Garment manufacturing in Nepal: incorporation and SEZ incentives (2025)

To incorporate a company in Nepal for garment manufacturing in 2025 is more than just a market entry decision. It’s about positioning your business at the crossroads of global trade shifts, preferential tariff regimes, and government-backed incentives.

Foreign investors are rethinking supply chains due to rising labor costs in Bangladesh, tariffs on Indian textiles, and over-dependence on China. Nepal, though smaller in scale, offers an attractive balance: cost-effective labor, Special Economic Zone (SEZ) incentives, tax holidays, and export-focused policies under FITTA 2019 and the SEZ Act 2016.

This comprehensive playbook covers:

• Why Nepal’s garment industry is on the rise.

• Step-by-step incorporation process.

• Tax, banking, and SEZ incentives.

• Comparison with India and Bangladesh.

• Compliance requirements and pitfalls to avoid.

Why choose Nepal for garment manufacturing in 2025?

Global drivers of Nepal’s rise

1. U.S. tariffs on Indian textiles: Trump-era tariffs redirected attention to alternate markets.

2. China plus one strategy: Brands diversify away from China due to supply chain risks.

3. Bangladesh wage increases: Rising costs reduce Bangladesh’s competitive edge.

4. Sustainability concerns: Nepal promotes eco-friendly hydropower, reducing carbon footprint of production.

Domestic advantages

• Cheaper labor: Nepal’s minimum wages are lower than India’s industrial hubs.

• Trade treaties: Duty-free or reduced tariffs under GSP in EU and partial U.S. benefits.

• SEZ access: 100% tax holiday for first 5 years, reduced rates for 5 more.

• Strategic location: Land-linked to India and China, both major textile consumers.

Incorporation process for foreign garment companies

Incorporation in Nepal is a legal and compliance-heavy process. For foreign garment firms, it involves OCR, DOI, FITTA, and NRB approvals.

Step-by-step guide

1. Name reservation at OCR (Office of Company Registrar).

2. Drafting and submission of Memorandum and Articles of Association (MoA & AoA).

3. Shareholding structure approval – 100% foreign ownership allowed under FITTA 2019.

4. Foreign Direct Investment (FDI) application at Department of Industry.

5. Capital remittance approval from Nepal Rastra Bank (NRB).

6. Industry registration certificate issued.

7. Tax registration (PAN & VAT) at Inland Revenue Department.

8. Industry-specific license for garment/textile manufacturing.

9. Application for SEZ tenancy with SEZ Authority if factory is to be located inside a zone.

Special Economic Zones (SEZs) in Nepal

The SEZ Act 2016 created zones to boost exports and attract foreign capital. Garment manufacturing was prioritized due to Nepal’s export history.

Key SEZ locations

• Bhairahawa SEZ – near India border, logistics hub.

• Simara SEZ – close to industrial belt.

• Biratnagar SEZ – eastern trade corridor.

• Dhangadhi SEZ – western gateway.

SEZ Incentives for Garment Manufacturing Investors

Nepal’s Special Economic Zones (SEZs) offer attractive incentives for garment manufacturing companies focused on exports. These include:

• Tax Holidays:
  – 100% corporate tax exemption for the first 5 years of operation and a reduced rate thereafter.

• Duty & VAT Exemptions:
  – Raw materials and machinery can be imported duty-free, and export sales are zero-rated for VAT.

• Concessional Land Lease:
  – Long-term leases at subsidized rates help reduce setup costs.

• Profit Repatriation:
  – Investors can repatriate profits and dividends (subject to Nepal Rastra Bank approval and compliance with relevant regulations), making returns predictable and more secure.

• Export Focus Requirements:
  – SEZ firms typically must export a defined portion of their output, ensuring orientation toward global markets.

Taxation Essentials for Foreign Garment Companies in Nepal

Corporate Tax

• Standard rate: 25%

• SEZ companies: 0% for 5 years, then 12.5% for the next 5 (subject to export compliance)

VAT & TDS

• VAT: 13%; garment exports are zero-rated

• TDS: Applies on salaries, contractors, and dividends as per law

Repatriation

• Profits & dividends: Repatriable after tax clearance with NRB approval

• Loans & royalties: Permitted under FITTA, subject to approval

Post-incorporation compliance checklist

Foreign companies must not stop after incorporation. Regular compliance builds credibility.

• Payroll setup with mandatory SSF contributions

• Annual statutory audit submission

• VAT filing and TDS payment/clearance on time

• Industry/business license renewal

• NRB compliance for foreign currency transactions

Garment Sector Challenges in Nepal

Practical Hurdles

• Infrastructure gaps: Limited logistics and unreliable electricity in SEZs

• Bureaucratic delays: Despite the online OCR system, approvals can be slow

• Skills mismatch: Shortage of workers trained in advanced garment finishing

• Documentation burden: Complex procedures for banking and profit repatriation

Mitigation Strategies

• Partner with local compliance and legal experts

• Invest in employee skill development programs

Plan ahead for customs and NRB documentation to avoid delays. 

Nepal vs India vs Bangladesh: a comparison

Case study: Global brand expansion into Nepal

A European fast-fashion brand shifted part of its production from India to Bhairahawa SEZ in 2023. Within two years:

• Reduced effective tax rate by 18%.

• Lowered logistics cost by 10% due to border proximity.

• Achieved stable labor retention compared to Bangladesh.

Top opportunities for 2025 and beyond

1. Sportswear exports: Growing demand in U.S. and Europe.

2. Eco-friendly garments: Nepal’s hydropower enables sustainable branding.

3. SME subcontracting: Brands outsourcing to Nepalese SMEs.

4. Luxury niche products: Cashmere and wool integrated with ready-made lines.

Numbered checklist: Incorporating a garment company in Nepal

1. Reserve company name.

2. Draft MoA and AoA.

3. Secure FITTA approval.

4. Transfer capital via NRB.

5. Register company with OCR.

6. Obtain PAN and VAT.

7. Get DOI industry license.

8. Sign SEZ lease agreement.

9. Recruit and onboard workforce.

10. Ensure payroll and compliance setup.

Frequently Asked Questions (FAQs)

Q1: Can I fully own a garment company in Nepal as a foreigner?
Yes, 100% foreign ownership is permitted under FITTA 2019.

Q2: How long does incorporation take?
Usually 6–10 weeks depending on FITTA and NRB approvals.

Q3: Are garment exports from Nepal duty-free?
Yes, under GSP in EU and partially in the U.S.

Q4: What is the minimum FDI requirement?
NPR 50 million (approx. USD 375,000).

Q5: Can I repatriate my profits?
Yes, with NRB approval and tax clearance.