FDI Legal Advisory in Nepal: Medha Law and Partners

1. Introduction to FDI in Nepal

Foreign Direct Investment (FDI) in Nepal plays a key role in driving industrial growth, employment generation, and infrastructure development. The Government of Nepal promotes FDI under the Foreign Investment and Technology Transfer Act, 2019 (FITTA 2019) and the Industrial Enterprises Act, 2020. These laws outline the procedures for investment approval, operation, and repatriation. FDI is permitted in almost all sectors except those listed in the Negative List published under FITTA 2019.
Nepal’s liberal investment policy, stable remittance inflow, and growing sectors such as hydropower, tourism, and information technology attract investors from India, China, and other countries. The Department of Industry (DOI) and the Investment Board of Nepal (IBN) serve as the key regulatory bodies overseeing foreign investment proposals and implementation. FDI Legal Advisory in Nepal: Medha Law and Partners.

2. Legal Framework Governing FDI in Nepal

Foreign Direct Investment in Nepal is primarily governed by the Foreign Investment and Technology Transfer Act, 2019 (FITTA 2019), which replaced the earlier 1992 Act. FITTA 2019 defines foreign investment, establishes procedures for approval, and ensures repatriation rights. The Industrial Enterprises Act, 2020, the Public-Private Partnership and Investment Act, 2019, and the Companies Act, 2006 further regulate business establishment and operation by foreign investors.

The Foreign Exchange Regulation Act, 1962 and directives issued by the Nepal Rastra Bank (NRB) regulate currency exchange and repatriation of earnings. Additionally, the Income Tax Act, 2002 governs taxation of foreign enterprises. These laws together provide a clear procedural and regulatory structure for entry, operation, and exit of foreign investors in Nepal.

The government also issues Foreign Investment and Technology Transfer Regulations, 2021, detailing the documentation and approval timelines for investment applications.

3. Approval Process for Foreign Investment in Nepal

The approval process for FDI in Nepal is structured under Section 5 of the Foreign Investment and Technology Transfer Act, 2019 (FITTA 2019) and the Foreign Investment and Technology Transfer Regulations, 2021. The process differs depending on the investment amount and the nature of the business.

Steps for Approval:

1. Submission of Application: Investors submit an application to the Department of Industry (DOI) for investments below NPR 6 billion, and to the Investment Board Nepal (IBN) for investments equal to or exceeding NPR 6 billion.

2. Required Documents:

   • Project Proposal

   • Joint Venture Agreement or Share Purchase Agreement

   • Financial Credibility Certificate

   • Company Incorporation Documents

   • Tax Clearance (if applicable)

3. Approval Decision: The DOI or IBN reviews and issues approval within 7 to 30 working days, depending on the project size.

4. Company Registration: Once approval is obtained, investors must register under the Companies Act, 2006 and obtain a Permanent Account Number (PAN) from the Inland Revenue Department.

4. Industries Open and Restricted for FDI in Nepal

Nepal maintains an open policy toward foreign investment, encouraging participation in most sectors under Schedule 8 of FITTA 2019 and the Industrial Enterprises Act, 2020. However, certain industries are restricted to protect national interests, cultural heritage, and security.

Industries Open for FDI:

• Hydropower generation and transmission

• Tourism, hotels, and resorts

• Manufacturing and infrastructure development

• Information technology and telecommunications

• Agriculture, livestock, and food processing

• Education and healthcare (subject to approval)

Industries Restricted for FDI:

According to the Negative List under FITTA 2019, FDI is not permitted in:

• Cottage and small-scale industries using traditional skills and labor

• Arms, ammunition, and explosives

• Currency and coin minting

• Real estate business (except large-scale infrastructure)

• Retail business with full foreign ownership

Investors are advised to verify sectoral openness with the Department of Industry (DOI) before submission.

5. Minimum Investment Thresholds for Foreign Investors in Nepal

The Foreign Investment and Technology Transfer Act, 2019 (FITTA 2019) sets a mandatory minimum investment threshold for all foreign investors entering Nepal. As per Section 3(2) of FITTA and Rule 3 of the Foreign Investment and Technology Transfer Regulations, 2021, the minimum investment amount is NPR 20 million (approximately USD 150,000) for each foreign investor.

