Foreign Investment in Nepal: How to Incorporate Your Business

Nepal is an emerging investment destination, offering numerous opportunities in sectors like tourism, hydropower, agriculture, and technology. For foreign investors looking to establish a presence, understanding the incorporation process is essential to ensure compliance with local laws and a smooth setup. This guide provides step-by-step instructions, legal references, and practical tips for incorporating a foreign company in Nepal.

Why Invest in Nepal?

Nepal’s strategic location between China and India, combined with its growing economy and government incentives for foreign investors, makes it an attractive market. The country welcomes foreign investments through its open investment policies, offering various incentives for businesses in priority sectors.

Legal Framework Governing Company Incorporation in Nepal

Before initiating the incorporation process, it’s important to familiarise yourself with the key laws regulating foreign investments and company registration in Nepal:laws:

• Companies Act, 2006 (2063 B.S.):

  • Governs the incorporation, operation, and dissolution of companies in Nepal.
  • Applicable to all companies, including foreign-invested entities.
    

• Foreign Investment and Technology Transfer Act, 2019 (2075 B.S.) (FITTA):

  • Provides regulations for foreign direct investment (FDI), technology transfers, and repatriation of profits.

• Industrial Enterprises Act, 2020 (2076 B.S.):

  • Offers incentives, tax relief, and operational guidelines for industries, including those established by foreign investors.

• Income Tax Act, 2002 (2058 B.S.):
  

  • Details the tax obligations of companies operating in Nepal.

• Labour Act, 2017 (2074 B.S.):

  • Outlines employment laws, ensuring fair practices and rights for employees.

• Environment Protection Act, 2019 (2076 B.S.):

  • Mandates environmental compliance for companies operating in Nepal.
    

Step-by-Step Guide to Incorporating a Foreign Company in Nepal

1. Choose the Right Business Structure

Foreign investors can establish the following types of companies in Nepal:

• Private Limited Company (ideal for smaller investments)
• Public Limited Company (for larger projects requiring public shareholding)
• Branch Office (for companies looking to operate directly under the parent company)
• Liaison Office (for non-commercial activities like market research or networking)

2. Obtain Foreign Investment Approval

To invest in Nepal, foreign entities must first obtain approval from the Department of Industry (DOI) or the Investment Board Nepal (IBN) for large-scale projects.

• Authority Involved:

  • Department of Industry (DOI) for small and medium investments.
  • Investment Board Nepal (IBN) for large-scale investments exceeding NPR 6 billion.

• Documents Required:

  • Copy of the company’s incorporation certificate (from the home country)
  • Articles of Incorporation or Memorandum of Association
  • Board resolution authorising investment in Nepal
  • Passport copies of foreign directors/shareholders
  • Financial projections and feasibility studies
  • Proposed capital structure and business objectives
  • Proposed technology transfer agreement, if applicable

• Regulatory Process:

  • Submit an application to the DOI or IBN.
  • The application is reviewed to ensure compliance with FITTA regulations.
  
  

3. Company Name Reservation

Before registering a company, reserve a unique company name with the Office of the Company Registrar (OCR).

Process:

• Check name availability online.
• Submit an application with suggested names and pay the reservation fee.
• Receive confirmation from OCR.
  
  

4. Register the Company with the Office of the Company Registrar (OCR)

Once investment approval is obtained, the next step is company registration under the Companies Act, 2006.

Documents Required:

• Approval letter from DOI or IBN.
• Proposed company name (check availability via OCR’s portal).
• Memorandum and Articles of Association.
• Details of shareholders, directors, and local representatives.
• Rent Agreement 

Procedure:

• Submit documents through OCR's online portal or in person.
• Pay the applicable registration fee based on authorised capital.
• Obtain a Certificate of Incorporation.

5. Register for Taxation

Every incorporated company must register with the Inland Revenue Department (IRD) to obtain:

• Permanent Account Number (PAN).
• Value Added Tax (VAT) registration (if applicable).
• Tax Deduction at Source (TDS) number.

Under the Income Tax Act, 2002 & Value Added Tax Act, 2052 (1996), companies are required to comply with tax regulations, including annual filings.

Documents Required:

• Certificate of incorporation
• MoA and AoI
• Details of the company’s directors and shareholders
• PAN certificate
• Business operation documents
• Rent Agreement

6. Obtain Industry-Specific Licenses

Depending on the nature of the business, additional licenses or permits may be required. For instance:

• Hydropower projects require licensing from the Department of Electricity Development.
• Tourism businesses must obtain permits from the Department of Tourism.

4. Open a Bank Account for Capital Injection

Foreign companies are required to open a business bank account in Nepal to bring in the initial investment.

Steps:

• Submit the investment approval letter.
• Provide a capital injection plan.
• Transfer the approved foreign investment amount via banking channels.

7. Hire Local and Foreign Employees

Employers must comply with the Labour Act, 2017, by:

• Registering employees with the Social Security Fund (SSF)
• Maintaining employee records and adhering to labor rights
• Signing employment contracts
• Providing employee benefits like provident funds and insurance
• Obtaining work permits for foreign employees

7. Post-Incorporation Compliance

After incorporation, foreign companies must:

• File annual returns with the OCR
• Maintain accurate financial records
• Ensure tax compliance (e.g., income tax, VAT, customs duties)

Taxation for Foreign Companies in Nepal

• Corporate Income Tax:

  • General Rate: 25%
  • Special Rate: 20% for specific industries (e.g., tourism, hydropower)

• Withholding Tax:

  • Dividends: 5%
  • Royalties and Technical Fees: 15%

• Value Added Tax (VAT):

  • Standard Rate: 13%

• Tax Holidays and Incentives:

  • Industries in prioritised sectors may qualify for tax exemptions and holidays under the Industrial Enterprises Act, 2020.

Key Considerations for Foreign Investors

Restrictions on Foreign Investment

Certain sectors are prohibited or restricted for foreign investment under FITTA, including:

• Real estate business (except construction-related activities).
• Retail trade with less than 51% foreign ownership.
• Atomic energy, arms, and ammunition production.

Repatriation of Profits

Foreign investors can repatriate profits, dividends, and capital gains after paying applicable taxes. The process must be approved by Nepal Rastra Bank (NRB), the central bank.

Annual Compliance Requirements

All companies must submit:

• • Annual financial statements audited by a licensed auditor.
  • Tax returns to the IRD.
  • Details of foreign employees and their permits.

Common Challenges for Foreign Companies in Nepal

1. Regulatory Delays: Bureaucratic hurdles can slow down the approval process.
2. Infrastructure Gaps: Limited infrastructure, particularly in rural areas, can pose challenges.
3. Currency Convertibility: Restrictions on foreign exchange transactions require NRB approval.

In Conclusion:

Nepal offers exciting opportunities for foreign investors willing to navigate its regulatory environment. By following the outlined steps and seeking professional guidance, companies can successfully establish their presence and benefit from Nepal’s growing economy.

Disclaimer

This article is for informational purposes only and does not constitute legal or financial advice. Foreign companies should consult qualified professionals or legal advisors to navigate the incorporation process and ensure compliance with Nepalese laws.