nature of the project, the application is submitted to the Department of Industry, Investment Board Nepal or through an automatic approval system.
Step 5: Register the Company
Once the approval is received, the investor registers the company with the Office of the Company Registrar (OCR). The ownership and investment structure must be consistent with the memorandum and articles of association.
Step 6: Finalize Tax and Industry Registration
The company must obtain a Permanent Account Number and, if applicable, VAT registration.It then has to register with the relevant body in the industry.
The standard order is: FDI approval followed by company incorporation, tax registration, industry registration.
Step 7: Bring the Investment Into Nepal
The approved investment has to be transferred through an authorised banking channel.
The remitting investor, the amount and purpose of the transfer should be similar to the FDI approval. Records of all bankings, SWIFT documents and investment certificates should be preserved for future repatriation.
Step 8: Obtain Additional Licences
Additional licences might be needed from tourism, energy, health, telecommunications, food, environmental and/or local-government authorities, depending on the business.
Step 9: Maintain Ongoing Compliance
After starting operations,the company will have to keep its books in order (maintain audited accounts), file tax and company returns, comply with labour laws and obtain approval for significant changes in ownership, capital, location or business activity.
Documents Required for FDI Approval
The documents depend on the investor and investment structure. Common requirements include:
- FDI application
- Project report
- Passport copy of each individual investor
- Incorporation documents of a corporate investor
- Investor's profile or biodata
- Financial Credibility Certificate issued by the bank
- Board resolution approving the investment
- Authority letter or power of attorney
- Proposed ownership structure
- Joint-venture agreement (if applicable)
There may also be a need for a share-purchase agreement, audited accounts, tax clearance documents, valuation documents and information about the existing liabilities of the company.
Repatriation of Profits and Investment
Foreign investors are usually allowed to repatriate:
- Dividends and profits
- Proceeds from the sale of shares
- Amounts remaining after liquidation
- Approved royalty payments
- Technology-transfer fees
- Other permitted investment returns
The investor is normally required to fulfill the necessary tax obligations and provide evidence of the original approved investment prior to repatriation and to secure the required foreign-exchange approval.
Proper banking records are essential.Transfer of funds through informal channels or without proper recording could pose problems during withdrawal of profit or sale proceeds from Nepal.
Benefits of Foreign Direct Investment in Nepal
Foreign investors may receive several legal and commercial advantages:
Full Ownership in Many Industries
Generally, many sectors allow 100% foreign ownership, allowing investors to have access to the control of management, technology and business activities of the company.
Right to Repatriate Investment Returns
FITTA allows investors who have been approved to repatriate dividends, share sale proceeds and other eligible returns, upon satisfying tax and foreign exchange regulations.
Technology and Intellectual-Property Transfer
Foreign investors can bring in special technology, trademarks, software, production system and management expertise under the approved agreement.
Business Visa Eligibility
Business visas are granted after the completion of the relevant investment and registration processes to investors who meet the requirements.
One-Stop Services
The One Stop Service Center at the Department of Industry handles the activities relating to FDI Approval, Industry Registration, Visa Recommendation, Environment and Foreign Exchange Facilities.
Investment Opportunities
Potential sectors include information technology, tourism, manufacturing, renewable energy, infrastructure, agriculture processing and export-oriented industries. Eligibility for the sector prior to investment should still be assessed.
How Legal Counsel Can Assist Foreign Investors
Several government authorities are involved in foreign investment in Nepal; such as the Department of Industry, Investment Board Nepal, Office of the Company Registrar, Inland Revenue Department, Nepal Rastra Bank and Department of Immigration.
Problems can arise in the early stages, such as approval delays, ownership issues, banking complications or problems with the repatriation of profits. A qualified corporate attorney can assist with:
- Reviewing whether the proposed sector is open to FDI
- Selecting the appropriate investment and ownership structure
- Preparing and lodging applications for Foreign Direct Investments (FDI).
- Drafting project reports and related documents
- Registering the foreign-invested company
- To prepare joint-venture and shareholders' agreements.
- Conducting due diligence before purchasing an existing company
- Preparing share-purchase and technology-transfer agreements
- Registration of industry, PAN, VAT and sectoral registrations
- Ensuring trademarks and intellectual property protection
- Assisting with business-visa documentation
- Maintaining post-investment regulatory compliance
- Supporting profit and investment repatriation
Early legal review will ensure that the investment structure, company documents and banking process are compliant with Nepalese law from the beginning.
Frequently Asked Questions
What is the minimum FDI amount in Nepal?
Generally minimum foreign investment is NPR 20 million per investor and project. Some qualifying industries in the ICT sector that fall under the automatic route may be exempted.
Can a foreigner own 100% of a company in Nepal?
Yes. Many sectors allow for 100% foreign ownership. There are some regulated industries, however, which have ownership restrictions or need a local partner.
Can a foreign investor purchase shares in an existing Nepalese company?
Yes. Foreign investors can invest by buying the shares of an existing company, following the FDI clearance, due diligence and company registration process.
Can foreign investors transfer profits outside Nepal?
Yes. The dividends and proceeds from the sale of its shares and others are eligible for repatriation when the tax, banking and foreign-exchange requirements are fulfilled.
Does FDI approval allow the company to start operating immediately?
No. The investor must also register the company, undertake tax registration, industry registration and obtain the necessary sector-specific licensing requirements.
Conclusion
Foreign Direct Investment in Nepal is primarily regulated by Foreign Investment and Technology Transfer Act (FITTA), the Industrial Enterprises Act, Companies Act and foreign exchange laws.
Foreign investors may establish a new company, form a joint venture or acquire shares in an existing business or transfer technology. The proposed sector, however, should be open to foreign investment, proper approval must be obtained and the investment must enter Nepal through the formal banking system.
Prior to investing, investors should verify the minimum investment requirement, foreign-ownership caps, regulatory licences and repatriation process for their intended business.
Disclaimer: This article is for general informational purposes only and is based on the laws, regulations, and practices in Nepal as of the date of publication. Laws and procedures may change over time. Before making any investment decision or taking legal action, please consult a qualified legal professional or other relevant expert for advice specific to your circumstances.
