Foreign Investment and Technology Transfer Act

1. Introduction and Legislative Intent

The Foreign Investment and Technology Transfer Act, 2019 (FITTA 2019), enacted by Nepal’s Federal Parliament, is a landmark statute intended to revamp and consolidate the country’s legal framework concerning foreign direct investment (FDI) and technology transfer. The Act replaces the Foreign Investment and Technology Transfer Act, 1992 (2049), aligning Nepal’s investment regime with global best practices while upholding its commitments under the World Trade Organization (WTO) and bilateral investment treaties (BITs). Medha Law and Partners is a leading corporate and best law firm in Nepal.

The Act’s preamble reflects the national aspiration for economic prosperity through industrialization, employment generation, infrastructure development, and productivity enhancement. It expressly aims to attract foreign capital and advanced technology, positioning Nepal as a competitive and business-friendly destination in South Asia.

2. Definitions and Foundational Concepts

FITTA 2019 introduces a lexicon of critical terms that underpin its legal structure. These include:

• Foreign Investment: A broad term encompassing equity investment, reinvestment, lease financing, venture capital participation, acquisition of securities, and investments via technology transfer.
• Technology Transfer: Recognized not only as the transfer of tangible IP (patents, trademarks) but also of intangible expertise (know-how, franchising, advisory services).
• Foreign Investor: Defined expansively to include individuals, institutional investors, non-resident Nepalis (NRNs), international agencies, and foreign governments.

This inclusive framing ensures that a diverse set of global investors can participate in Nepal’s economy through structured and legally sound channels.

3. Permissible Forms and Modalities of Investment

FITTA 2019 permits foreign investment through multiple channels, reflecting an effort to foster flexibility and innovation in investment structuring:

• Equity Investments (primary and secondary markets)
• Reinvestment of Earnings
• Lease Financing of Capital Goods
• Technology Transfer Agreements
• Establishment of Branch Offices
• Venture Capital Funds
• Public Offerings in Foreign Capital Markets
• Mergers and Acquisitions (M&A)
• Greenfield and Brownfield Projects

Each of these modalities comes with specific procedural requirements and regulatory oversight mechanisms. Notably, venture capital investment is formally recognized, signifying Nepal’s openness to modern financing structures.

4. Minimum Threshold and Prohibited Sectors

Foreign investment is subject to a minimum investment threshold as notified by the Government via Gazette notifications. The Act also categorically prohibits foreign investment in sectors listed in the Schedule, such as:

• Primary agriculture (except agro-processing)
• Cottage and small-scale industries
• Arms and ammunition manufacturing
• Real estate and local-level services (e.g., tailoring, driving)
• Print and electronic media in national language

This prohibition ensures protection for domestic micro-enterprises and sensitive sectors, reinforcing national security and cultural preservation objectives.

5. Institutional Framework and Approving Authorities

FITTA 2019 delineates a dual-track approval mechanism:

• The Department of Industries (DoI) approves investments up to NPR 6 billion.
• The Investment Board of Nepal (IBN) approves investments exceeding NPR 6 billion.

This bifurcation aims to streamline regulatory processes while aligning investment size with corresponding levels of bureaucratic scrutiny. Additionally, both the DoI and IBN are empowered to facilitate, monitor, and, if necessary, enforce compliance.

6. One Stop Service Centre (OSSC)

A significant innovation is the institutionalization of the One Stop Service Centre, mandated to offer integrated services including:

• Company and industry registration
• Environmental clearances
• Visa and immigration services
• Labour permits
• PAN registration and tax support
• Quality certification and utility provisioning

This mechanism is designed to reduce bureaucratic red tape and transaction costs for foreign investors, though its success hinges on inter-agency coordination and digital governance capabilities.

7. Repatriation Rights and Capital Protection

Repatriation is a cornerstone of investor protection under FITTA 2019. The Act guarantees:

• Return of capital and earnings (dividends, royalties, interest)
• Proceeds from asset liquidation or share sales
• Lease rentals and damages awarded by legal/arbitral bodies

Such repatriation is conditioned on fulfillment of tax liabilities and procedural compliance. The Nepal Rastra Bank (NRB) plays a central role in enabling currency conversion and remittance approvals. The Act prohibits blanket ceilings on repatriation, aligning with international investment protection standards.

