A Guide to Liaison and Branch Offices for Foreign Companies in Nepal

As foreign companies broaden their global reach, Nepal has emerged as a compelling market in South Asia. Whether you aim to test the waters or engage fully in commercial activities, establishing a liaison office or a branch office is a popular way to gain legal footing without forming a standalone local entity. This guide offers a comprehensive look at the regulatory framework, tax implications, and compliance obligations for foreign companies considering these two office models in Nepal.

1. Liaison Offices in Nepal

1.1 Scope and Purpose

A liaison office—also called a representative office—facilitates non-commercial functions, such as:

• Market Research & Feasibility: Investigating Nepal’s market potential and competitor landscapes.
• Networking & Promotional Activities: Building industry relationships and brand recognition.
• Coordination & Communication: Acting as a local channel between foreign headquarters and Nepali stakeholders.

Important: By definition, liaison offices cannot directly generate revenue in Nepal.

1.2 Governing Regulations

• Foreign Investment and Technology Transfer Act (FITTA) 2019: Governs foreign-owned operations, ensuring alignment with investment regulations.
• Department of Industry (DoI): Primary approving authority for liaison office establishment.
• Nepal Rastra Bank (NRB): Monitors any foreign exchange requirements, including remittances for liaison office expenses.

1.3 Establishment Process

1. Application to the DoI: Submit a formal application detailing the scope, objectives, and budget of your proposed liaison activities.
2. Approval & Licensing: Once vetted, the DoI issues the approval letter, allowing you to open a liaison office with explicit non-commercial status.
3. PAN Registration: A Permanent Account Number (PAN) may be obtained from the Inland Revenue Department (IRD) for basic operational compliance, even though no revenue is generated locally.

1.4 Compliance and Renewal

• Annual Reporting: Liaison offices typically report operational expenses and activities to the DoI, demonstrating adherence to non-commercial mandates.
• Renewal of Permission: Depending on the approval conditions, you may need to renew your liaison office license periodically, ensuring continued compliance with Nepalese laws.

2. Branch Offices in Nepal

2.1 Scope and Purpose

A branch office is an extension of the parent foreign company—legally recognized to carry out commercial operations. Common applications include:

• Executing Projects or Contracts: Working on infrastructure, IT services, or specialized consulting assignments.
• Trading & Revenue Generation: Directly invoicing local clients for products or services.
• Hiring Local Workforce: Engaging in recruitment and payroll of Nepali employees under the branch office umbrella.

2.2 Governing Regulations

• FITTA 2019: The foundational act for foreign-owned branch offices, covering investment thresholds and repatriation rules.
• Department of Industry (DoI) or Investment Board Nepal (IBN): Grants approval for setting up a branch, depending on the project scale and sector.
• Nepal Rastra Bank (NRB): Regulates inbound capital and outward remittances (profit, dividends, or royalty payments).

2.3 Establishment Process

1. Business Proposal & Feasibility Study: Demonstrate the viability of your planned commercial activities, detailing capital structure, scope, and strategic goals.
2. Submission to DoI or IBN: Provide a robust application with supporting documents (parent company’s financials, board resolutions, etc.).
3. Approval & Licensing: Obtain the license authorising branch operations in Nepal, which may also involve registration with the Office of the Company Registrar (OCR) if so required.
4. Tax & Accounting Registration: Acquire a Permanent Account Number (PAN) and VAT registration (if turnover exceeds NPR 2 million) from the Inland Revenue Department (IRD).

2.4 Compliance and Ongoing Obligations

• Statutory Audits: Branch offices must prepare annual audited financial statements per Nepal Financial Reporting Standards (NFRS) and submit them to IRD and OCR (if applicable).
• Corporate Tax & VAT: Profits generated locally are subject to standard corporate tax (generally 25%), while sales may require VAT compliance.
• Foreign Exchange Regulations: NRB clearance is required for profit repatriation, dividend payments, and any cross-border monetary transfers.

3. Key Differences Between Liaison and Branch Offices

4. Additional Considerations for Foreign Investors

4.1 Sector-Specific Requirements

Certain regulated sectors (e.g., banking, insurance, telecom, aviation) impose higher capital requirements or special licenses for foreign branches. Liaison offices in these industries typically remain limited to brand representation or administrative coordination.

4.2 Labor and Employment Compliance

• Work Permits & Visas: Foreign employees must obtain valid work permits and visas from Nepal’s Department of Labor and Immigration.
• Local Staffing Policies: Some projects might require a specified ratio of local-to-foreign staff, particularly in large-scale infrastructure or public sector ventures.

4.3 Repatriation of Funds

Branch offices distributing profits to the parent company need:

• Tax Clearance Certificate from the IRD.
• Approval from NRB to facilitate foreign currency transactions.

Frequently Asked Questions (FAQ)

1. Which option is faster to set up—liaison office or branch office?

A liaison office typically has fewer requirements and is approved faster, given its non-commercial scope. Setting up a branch office demands a more detailed application due to commercial activities and revenue potential.

2. Can a liaison office eventually convert into a branch office?

Yes. A liaison office may transition into a branch office by submitting revised documentation and obtaining necessary approvals from the DoI or IBN, reflecting the change to commercial operations.

3. Are branch offices subject to Nepal’s corporate tax regime?

Absolutely. As branch offices can earn revenue locally, they are liable for corporate tax, VAT (if thresholds are met), and must file appropriate tax returns with the Inland Revenue Department.

4. Can liaison offices hire local staff?

Yes, but only for non-commercial functions like administrative support, research, or coordination. They still need to comply with labor regulations, including SSF (Social Security Fund) contributions if employing Nepalese citizens.

5. How do I handle profit repatriation from a branch office?

Branch offices must secure IRD clearance and NRB approval for cross-border transfers. Proper accounting and compliance with Nepalese tax laws is essential to avoid delays or penalties.

Conclusion

Deciding between a liaison office and a branch office in Nepal hinges on your market objectives, commercial ambitions, and risk tolerance. Liaison offices offer simplicity and a foothold for research and networking without revenue generation, while branch offices afford direct commercial engagement—albeit with greater compliance obligations. By understanding each model’s legal framework, tax implications, and labor requirements, foreign investors can chart a strategic and compliant path to succeed in Nepal’s growing economy.

At Digital Consulting Ventures, we specialise in guiding foreign enterprises through the intricacies of Nepal’s corporate regulations—from selecting the right office model to ensuring tax and accounting compliance. Contact us for tailored advice and expert support on expanding your global footprint into Nepal.