What is FDI?
Foreign Direct Investment (FDI) involves the process of making investment by the person of one economy to the registered entity of another entity with the motive of earning profits by forming long term relationship and exercising control over that particular entity. Foreign investors are attracted towards the country by various factors such as economy, availability of manpower, cheaper labour forces, easier tax and legal compliances. Foreign investment and investors need to be handled carefully to maintain trust which reflects the overall business environment of the country in the world business areana. Political and legal stability influences the injection and repatriation of foreign direct investment in the country.
Understanding Role of FDI in Nepal’s Economy
Nepal has a short history of foreign direct investment in Nepal which started after the adoption of FDI promotion strategy in 1992 which was supported by the Sixth Five-year plan (1980-1985) formed by National Planning commission of Nepal. Safe landing of ten year long Maoist insurgency in 21st November 2006 by signing Comprehensive Peace Accord between Government of Nepal and Moaist led to a ray of hope for better business environment in Nepal. Many commercial laws and regulations were formed and amended to lift the spirit of the business and to attract the foreign investment during that period.
Investment Board Nepal (IBN) was established through the Investment Board Act, 2011 and was reconstituted by introducing the Private Public Partnership and Investment Act (PPPIA) in 2019. The IBN is responsible for approving investment of NPR 6 billion or above for infrastructure development and provides hand holding facilities to investors in Nepal.
Recent FDI Statistics and Trends in Nepal
As per the survey report on Foreign Direct Investment in Nepal (2022-23), Nepal has attracted Rs 295 billion of foreign investment at the end of 2022/23 increasing by 11.8% compared to the previous year. This report further mentions that investors have much interest in the industrial sector contributing 59.7 percent of the total foreign investment in Nepal.
Countries Leading Foreign Investment in Nepal
Foreign investors from 58 countries are actively participated in the Nepalese economy. Investors from India, China, United States and European countries are the leading contributors for FDI in Nepal.
Top Sectors Attracting FDI in Nepal
Nepal is a country with more prospective as it is located between the two largest economy of the world. Different countries are committing and investing FDI in Nepal. The different sectors attracting FDI in Nepal are as follows:
Hydropower and Energy Projects
Nepal has abundance water resources with feasibility of hydro-electricity which can be exported to India, China and Bangladesh where energy sources has high demand due to rapid industrialization. Nepal has reached agreements with India and Bangladesh for hydropower trade.
Tourism and Hospitality Industry
Nepal has many mountains above 8,000 meter in the Mahabharat range, including Mount Everest and Mount Kanchanjunga, which can attract millions of tourist every year. Nepal is rich in culture, traditions as well as different climatic conditions. This opens the scope for hotels, resorts and adventurous sports in Nepal.
Manufacturing and Agriculture Sectors
Almost 60% of the total population of Nepal is engaged directly or indirectly in agriculture. Nepal is also rich in herbs. Commercialization of agriculture is being practiced by youths which is increasing productivity. So, we can establish agro and herbal manufacturing industries and export the finished goods to third world countries.
Emerging Technology and Startup Ecosystem
As per the data of government of Nepal. 76.2% population of Nepal is literate. This means that Nepal is an educated country. Nowadays, youths are interested in technology related startups and are in mission to create Nepal as an outsourcing hub and generate foreign currencies.
FDI Policy
The keys FDI policies and laws which regulates the foreign direct investment in Nepal are explained below:
Foreign Investment and Technology Transfer Act (FITTA), 2019
This act has been authenticated by the President of Nepal on 27th March 2019 (2075.12.13). The objective of this act is to amend and consolidate the prevailing Nepal laws relating to foreign investment and technology transfer in order to make national economy competitive, strong and employment-oriented through mobilization to the maximum extent of the available means and resources for economic prosperity of the country, and to achieve sustainable economic growth through industrialization while creating investment friendly environment to attract foreign capital, technology and investment in the sectors of import substitution, export promotion, through increase in productivity, and of infrastructure development and production of goods or services.
Industrial Enterprise Act (IEA), 2020
This act has been authenticated by the President of Nepal on 11th February 2020. The objective of this act is to amend and consolidate the prevailing laws relating to industrial enterprises in order to build a dynamic and robust economy by making an easy, predictable and effective management of the industrial sector while focusing, respectively, on import substitutions and export promotions, through mobilization of the resources available in the country, to the maximum extent, to enhance the production of industrial goods or services and employment opportunities by making the industrial environment of the country investment friendly and competitive.
Public-Private Partnership and Investment Act, 2019
This act has been authenticated by the President of Nepal on 27th March 2019. The objective of this act is to contribute to economic prosperity of the country through investment even by native or foreign private sector in infrastructure construction and services sectors; to manage the projects to be conducted in public private partnership; and to consolidate and amend to the legal provisions relating to investment.