8. Technology Transfer Provisions

The Act promotes technology transfer as a legitimate form of investment, subject to:

• Prior approval by the competent authority
• Registration of contractual terms
• Compliance with royalty ceilings
• Performance-linked conditions, especially in sensitive sectors (e.g., liquor industry)

By codifying technology transfer, the Act integrates intellectual property with industrial policy and signals openness to strategic partnerships in R&D and advanced manufacturing.

9. Escrow Arrangements and Financial Flexibility

Foreign investors may enter into escrow agreements with commercial banks, facilitating secure transactions among co-investors or partners. This facility:

• Enables conditional fund releases
• Assures legal enforceability of financial undertakings
• Enhances credit and investment risk management

The recognition of such arrangements is an alignment with international project finance practices and underscores Nepal’s maturing financial infrastructure.

10. National Treatment and Investment Guarantees

FITTA 2019 enshrines the principle of national treatment, ensuring foreign investments are treated no less favorably than domestic ones in key areas such as:

• Use and management of investment
• Transfer of ownership
• Market access (within permitted sectors)
• Repatriation and currency management

However, exceptions are carved out in areas like:

• Public procurement
• Financial service regulation
• Subsidies and state support to domestic firms
• Protection of intellectual property and biodiversity

The Act explicitly forbids nationalization and expropriation, except for public purposes and against fair compensation—reinforcing legal security for foreign investors.

11. Approval Procedures and Regulatory Due Process

FITTA 2019 provides a structured process for seeking investment approval:

• Application Submission: Prospective foreign investors must submit detailed applications, including business plans and investment schedules.
• Approval Timeline: The competent authority (Department of Industries or Investment Board) is required to render a decision within 7 working days, promoting procedural efficiency.
• Reinvestment Clause: Investors reinvesting profits in the same or another permitted sector are not required to seek new approval, provided there is no change in ownership structure or sector classification.
• Review Mechanism: In case of denial, the investor may seek a review from the Ministry within 30 days.

This procedural design emphasizes transparency, legal certainty, and investor protection while allowing administrative flexibility for complex cases.

12. Currency Conversion, Financial Reporting, and Banking Regulation

Foreign investors must channel funds through formal banking systems and are obligated to:

• Submit source declarations affirming that the funds originate from lawful means.
• Invest in convertible foreign currencies (exceptions exist for Indian Rupees for Indian investors).
• Seek foreign exchange approvals for repatriation, lease rentals, and payments under technology agreements.

The Nepal Rastra Bank plays a key regulatory role in:

• Currency approvals
• Exchange rate determination
• Anti-money laundering compliance
• Monitoring inward and outward flows

These provisions integrate Nepal’s investment regime with international standards on transparency, anti-corruption, and financial accountability.

13. Capital Injection Timeframes and Revocation of Approval

Foreign investment approvals are subject to time-bound performance criteria:

• Investors must inject capital within the prescribed timeframe (notified in subordinate legislation).
• Failure to meet deadlines—without justifiable reasons—may result in revocation of investment approval.

This mechanism ensures commitment and project discipline while discouraging speculative or dormant approvals that may distort sectoral planning or inflate investment statistics.

14. Ownership Transfer and Share Deal Disclosures

FITTA mandates robust oversight of investment ownership changes:

• Share Transfers: All transactions (within or outside Nepal) involving change in ownership or beneficial interest must be reported to the approval authority and Nepal Rastra Bank within 30 days.
• Tax Compliance Condition: Such changes must be accompanied by clearance of tax obligations before legal registration of transfer is effectuated.

These requirements ensure transparency, prevent money laundering or tax avoidance, and facilitate accurate data maintenance for national planning and policy evaluation.

15. Rights of Repatriation and Scope of Capital Recovery

Section 20 of the Act enshrines one of its most crucial investor rights—capital repatriation, allowing foreign investors to recover:

• Capital proceeds from full/partial sale of shares
• Dividends and profits
• Liquidation proceeds post-settlement of liabilities
• Royalty and technical fees
• Lease rents and litigation damages

This right is subject to:

• Tax clearance under Nepalese law
• Proportionality rule (repatriation in accordance with ownership percentage)
• Compliance with documentation and verification by the Department and NRB

The Act also stipulates exchange of convertible currencies at market rates, ensuring economic rationality and protecting investor returns.

16. Promotion, Facilitation, and Institutional Support

FITTA emphasizes investment promotion and facilitation through dedicated agencies:

a. Functions of the Investment Board:

• Policy reform advisories
• Promotion strategies
• Investment facilitation and coordination
• Regulatory harmonization

b. Department of Industries:

• Providing operational support
• Visa and employment clearances
• Environmental approvals
• Monitoring misuse of facilities
• Repatriation and taxation coordination

This institutional synergy is complemented by the One Stop Service Centre, envisioned as a digitized and integrated investment support hub for reducing bureaucratic friction.