This threshold applies to both joint ventures and fully foreign-owned enterprises, regardless of the sector. It ensures that only serious and sustainable investments enter the Nepali market. The threshold excludes working capital and focuses solely on equity investment or paid-up capital.

However, the government may revise this threshold periodically through official gazette notifications. Smaller investments below the threshold can only be made by Nepali citizens or companies with domestic capital.

6. Repatriation of Profits and Capital from Nepal

Foreign investors in Nepal are entitled to repatriate their earnings as guaranteed under Section 10 of the Foreign Investment and Technology Transfer Act, 2019 (FITTA 2019) and the Foreign Exchange Regulation Act, 1962. Repatriation covers profits, dividends, capital gains, principal from loan repayments, and proceeds from the sale of shares.

Before repatriation, investors must obtain clearance from the Department of Industry (DOI) or the Investment Board Nepal (IBN) and approval from the Nepal Rastra Bank (NRB). The NRB ensures that all taxes and dues have been paid under the Income Tax Act, 2002.

Repatriation must be made in convertible foreign currency through the banking system. The process generally takes two to four weeks, depending on documentation and compliance review. The government’s liberal repatriation policy reinforces investor confidence and facilitates long-term reinvestment.

7. Taxation on Foreign Investment in Nepal

Foreign investors in Nepal are subject to taxation under the Income Tax Act, 2002, and related rules issued by the Inland Revenue Department (IRD). Corporate income tax rates for foreign-owned companies generally range from 25% to 30%, depending on the sector and business type. Dividends distributed to foreign investors are subject to a 10% withholding tax, while interest on loans is taxed at 15%.

Certain sectors, including hydropower, export-oriented industries, and technology ventures, may receive tax exemptions or reductions under the Industrial Enterprises Act, 2020, and government-issued incentive packages. Value Added Tax (VAT) at 13% is applied to goods and services, including foreign-owned enterprises operating domestically.

Foreign investors must also comply with withholding tax provisions, submit annual tax returns, and obtain tax clearance before repatriating profits. Professional guidance ensures compliance and avoids penalties under Nepali tax law. Medha Law and Partners Is a leading law firm in Nepal.

8. Role of BOI and DOI in FDI Regulation in Nepal

The Investment Board Nepal (IBN or BOI) and the Department of Industry (DOI) are the two principal authorities regulating foreign investment in Nepal. Their responsibilities are defined under FITTA 2019, Industrial Enterprises Act 2020, and related regulations.

Department of Industry (DOI):

• Approves foreign investments below NPR 6 billion

• Monitors compliance with FITTA 2019 and sectoral regulations

• Issues investment certificates and project approvals

• Facilitates company registration, licenses, and local permits

Investment Board Nepal (IBN/BOI):

• Approves mega projects exceeding NPR 6 billion

• Coordinates with multiple government agencies for large-scale infrastructure and industrial projects

• Provides policy guidance, incentives, and special approvals

• Ensures smooth facilitation of foreign investors in strategic sectors like hydropower, transportation, and technology

Together, DOI and BOI provide a structured mechanism for foreign investors, ensuring regulatory compliance while promoting sustainable economic development.

9. FDI in Hydropower, Tourism, and Technology Sectors in Nepal

Nepal offers significant opportunities for foreign investors in hydropower, tourism, and technology sectors.

Hydropower Sector:

Nepal’s rivers provide enormous hydropower potential, attracting both regional and global investors. Under FITTA 2019 and the Electricity Act, 1992, foreign investors can establish generation, transmission, and distribution projects. The government provides tax incentives, including exemptions on profits for initial years, accelerated depreciation, and easy repatriation of earnings.

Tourism Sector:

Tourism is a major contributor to Nepal’s economy. Investments in hotels, resorts, trekking infrastructure, and adventure tourism are encouraged under Industrial Enterprises Act 2020. FDI is allowed in hotel ownership, resorts, and specialized tourism services, with licensing from the Ministry of Culture, Tourism, and Civil Aviation.

