Government Incentives and Tax Benefits for Foreign Investors in Nepal

Foreign company registration in Nepal is becoming increasingly attractive thanks to a range of government incentives and tax benefits. The Government of Nepal has introduced investor-friendly policies and fiscal advantages to encourage foreign direct investment (FDI). These incentives span corporate tax relief, VAT and customs concessions, profit repatriation guarantees, and special schemes like tax holidays and Special Economic Zones (SEZs). This article provides a comprehensive overview of the major government incentives and tax benefits available to foreign investors across all sectors, backed by up-to-date data and legal references from official sources.

Nepal’s FDI Policy and Foreign Company Registration Climate

Nepal’s policy framework actively welcomes foreign investors, making foreign company registration in Nepal a straightforward process. Under the Foreign Investment and Technology Transfer Act (FITTA) 2019, almost all sectors are open to 100% foreign ownership, with only a small negative list of restricted industries. This means foreign companies receive national treatment – they are treated the same as domestic companies, with legal protections against nationalization or expropriation. Land ownership is permitted for companies incorporated in Nepal with foreign investment, enabling investors to own property through their company.

To streamline FDI, FITTA 2019 introduced a Single-Point Service Center (one-stop service) for investors. Through this facility, foreign investors can obtain all necessary approvals and services – from investment approval and company incorporation to work permits and visas – under one roof.The law also sets clear timeframes: approval for a foreign investment must be decided within 7 days of a complete application.This prompt approval process, combined with the simplified registration formalities, significantly eases the entry of foreign companies. Moreover, Nepal provides easy visa facilitation for investors: business visas are available for foreign investors and their representatives, and an investor who brings at least USD 100,000 in capital is eligible for a residential visa.These policy features highlight Nepal’s commitment to creating a welcoming investment climate.

Corporate Tax Rates for Foreign Companies

Foreign-invested companies in Nepal are subject to the same corporate income tax rates as local companies, as part of Nepal’s national treatment principle. The standard corporate income tax rate is 25% of taxable income. Certain industries face different rates: for example, banks, financial institutions, insurance companies, and petroleum businesses are taxed at 30%. On the other hand, “special industries” (often referring to manufacturing and infrastructure projects under the BOOT model) enjoy a lower rate of 20%. These rates apply equally to foreign-owned and Nepali-owned firms.

In addition to corporate tax, Nepal levies a tax on distributed profits (dividends). Notably, dividends are taxed at only 5% final withholding, for both residents and non-resident (foreign) investors.This low dividend tax means that after paying corporate income tax, a company can distribute profits to foreign shareholders with just a 5% tax, which is especially beneficial for investors looking to repatriate earnings. Furthermore, Nepal has signed Double Taxation Avoidance Agreements (DTAAs) with more than 10 countries, including India, China, and several European and SAARC nations.These treaties prevent foreign investors from being taxed twice on the same income and can reduce withholding tax rates on dividends, royalties, or interest. Overall, Nepal’s moderate corporate tax rates and favorable tax treaty network provide a competitive tax regime for foreign companies.

VAT and Customs Duty Concessions

Nepal imposes a Value Added Tax (VAT) at a standard rate of 13% on goods and services. However, the tax system offers important concessions that benefit foreign investors, particularly those involved in manufacturing or export. Most significantly, exports are zero-rated under VAT – any VAT paid on inputs for producing export goods or services is refunded, resulting in no VAT cost on exported products. This ensures foreign companies focused on export markets can operate tax-efficiently. Additionally, certain projects (for example, large infrastructure or industrial projects) may receive special VAT exemptions or refunds on capital goods. The government often announces VAT and customs duty waivers on the import of machinery and equipment for priority industries in its annual budget, reducing upfront costs for investors.

On the customs side, Nepal provides several incentives to lower the import burden for industries. By law, the import customs duty on raw materials is set lower than the duty on finished products, encouraging local production. For instance, if a finished good carries a high import tariff, the raw materials to produce that good domestically will have a tariff one tier lower,This structure benefits manufacturing companies (including foreign joint ventures) by making their input imports cheaper. Moreover, industries that export their output or sell in foreign currency can avail duty drawback facilities – they can get refunds of import duties on raw materials used in exported goods. If an industry is not using the bonded warehouse or passbook facility, it can still claim duty refunds once it exports the finished product.

