10 Common Mistakes to Avoid When Incorporating in Nepal

Nepal is emerging as a promising destination for foreign businesses seeking to enter South Asia. With competitive labor costs, expanding infrastructure, and increasing digitalization, company incorporation in Nepal is an attractive prospect. However, the process is nuanced—especially for foreign investors unfamiliar with local laws, documentation, and compliance procedures.

Even the most experienced global firms can fall into regulatory or operational pitfalls that delay their launch or increase overheads. This guide outlines 10 common mistakes to avoid when incorporating in Nepal, backed by practical insights from accounting and legal experts working with international businesses.

1. Ignoring the FITTA Approval Requirement

Under the Foreign Investment and Technology Transfer Act (FITTA), all foreign companies must obtain prior approval from the Department of Industry (DOI) before proceeding with company registration.

Mistake: Skipping this step or assuming that a domestic process is sufficient.

Fix: Begin with a properly structured FITTA application before engaging the Office of the Company Registrar (OCR).

2. Underestimating the Minimum Investment Threshold

Nepal has a minimum investment requirement for foreign companies—historically NPR 20 million (approx. USD 150,000), with 2025 reforms lowering this for certain sectors.

Mistake: Planning investment amounts below the threshold without checking eligibility.

Fix: Confirm the required capital based on sector and apply accordingly to avoid rejection.

3. Selecting a Restricted Sector

Nepal restricts foreign investment in certain industries such as retail trading, security services, tobacco, and small-scale agriculture.

Mistake: Attempting incorporation in a sector not open to FDI.

Fix: Review the updated Negative List and consult with legal advisors before finalizing your business plan.

4. Delaying Tax Registration

After company registration, your business must register for PAN (Permanent Account Number) and, where applicable, VAT. This is essential to begin operations and remain compliant.

Mistake: Delaying tax registration, which can delay invoicing and hiring.

Fix: Initiate PAN and VAT applications immediately after incorporation to avoid legal complications and banking restrictions.

5. Improper Bank Account Setup for Capital Injection

To validate your investment, foreign capital must be routed through formal banking channels into a designated account in Nepal.

Mistake: Using informal remittance or personal accounts to transfer capital.

Fix: Open a corporate bank account in Nepal in the company’s name and transfer investment funds in accordance with NRB guidelines.

6. Unclear Shareholding and Governance Structure

Foreign companies often form joint ventures or hold equity through local entities. Without clear shareholding and governance frameworks, disputes may arise.

Mistake: Failing to define board roles, voting rights, or exit clauses.

Fix: Draft a strong Shareholders’ Agreement with provisions for dispute resolution, exit options, and dividend distribution.

7. Overlooking Labor Law Compliance

Nepal’s Labor Act applies to both local and foreign employers. From contracts to workplace safety and provident fund contributions, compliance is essential.

Mistake: Hiring staff without written contracts or not contributing to required social security funds.

Fix: Structure employee relationships legally and engage an HR or legal advisor familiar with Nepal’s labor code.

8. Mismanaging Tax Filings and Compliance

Foreign firms are subject to annual audits, monthly VAT filings, and TDS obligations. These are strictly enforced by the Inland Revenue Department.

Mistake: Missing deadlines or underreporting income due to unfamiliarity with the local tax system.

Fix: Partner with a local accounting firm experienced in cross-border compliance.

9. Not Considering Repatriation Procedures Early

Repatriating profits or exiting a company requires prior approval and proper documentation. Many companies ignore this until they need it—and find themselves delayed.

Mistake: Waiting until the end of the fiscal year to think about profit repatriation.

Fix: Maintain proper financial documentation from the start and ensure that your capital inflows are traceable and approved under FITTA.

10. Neglecting Local Representation and Communication

Government offices, banks, and tax departments often prefer communicating with local representatives for efficiency and language comfort.

Mistake: Relying solely on remote teams to manage operations without a local presence.

Fix: Designate a local representative or hire a compliance officer who can manage ongoing administrative and legal tasks.

Conclusion

While Nepal offers real opportunities for growth and access to South Asian markets, company incorporation in Nepal requires a clear understanding of the legal framework, investment process, and operational obligations. Avoiding these 10 common mistakes can save time, reduce costs, and help you establish a compliant and successful presence in Nepal.

Partnering with local experts in legal, tax, and HR can significantly de-risk your incorporation journey and allow you to focus on your core business strategy from day one.