Technology Sector:

IT and software services are open for 100% foreign ownership. Incentives include reduced corporate taxes and repatriation rights. Investors are required to register with DOI, obtain IT service licenses, and comply with data protection laws.

These sectors remain highly attractive due to Nepal’s liberal FDI policy, growth potential, and government facilitation.FDI Legal Advisory in Nepal: Medha Law and Partners.

10. Legal Challenges and Dispute Resolution Mechanisms in Nepal for FDI

Foreign investors in Nepal may face legal and operational challenges, including regulatory delays, sector-specific restrictions, and contractual disputes. These challenges are addressed under FITTA 2019, the Civil Procedure Code 2017, and arbitration laws.

Common Legal Challenges:

• Delays in approval from DOI or BOI

• Land acquisition issues and property registration complications

• Sector-specific restrictions in the Negative List

• Tax disputes and compliance with withholding provisions

Dispute Resolution Mechanisms:

• Negotiation and Mediation: Investors are encouraged to resolve conflicts amicably before formal proceedings.

• Arbitration: Under the Arbitration Act, 1999, disputes can be resolved domestically or internationally.

• Litigation: Courts handle disputes regarding contracts, taxation, and regulatory compliance.

• BOI Facilitation: Mega projects may leverage IBN’s facilitation for resolving administrative and inter-agency disputes.

These mechanisms ensure that foreign investors have legal recourse while maintaining regulatory oversight and stability. FDI Legal Advisory in Nepal: Medha Law and Partners.

11. How Medha Law and Partners Assists in FDI Advisory in Nepal

Medha Law and Partners provides comprehensive legal advisory services for foreign investors in Nepal, guiding clients through every step of the FDI process. The firm specializes in FDI compliance, investment structuring, regulatory approvals, and dispute resolution.

Key Services:

• Regulatory Guidance: Advising on FITTA 2019, Industrial Enterprises Act 2020, and sector-specific rules

• Approval Assistance: Preparing and submitting applications to DOI and Investment Board Nepal (IBN/BOI)

• Company Formation: Handling registration, incorporation, and obtaining PAN from the Inland Revenue Department

• Contract Drafting and Negotiation: Structuring joint venture agreements, shareholder agreements, and technology transfer contracts

• Dispute Resolution: Representing clients in arbitration, mediation, and litigation under Nepali law

Advocates Prabin Kumar Yadav and Pratik Poudel are recognized for their expertise in FDI advisory, offering strategic solutions that ensure compliance and smooth operations for foreign investors.

12. Frequently Asked Questions (FAQs) on FDI in Nepal

Q1: What is the minimum investment required for FDI in Nepal?

The minimum foreign investment in Nepal is NPR 20 million, as per FITTA 2019. This applies to both joint ventures and wholly foreign-owned enterprises. The threshold focuses on equity capital and excludes working capital.

Q2: Which authorities approve foreign investment in Nepal?

Investments below NPR 6 billion are approved by the Department of Industry (DOI), while projects equal to or above NPR 6 billion require approval from the Investment Board Nepal (IBN/BOI).

Q3: Can foreign investors repatriate profits from Nepal?

Yes. Under FITTA 2019 Section 10 and Foreign Exchange Regulation Act 1962, foreign investors can repatriate profits, dividends, and capital after obtaining NRB clearance and paying applicable taxes.

Q4: Which sectors are restricted for foreign investment in Nepal?

FDI is restricted in industries listed in the Negative List under FITTA 2019, including arms, explosives, currency minting, real estate (except large infrastructure), and traditional cottage industries.

Q5: What are the tax obligations for foreign investors?

Foreign-owned enterprises must pay corporate income tax (25–30%), withholding tax on dividends (10%), and VAT at 13%. Tax incentives may apply for specific sectors such as hydropower and IT.

Q6: How can Medha Law and Partners assist foreign investors?

Medha Law and Partners provides end-to-end legal advisory, including FDI approval, company registration, regulatory compliance, investment structuring, and dispute resolution. Advocates Prabin Kumar Yadav and Pratik Poudel offer specialized guidance for smooth operations in Nepal.