The government also extends customs duty exemptions or concessions on the import of plant, machinery, and equipment for industrial production. Many foreign investors setting up factories or large projects in Nepal benefit from reduced or 0% customs duty on importing machinery (as periodically provisioned in the Finance Act). These VAT and customs incentives substantially lower the cost of establishing and operating a foreign-owned business in Nepal, especially in manufacturing and infrastructure development.

Income Tax Holidays and Sector-Specific Incentives

One of the most appealing aspects of Nepal’s incentive regime is the availability of income tax holidays and concessions for certain industries, regions, and scales of investment. The Industrial Enterprise Act, 2020 (2076) and annual Finance Acts provide a framework of tax exemptions to encourage investment in priority sectors and less-developed areas of the country. These tax holidays significantly reduce or even eliminate the corporate tax liability for a number of years, depending on criteria like location or nature of the business:

• Regional Tax Holidays: Industries established in designated underdeveloped or remote regions enjoy large income tax exemptions. Businesses set up in a least developed area receive 90% income tax exemption for up to 10 years from the start of commercial operations. Those in an underdeveloped area get an 80% exemption for 10 years, and in a moderately developed (less developed) area a 70% exemption for 10 years. These regional incentives aim to channel investment outside the Kathmandu Valley into other provinces by drastically lowering taxes for a decade.

• Large-Scale Investment Incentives: Projects above certain scale qualify for full tax holidays. Any new industry investing over NPR 1 billion (approximately USD 7.5 million) and creating more than 500 direct jobs is granted 100% income tax exemption for the first 5 years, and a 50% exemption for the next 3 years. This reward for big investors effectively halves the tax burden even after the initial tax holiday period, making Nepal attractive for large foreign ventures and multinational projects.

• Priority Sectors (Infrastructure, Energy, Tourism): Nepal prioritizes infrastructure and energy development, offering special tax breaks for these sectors. For example, investments in public infrastructure (roads, bridges, railways, airports, etc.) get a 40% income tax reduction as an ongoing concession. In the energy sector, hydropower and other renewable energy projects enjoy a 10-year tax holiday (100% exemption) from the date of commercial generation, followed by a 50% tax reduction for the next 5 years. This means a hydropower plant can operate tax-free for a decade and then pay only half of the standard rate in the subsequent five years, provided it comes into operation within the stipulated date. Similarly, large-scale tourism projects (such as hotels or resorts with investment over NPR 2 billion) are granted full tax exemption for 5 years and 50% for the next 3 years after starting operations, incentivizing foreign investment in Nepal’s growing tourism industry.

• Technology and Special Industries: Certain knowledge-based industries also see benefits. Enterprises like IT parks, biotech parks, software development, and data processing centers established within designated technology parks can receive 50% income tax exemptions, as specified by government notice. Likewise, producers of specific goods such as processed tea, dairy products, and textiles are granted a 50% reduction in income tax to promote domestic production These sectoral incentives reflect Nepal’s policy focus on self-reliance in agriculture and manufacturing, as well as promotion of the tech sector.

It’s important to note that these are base incentives provisioned by law, and the government often enhances them via annual budget announcements. All such incentives are legally protected – once granted, an incentive is shielded from adverse changes in law, ensuring investors can count on the promised benefits throughout the specified period.Overall, generous tax holidays across various sectors and regions significantly improve the post-tax return on investment for foreign companies in Nepal.

Special Economic Zone (SEZ) Benefits

Nepal has established Special Economic Zones (SEZs) to attract export-oriented FDI, with a dedicated Act (Special Economic Zone Act 2016) that provides additional benefits to industries operating within these zones. Companies setting up in an SEZ enjoy sweeping tax holidays and fiscal concessions beyond the standard incentives:

• Corporate Tax Holiday in SEZ: Industries in an SEZ are completely exempt from income tax for an initial period, followed by a partial exemption. If the SEZ is located in a mountain or specified hill district, the company gets a full income tax exemption for the first 10 years, and then a 50% exemption for the remaining years of operation. For SEZs in other locations (e.g., the plains or urban areas), there is a 100% income tax holiday for the first 5 years of operation and a 50% exemption for the next 5 years.These substantial holidays mean a decade of little to no corporate tax, greatly enhancing profitability for qualifying foreign investors.