17. Fiscal Incentives and Foreign Currency Management

Foreign investors and their enterprises are eligible for a suite of benefits:

• Access to facilities and exemptions under the Industrial Enterprises Act (IEA)
• Dual currency accounts (local and foreign)
• Hedging instruments for currency fluctuation risks
• Foreign exchange approvals for repatriation, debt servicing, and employee compensation

Notably, remuneration repatriation rights are extended to foreign employees, subject to tax and declaration compliance. Exchange rates are determined on a market-driven basis, signaling Nepal’s movement toward liberalized financial practices.

18. Employment of Foreign Personnel

While emphasizing employment of Nepali citizens, the Act permits the hiring of foreign professionals under certain conditions:

• When suitable Nepali candidates are unavailable
• For the purpose of transferring skills and technical know-how
• With disclosure of employment terms to the Department
• Subject to compliance with labor, immigration, and tax laws

The rights of foreign employees include visa facilitation, identity documentation, and the right to repatriate net savings post-tax.

19. Land and Infrastructure Provisions

The Act facilitates land access while maintaining regulatory safeguards:

• Investors must attempt to secure land independently.
• In cases of hardship, the government may assist in acquisition or leasing through coordination mechanisms.
• Exceeding land ceilings for industrial use is permitted upon justification.
• Land use is restricted to the purpose for which it was approved.

These provisions aim to balance industrial needs with land use planning, environmental sustainability, and local community interests.

20. National Treatment and Sectoral Carve-Outs

FITTA reaffirms national treatment but with strategic exceptions:

• Procurement and subsidies: Reserved for domestic industries
• IPR protection: Carve-outs for TRIPS-related compliance
• Financial services: Subject to prudential regulations
• Public services and non-commercial activities: Excluded from parity
• Environment and health standards: Justified differentials permitted

These carve-outs provide legal room for Nepal to meet social policy objectives while complying with its WTO and BIT obligations.

21. Protection Against Expropriation

The Act guarantees non-expropriation, subject to:

• Expropriation only for public purposes
• Compliance with due process of law
• Fair and equitable compensation, based on prevailing market valuation

This clause mirrors customary international law principles and is critical for fostering investor trust, particularly in capital-intensive and long-term sectors such as infrastructure and energy.

22. Dispute Resolution and Arbitration Framework

Disputes are to be resolved in a tiered manner:

• Mutual Negotiation and Department Facilitation
• If unresolved in 45 days, parties may invoke:
• Joint investment agreement clauses (if any)
• Arbitration under Nepalese law, or
• UNCITRAL Arbitration (international commercial arbitration rules)

Unless otherwise agreed, arbitration must be conducted in Nepal, under Nepali substantive law. This ensures accessibility, legal certainty, and domestic jurisdiction, while allowing international procedural flexibility.

23. Automatic Route and Digital Governance

FITTA 2019 empowers the government to introduce an automatic approval route for certain sectors and investment types. This includes:

• Company and industry registration
• Foreign investment approvals
• Online services through a digital portal

This digital shift aims to modernize Nepal’s investment climate by reducing human discretion and enabling real-time tracking and transparency.

24. Legal Safeguards, Transitional Provisions, and Rulemaking Powers

• Approvals remain valid as long as the investment remains in Nepal.
• Approvals are revoked if:
• Investment isn’t injected within two years (without cause)
• Ownership fully transfers to Nepali entities
• Industry is deregistered due to non-compliance

The Government retains power to:

• Amend restricted sectors list
• Issue subordinate rules, directives, and guidelines
• Enter into bilateral/multilateral investment agreements

Additionally, existing approvals under the repealed Act (FITTA 1992) are grandfathered into FITTA 2019, ensuring legal continuity and investor confidence.

Conclusion

The Foreign Investment and Technology Transfer Act, 2019 represents a robust, modern, and strategically balanced legal framework. It provides a legal roadmap to harness foreign capital and technology while safeguarding national interests and policy space.

The Act’s emphasis on procedural efficiency, regulatory clarity, investor protection, and alignment with international legal standards marks a pivotal evolution in Nepal’s investment landscape. Its successful implementation, however, will depend on subordinate legislation, institutional coordination, and bureaucratic agility.