Repatriation of Profits in Nepal: What Foreign Investors Need to Know

For foreign investors establishing a company in Nepal, understanding the intricacies of profit repatriation is crucial. Securing approvals from Nepal Rastra Bank (NRB), adhering to local taxation policies, and maintaining compliant financial records under the Foreign Investment and Technology Transfer Act (FITTA) 2019 are just a few steps in a process designed to ensure transparency and control over outbound capital flows. This guide delves into the legal framework, documentation requirements, and best practices for repatriating profits, dividends, and other returns from your Nepal-based enterprise.

1. Legal Framework Governing Profit Repatriation in Nepal

1.1 Foreign Investment and Technology Transfer Act (FITTA) 2019

Under FITTA 2019, foreign investors are entitled to:

• Full Repatriation of Profits: Post-tax earnings and dividends can be transferred abroad once relevant clearances are obtained.
• Repatriation of Capital Gains: Realised gains from share transfers or liquidation can be repatriated subject to capital gains tax and regulatory approvals.
• Loan Repayment and Interest Transfers: External commercial borrowings and associated interest payments can be remitted to the lender’s home country following due process.

1.2 Role of Nepal Rastra Bank (NRB)

As Nepal’s central bank, NRB ensures:

• Foreign Exchange Control: Monitoring inbound and outbound forex transactions.
• Approval for Outward Remittances: Companies must secure NRB clearance to repatriate dividends, interest payments, and equity funds.
• Periodic Reporting: NRB requires disclosures on loan repayments, equity changes, and net profit distributions to ensure compliance with monetary regulations.

2. Steps to Repatriate Profits

2.1 Obtain Tax Clearance

Before initiating any outbound fund transfer:

1. Corporate Tax Settlement: Ensure all corporate income tax, withholding tax, and VAT (if applicable) are fully paid.
2. Tax Clearance Certificate: Issued by the Inland Revenue Department (IRD), this document confirms there are no outstanding tax liabilities.

2.2 Prepare Financial Statements

• Audited Financials: Repatriation requests hinge on annual audited accounts that comply with Nepal Financial Reporting Standards (NFRS).
• Board Resolutions: For dividend or interest payouts, your board must authorize the specific amount and timeline of remittances.

2.3 Lodge Application with NRB

Submit:

• Tax Clearance Certificate from IRD.
• Audited Balance Sheet and Profit & Loss Statement.
• Supporting Documents: Dividend declaration letter, details of foreign shareholders or lenders, and bank references.

NRB reviews the documentation to ensure compliance with FITTA 2019, Companies Act 2006, and any sector-specific laws. Once approved, the central bank issues a clearance letter.

2.4 Execute the Transfer

With NRB’s go-ahead:

1. Coordinate with a Local Bank: Authorised dealer banks in Nepal facilitate foreign exchange transfers.
2. Maintain Transaction Records: Keep a thorough paper trail, including SWIFT details, remittance requests, and bank acknowledgments for future reference and audits.

3. Tax Considerations for Profit Repatriation

3.1 Corporate Income Tax

Nepal’s corporate tax rate generally stands at 25% for most industries. Certain sectors (e.g., banking, insurance) can face higher rates of 30% or more. Proper tax planning ensures minimal disruptions in the repatriation process.

3.2 Withholding Tax

• Dividend Distribution: Subject to a withholding tax of up to 5%, depending on current laws.
• Interest Payments: Withholding tax rates can reach up to 15% for interest remitted to non-residents, although Double Taxation Avoidance Agreements (DTAA) may lower these rates.

3.3 Capital Gains Tax

If foreign investors sell shares or liquidate assets, capital gains may be taxed. The applicable rate varies based on asset type, holding period, and DTAA provisions.

4. Best Practices for Seamless Repatriation

4.1 Maintain Accurate Documentation

• Transaction Logs: Every financial move, from initial FDI inflows to profit distributions, must be meticulously recorded.
• Audited Accounts: Align with NFRS to avoid red flags during NRB or IRD reviews.

4.2 Engage Local Experts

• Chartered Accountants (CAs): Familiar with Nepalese tax laws and audit procedures, ensuring compliance.
• Legal Counsel: Advises on potential regulatory pitfalls and handles official correspondences with NRB and IRD.

4.3 Utilize DTAAs

Nepal holds Double Taxation Avoidance Agreements with select nations. Leveraging these treaties can:

• Reduce Withholding Taxes: Apply lower withholding rates on dividends, interest, or royalties.
• Prevent Double Taxation: Eliminate paying taxes in both Nepal and the investor’s home country.

4.4 Plan Ahead for Currency Fluctuations

• Hedging Instruments: Consider forward contracts or currency swaps if large amounts are to be repatriated at once.
• Staggered Transfers: Minimises the impact of exchange rate volatility on your remitted funds.

Frequently Asked Questions (FAQ)

1. Is there a minimum holding period before I can repatriate profits?
   Not specifically. However, compliance steps—like tax clearance and NRB approval—must be completed each time you remit profits abroad.

2. Do I need separate approval for dividend and loan interest transfers?
   Yes. While the process is similar, you must submit separate requests and documents for dividend distributions and loan interest remittances to NRB.

3. Can foreign investors repatriate 100% of their profits from Nepal?
   Yes, provided all statutory obligations—taxes, audited statements, NRB approvals—are fulfilled. Partial or full profit repatriation is permitted once these criteria are met.

4. How long does the NRB approval process typically take?
   Timelines vary, but a straightforward application with complete documentation may receive clearance in 2–4 weeks. Complex cases might take longer if additional clarifications are needed.

5. Can I reinvest my profits in Nepal instead of repatriating them?
   Absolutely. Foreign investors can reinvest their dividends or profits into existing or new Nepal-based ventures, often qualifying for additional tax incentives or capital allowances.

Conclusion

Successfully repatriating profits from a Nepal-based company hinges on regulatory alignment, robust accounting, and timely approvals from bodies like NRB and IRD. By maintaining transparent financial records, settling taxes proactively, and filing the correct applications, foreign investors can safeguard their FDI returns. Combining prudent tax planning with local expertise not only streamlines the repatriation process but also fosters trust with Nepal’s regulatory ecosystem—paving the way for long-term, profitable operations in this promising frontier market.

At Digital Consulting Ventures, we specialise in guiding foreign companies through Nepal’s profit repatriation journey—from tax optimisation to NRB compliance. Our experts ensure seamless transactions, leaving you free to focus on expanding your investment footprint in Nepal.