How to Choose Between Starting a Foreign Branch or Subsidiary in Nepal

Nepal is rapidly positioning itself as a regional hub for cross-border investment, particularly in sectors such as hydropower, tourism, IT services, and manufacturing. With the government welcoming foreign investment through policy reforms and streamlined procedures, more international firms are exploring foreign company registration in Nepal.

One of the first and most important decisions for any foreign investor is this: Should we open a branch office or set up a subsidiary? While both structures enable foreign companies to operate in Nepal, they differ significantly in terms of liability, taxation, governance, and strategic flexibility.

This guide provides an in-depth comparison of foreign branches and subsidiaries in Nepal—helping foreign companies make a well-informed, compliant, and strategic choice.

Understanding the Legal Definitions

1. Branch Office

A branch is an extension of a foreign parent company, not a separate legal entity. It operates in Nepal under the name and control of the overseas parent.

2. Subsidiary Company

A subsidiary is a locally incorporated company in Nepal with its own legal identity, even though it may be 100% foreign-owned. It functions independently, subject to Nepalese law.

Key Legal Requirements

Both entities must be registered with the Department of Industry (DoI) and approved by Nepal Rastra Bank (NRB) to operate legally and repatriate profits.

Taxation Differences

One of the most critical distinctions between a branch and a subsidiary in Nepal is how they are taxed.

Branch Taxation:

• Taxed on Nepal-sourced income only

• Corporate Tax Rate: 25% of net profits

• No dividend tax (since profits are not distributed as dividends)

• Subject to withholding tax on service fees, interest, royalties

Subsidiary Taxation:

• Taxed as a resident company (on worldwide income if applicable)

• Corporate Tax Rate: 25% (standard), 20% (for special industries)

• 5% Dividend Tax when profits are distributed to the foreign parent

• Can claim deductions and depreciation like a domestic firm

For foreign companies that want to avoid dividend taxes, a branch may seem advantageous. However, subsidiaries offer tax planning flexibility, especially for expanding operations or reinvesting profits.

Profit Repatriation Rules

Branch:

• Profits remitted to the parent company are not taxed as dividends

• Repatriation allowed after:

  • Annual audit

  • Tax clearance

  • NRB approval

Subsidiary:

• Must declare dividends through a board resolution

• Pay 5% withholding tax on dividends

• Require NRB approval after tax clearance

While both entities can remit profits legally, the process is slightly easier for branches, especially for companies offering services or short-term projects.

Operational Control and Flexibility

Branch:

• Entirely controlled by the parent

• Can only engage in approved activities listed in FITTA approval

• Cannot raise capital from local market or issue shares in Nepal

Subsidiary:

• Operates independently with its own board

• Greater flexibility to expand operations, hire staff, lease property

• Can raise local funding, participate in tenders, and diversify services

For companies aiming for long-term growth or localization, a subsidiary offers broader flexibility.

Liability and Legal Risk

Branch:

• Unlimited liability: Parent company is directly liable for branch’s debts, taxes, and legal obligations in Nepal

Subsidiary:

• Limited liability: Parent company’s risk is limited to capital invested

• Cannot automatically bind the parent to local contracts or disputes

From a legal risk perspective, subsidiaries offer greater protection, especially for high-risk industries.

Setup Timeline and Process

Branch setup is generally faster, but both involve multiple agencies: Company Registrar, DoI, NRB, and Inland Revenue Department.

Compliance Requirements

Both Branches and Subsidiaries Must:

• Maintain NFRS-compliant financial statements

• Undergo annual audits

• File corporate tax returns, VAT returns, and TDS

• Contribute to Social Security Fund (SSF) if they employ local staff

Additional for Subsidiaries:

• Hold board and shareholder meetings

• Maintain statutory records and share registers

• Prepare and file annual general meeting (AGM) resolutions

When to Choose a Branch

A branch might be ideal when:

• You want a temporary or representative presence

• Your operations are limited in scope (e.g., consulting, project-based work)

• You prefer minimal administrative overhead

• You wish to avoid dividend taxes

When to Choose a Subsidiary

A subsidiary may be better when:

• You are planning long-term operations in Nepal

• You need to hire a full local team or expand locations

• You want to limit legal risk and separate liabilities

• You aim to raise funds locally or apply for large tenders/contracts

Sector-Specific Considerations

• Hydropower / Infrastructure: Often structured as subsidiaries to secure local licenses and funding

• IT / Software: Branch may be sufficient for remote service delivery, but subsidiaries offer better scalability

• Tourism / Hotels: Subsidiaries are preferred for real estate ownership and long-term operations

• Trading / Import-Export: Subsidiary often needed for warehousing, inventory, and VAT compliance

Cost Comparison

Over time, subsidiaries incur higher administrative costs but also offer more autonomy and benefits.

Summary: Choosing the Right Entity for Your Business

Foreign company registration in Nepal is a promising move—but only if you choose the right structure. A branch offers simplicity and fast setup for limited engagements. A subsidiary offers legal protection, operational freedom, and room for growth.

Ultimately, your decision should align with:

• Business duration in Nepal

• Capital investment strategy

• Compliance capacity

• Risk appetite

• Tax planning goals

Final Thoughts

Both branches and subsidiaries are legitimate options under Nepal’s investment law. The Nepalese government supports either structure, provided compliance is maintained. If you’re unsure, consult a local legal and accounting advisor to assess the best fit for your operational and financial goals.

The right decision at this early stage will not only simplify your market entry—but also shape the long-term success of your investment in Nepal.