• Dividend Tax Exemption: In addition to the corporate tax break, dividends distributed by SEZ industries are tax-free for a defined period. Investors in SEZ companies pay no tax on dividends for the first 5 years, and only 50% of the applicable dividend tax for the next 3 years. Given that Nepal’s dividend tax is already low at 5%, this effectively reduces the dividend withholding to 0% initially and about 2.5% thereafter for several years – an added boon for foreign shareholders remitting profits.

• VAT and Customs Benefits in SEZ: To promote exports, SEZ transactions are largely VAT-free. Any goods or services exported from an industry within the SEZ carry 0% VAT (zero-rated), ensuring that SEZ companies can claim refunds on input VAT and not incur VAT on their export sales. Likewise, sales or transfers of raw materials and finished goods between industries within the SEZ are zero-rated, creating a VAT-free supply chain inside the zone. SEZ companies also benefit from customs duty concessions. They can import needed raw materials, machinery, equipment, and even up to three vehicles by furnishing a bank guarantee, rather than upfront duty payment.  Essentially, customs duties on such imports are deferred or waived as long as the goods are used for the SEZ production. If an SEZ industry purchases raw materials from a domestic exporter who had paid duty, that duty is reimbursed to the exporter, preventing double taxation on inputs.

• Repatriation and Currency Facilities: The SEZ framework guarantees hassle-free repatriation for foreign investors. Profits, dividends, and proceeds from the sale of shares can be repatriated in foreign currency for SEZ industries. Foreign investors in SEZs are even allowed to maintain bank accounts in foreign currency in Nepal (with approval), making it easier to conduct international transactions. These provisions ensure that foreign companies can easily transfer their returns out of Nepal. Additionally, administrative support is strong – a one-window service center is established within each SEZ to handle all regulatory and operational needs of companies on-site. Labor disruptions are minimized since strikes are prohibited inside SEZs, providing a stable working environment.

SEZs in Nepal currently include locations such as Bhairahawa and Simara, with more under development. The combination of multi-year tax holidays, zero VAT, duty-free imports, and dedicated facilities in these zones is a significant incentive for foreign investors, particularly those focused on manufacturing exports. It allows companies to operate at much lower tax costs and with streamlined customs and administrative processes.

Repatriation of Profits and Capital

For foreign investors, the ability to repatriate profits, dividends, and invested capital is crucial. Nepal’s laws provide full rights for repatriation of earnings and capital, which is a strong assurance for investors. Under FITTA 2019 and Nepal Rastra Bank regulations, foreign investors are entitled to repatriate the following in foreign currency, after paying applicable Nepali taxes:

• Dividends or Profit: Net profits or dividends from the company can be sent abroad. Nepal allows repatriation in the same currency of the original investment or any convertible foreign currency.

• Capital Gains: If the foreign investor sells shares or equity in the Nepali company (in part or full), the proceeds from the sale can be repatriated.

• Loan Repayments and Interest: Any foreign loans brought into Nepal (with NRB approval) can be repaid to the foreign lender, along with interest, in foreign currency.

• Technology Transfer Fees: Royalties, technical know-how fees, or management fees due to foreign partners under an approved technology transfer agreement can also be remitted.

All repatriation is subject to the condition that applicable taxes are settled and the necessary approvals are obtained. The Department of Industry (DoI) or Investment Board Nepal (for larger projects) and Nepal Rastra Bank (NRB) jointly regulate this process to ensure compliance with tax and foreign exchange laws. Notably, FITTA 2019 introduced a faster timeline for repatriation approvals – the government must grant permission to repatriate funds within 15 days of application (once all documents are in order). In practice, a foreign investor will apply with evidence of tax clearance and profit/dividend declaration, and upon approval, NRB will effect the remittance. Recent reforms have also aimed at simplifying this procedure. For instance, once tax clearance is obtained, NRB approval is largely procedural, and in some cases regulatory requirements have been eased (such as for investment in listed securities or funds).

The repatriation guarantee is further evidenced in special provisions like the SEZ rules, which explicitly state that foreign investors can repatriate funds from share sales, dividends, and loan payments freely from SEZ-based businesses. Moreover, foreign investors can choose the currency for repatriation – typically the currency of the original investment or another major convertible currency – with NRB’s approval.

