Foreign Investment Law In Nepal

Foreign Investment Law In Nepal

Nepal is a landlocked country in South Asia with a population of about 30 million. Nepal has a diverse geography, culture and economy. Nepal is rich in natural resources, such as water, hydropower, minerals, herbs and tourism potential. Nepal is also strategically located between two large and fast-growing economies, China and India.

Nepal has been pursuing economic reforms and liberalization since the 1990s, with the aim of attracting foreign investment and technology transfer to boost its economic growth and development. Foreign investment in Nepal is regulated and administered by various laws and policies, such as the Foreign Exchange (Regulation) Act, 2019 (1962), the Foreign Investment and Technology Transfer Act, 2019 (2075), the Industrial Enterprises Act, 2016 (2073), the Investment Board Act, 2011 (2068) and the Public Private Partnership and Investment Act, 2019 (2075).

In this article, we will provide an overview of the foreign investment law in Nepal, covering the following topics:

• Forms and areas of foreign investment
• Approval process and incentives for foreign investment
• Restrictions and challenges for foreign investment
• Future prospects and opportunities for foreign investment

Forms and Areas of Foreign Investment

According to the Foreign Investment and Technology Transfer Act, 2019 (2075) (FITTA 2019), foreign investment means the following investment made by a foreign investor in an industry or company:

• Investment in shares (equity)
• Reinvestment of the earnings derived from equity
• Investment made in the form of loans or loan facilities
• Investment in kinds, such as machinery and equipment

Foreign investors can invest only in private limited companies or public limited companies registered with the Company Registrar Office. They cannot invest in proprietorship or partnership firms.

Foreign investors are permitted to own up to 100% equity share in any industry except the following:

• Cottage industries (except industries using electricity more than 5 kW)
• Personal service businesses (e.g. hair cutting, beauty salon, tailoring, driving training, etc.)
• Arms and ammunition industries
• Gunpowder and explosives
• Industries related to radioactive materials
• Real estate business (excluding construction industries)
• Film industries (national languages and other recognized languages of Nepal)
• Security printing
• Bank notes and coins
• Retail business (excluding international chain retail businesses with business in at least two countries)
• Tobacco (excluding more than 90% exportable)
• Internal courier service
• Atomic energy
• Poultry
• Fisheries
• Bee keeping
• Consultancy services (e.g. management, accounting, engineering, legal services); (Maximum of 51% foreign investment is allowed)
• Processing of food grains on rent
• Local catering services
• Rural tourism

Approval Process and Incentives for Foreign Investment

The Department of Industries (DOI) is the sole agency for administration and implementation of FITTA 2019. The DOI grants approval for foreign investment up to NPR 6 billion (about USD 50 million). For foreign investment above NPR 6 billion, the approval is granted by the Investment Board Nepal (IBN), which is a high-level body chaired by the Prime Minister.

The approval process for foreign investment involves the following steps:

• Submission of an application with required documents at the registration unit of the DOI or IBN.
• Assessment of the application by the officers and staff at the foreign investment section.
• Presentation of the application in the foreign investment approval committee.
• Issuance of an approval letter by the DOI or IBN within seven days of receiving a complete application.

The required documents for foreign investment approval include:

• A copy of passport or citizenship certificate of the foreign investor
• A copy of company registration certificate
• A copy of tax clearance certificate
• A copy of memorandum and articles of association of the company
• A copy of board resolution authorizing foreign investment
• A project report or feasibility study report
• A technology transfer agreement (if applicable)

Foreign investors can enjoy various incentives and facilities provided by the government of Nepal, such as:

• Tax exemptions or reductions on income tax, value added tax, customs duty and excise duty for certain industries or sectors
• Repatriation of profits, dividends, royalties, fees and loan payments after paying applicable taxes
• Visa facilities for foreign investors and their dependents
• Protection of intellectual property rights
• Non-nationalization or expropriation of foreign investment without compensation
• Settlement of disputes through arbitration or other means as agreed by the parties

Restrictions and Challenges for Foreign Investment

Despite the legal and policy reforms, foreign investment in Nepal faces some restrictions and challenges, such as:

• Lack of adequate physical infrastructure, such as roads, electricity, water and communication
• Political instability and frequent changes in government
• Bureaucratic hurdles and corruption
• Labor unrest and trade union interference
• Social and environmental issues
• Foreign exchange volatility and scarcity
• Competition from domestic and regional players
• Limited access to finance and market information

Future Prospects and Opportunities for Foreign Investment

Nepal has a huge potential for foreign investment in various sectors, such as:

Hydropower

Nepal has an estimated hydropower potential of 83,000 MW, of which only about 1,300 MW has been developed so far. The government has declared hydropower as a priority sector and has offered attractive incentives and facilities for investors.

Tourism

Nepal is a popular destination for tourists from all over the world, who are attracted by its natural beauty, cultural diversity and adventure activities. Nepal has 10 UNESCO World Heritage Sites, eight of the world's highest mountains, including Mount Everest, and various national parks and wildlife reserves. The government has launched the Visit Nepal 2020 campaign to promote tourism and has eased visa regulations and improved airport facilities for tourists.

Agriculture:

Nepal is an agrarian country with about 66% of its population engaged in agriculture. Agriculture contributes about 27% to the GDP and accounts for about 15% of the total exports. Nepal has a favorable climate and fertile soil for growing various crops, such as rice, wheat, maize, sugarcane, tea, coffee, fruits and vegetables. The government has identified agriculture as a key sector for economic transformation and has encouraged foreign investment in agro-processing, organic farming, cold storage, irrigation and mechanization.

Manufacturing

Nepal has a comparative advantage in manufacturing labor-intensive products, such as garments, carpets, handicrafts, leather goods, paper products and metal products. Nepal also has abundant natural resources, such as minerals, herbs and medicinal plants, that can be used for manufacturing value-added products. The government has established special economic zones (SEZs) and industrial estates to facilitate industrial development and has offered various incentives and facilities for investors.

Services

Nepal has a growing demand for services, such as education, health, banking, insurance, information technology, telecommunications, transportation and logistics. Nepal has a large pool of young and educated workforce that can provide quality and cost-effective services to domestic and international clients. The government has liberalized the service sector and has allowed foreign investment up to 100% in most of the service industries.

Foreign investment law in Nepal is evolving and improving to create a conducive environment for foreign investors. Nepal offers a range of opportunities and incentives for foreign investors who are willing to explore its untapped potential and overcome its challenges. Foreign investment can play a vital role in enhancing Nepal's economic growth, development and prosperity.