These policies reassure investors that they can exit with their capital and profits without undue hindrance. While there are administrative steps to follow, the legal right to repatriation is well-established and protected. In fact, Nepal’s central bank has a dedicated Foreign Exchange Management Department to facilitate FDI inflows and outflows. By ensuring profit repatriation, Nepal aligns with international norms and builds confidence that foreign businesses can realize returns on their Nepali investments.

Additional Incentives and Protections for Foreign Investors

Beyond tax-specific benefits, Nepal offers a range of other incentives and legal protections that support foreign companies:

• Investment Protection: Nepal is a signatory to multilateral agreements and treaties that protect foreign investment. It has joined the Multilateral Investment Guarantee Agency (MIGA) and has Bilateral Investment Promotion and Protection Agreements (BIPPAs) with several countries. These commitments provide assurances against non-commercial risks. Domestically, Nepali law guarantees that no industries with foreign investment will be nationalized, cementing the promise of security for investor assets.

• Legal Arbitration and Dispute Settlement: FITTA 2019 allows disputes involving foreign investors to be resolved through arbitration as per international practices, which can be faster and more reassuring than local court litigation. Nepal is also a party to the New York Convention on arbitration, which supports enforcement of foreign arbitral awards.

• Loss Carryforward: As per tax laws, businesses (including foreign-owned) can carry forward their losses for a certain number of years to offset future profits, which can be a relief for new companies in initial years. Moreover, any expenses on technology transfer (royalties, technical fees) are typically tax-deductible, reducing taxable income.

• Foreign Currency Facilities: Investors are permitted to open foreign currency accounts in Nepal for certain purposes, and loans from foreign lenders can be obtained with approval. There is also a hedging facility introduced for large infrastructure projects to mitigate foreign exchange risk, wherein the government helps provide a currency exchange rate hedge for project loans. This is particularly useful for foreign investments in big projects (like hydropower or highways) where earnings are in local currency but financing may be in USD.

• Sector-Specific Fiscal Incentives: The government often announces extra incentives in priority industries. For example, agriculture and agro-processing businesses may get excise duty relief or subsidized interest rates on loans. Information Technology (IT) firms are now recognized as an industry and can get benefits like concessional office space in IT Parks, and as mentioned, certain IT and BPO companies with high revenues are entitled to special support and financing facilities under the Industrial Enterprise Act. These incentives, while not exclusively for foreign firms, are fully accessible to them under the principle of equal treatment.

• Ease of Doing Business Reforms: Nepal has been gradually improving one-stop services for company registration and investment approval. The Online company registration system, e-government services for tax filing, and customs automation (through ASYCUDA) are in place to reduce bureaucratic delays. The government also provides relocation incentives for industries (e.g., if industries relocate to designated industrial zones, they may carry some tax benefits with them as per recent legal changes).

Together, these measures complement the tax and fiscal incentives to create a supportive ecosystem for foreign companies.

Conclusion: Why Nepal is Attractive for Foreign Investors

Nepal offers a compelling package of incentives that strongly support foreign company registration in Nepal and subsequent business growth. The combination of moderate tax rates, targeted tax holidays, and VAT/customs exemptions can significantly lower operating costs for foreign ventures. Investors enjoy the freedom to repatriate profits and capital in a timely manner, ensuring that they can realize returns on their investment. Progressive policies under FITTA 2019, such as one-stop service and fast-track approvals, reflect the government’s commitment to ease of doing business for foreigners. Crucially, these incentives are not limited to a single sector – whether it’s manufacturing, energy, tourism, or technology, foreign investors will find robust fiscal benefits tailored to their field, from multi-year corporate tax holidays to import duty waivers.

Equally important are the legal protections: Nepal guarantees no discrimination or nationalization of foreign investments, and bilateral treaties provide an extra layer of security for international investors. Special Economic Zones further amplify the advantages with near-zero tax burdens and streamlined operations for export-oriented companies. All these factors make Nepal an increasingly attractive destination for foreign investors seeking new opportunities. By reducing tax liabilities and providing a stable, facilitative policy environment, the government incentives significantly enhance the profitability and confidence of doing business in Nepal. For any company considering foreign company registration in Nepal, these incentives and benefits are key reasons why Nepal stands out as a promising investment location in South Asia.