Double Taxation Avoidance Agreements (DTAAs)
Nepal has entered into Double Taxation Avoidance Agreements (DTAAs) with various countries to prevent tax evasion and promote trade and investment abroad. A DTAA is anincome-tax treaty between two nations that avoids double taxation of income—once in Nepal and once in the country of residence of the investor—along with restricted withholding tax on dividends, interest, and royalties. Nepal has operational DTAAs with countries like India, China, the United Kingdom, South Korea, Norway, Mauritius, Sri Lanka, Thailand, Pakistan, and Qatar as of 2024. These treaties provide different tax advantages, including reduced withholding taxes, tax relief on certain business revenues, and tax incentives for foreign investors, thusmaking Nepal moreattractive as an investment hub.
Role of the Department of Industry and Other Regulatory Bodies
Foreign Direct Investment (FDI) is regulated by different governmental bodies in Nepal. The regulation is carried out in order to ensure that the national laws and economic policies of foreign investors are fully complied with. The key regulatory bodies for FDI in Nepal are:
Department of Industry (DoI)
DOI is operated under the Ministry of Industry, Commerce, and Supplies (MoICS). It acts as the primary agency for FDI approvals by approving foreign investment in small and medium-scale industries in Nepal. It grants business visas for foreign investors for the operation of business.
Investment Board Nepal (IBN)
IBN is Operated under the Office of the Prime Minister and Council of Ministers. It approves and facilitates large-scale foreign investment (investment above NPR 6 billion or strategic projects) and reviews infrastructure and national priority projects.
Nepal Rastra Bank (NRB)
NRB is responsible for all the regulations related to financial transactions of FDI. It approves inflows and repatriation of foreign currency in the foreign investment. Inflows occurs during the injection of capital whereas repatriation occurs during the transfer of profit or sales of foreign investment.
Key Legal Requirements for Foreign Investors in Nepal
Foreign investment is the following investment made by a foreign investor in an industry or company as per the prevailing laws of Nepal:
- Share investment in foreign currency
- Re-investment in an industry of dividends derived from foreign currency or shares
- Lease finance
- Investment made in venture capital fund
- Investment made in listed securities through secondary securities market
- Investment made by purchasing shares or assets of a company incorporated in Nepal
- Investment received through the banking channel after issuing securities in a foreign capital market by an industry or company incorporated in Nepal
- Investment made through technology transfer
- Investment maintained by establishing and expanding an industry in Nepal.
Foreign investor is any foreign individual, firm, company, Non-resident Nepali or foreign government or international agency or other corporate body of similar nature that makes foreign investment, and also includes, in the case of a foreign investor that is an institutional foreign investor, the ultimate beneficiary of such an institution.
Industrial Enterprises Act 2076 has classified industries into the following types in Nepal:
a) Micro-industry: An industry with the fixed capital not exceeding two million rupees, excluding house and land, the entrepreneur himself or herself is involved in the operation and management of the industry with a maximum of nine workers including the entrepreneur with annual transaction of less than ten million rupees and with the capacity of electric energy, fuel or other oil engine to be consumed by the engine, equipment or machine, if any, used being twenty KW or less is the micro industry.
b) Cottage industry: An industry based on traditional skills and technology, labour-oriented and based on specific skills or local raw materials and local technology, arts and culture with the capacity of electric energy to be consumed by the engine, equipment or machine, if any, used being up to fifty KW is considered to be a cottage industry
c) Small industry: An industry with the fixed capital not exceeding one hundred fifty million rupees, other than a micro enterprise and cottage industry.
d) Medium industry: An industry with the fixed capital exceeding one hundred fifty million rupees but not exceeding five hundred million rupees.
e) Large industry: An industry with the fixed capital exceeding five hundred million rupees.
How to Invest in Nepal as a Foreign Investor
The foreign investor should follow the given steps for setting up the business in Nepal to be free from any non-compliance with the laws and regulations of Nepal.
Step 1: Choose Investment Structure
The investor should decide whether to incorporate a wholly owned subsidiary or joint venture (partnership) with Nepalese companies. One can also open branch office for consultancy business which is not applicable to full scale business.
Step 2: Obtain FDI Approval
The investor should get approval for investment from the Department of Industry (DOI) for the investment below 6 billion Nepalese rupees and from the Investment Board of Nepal (IBN) for the investment above 6 billion Nepalese rupees. The business plan, Memorandum of Association, Articles of Association, passport copy of investor and bank statement showing commitment of funds is required for approval of investment.
Step 3: Register the Company
The investor should register the company at the Office of Company Registrar (OCR) which will take at least 7-15 days for incorporation. Then, the company should get registered in local body and obtain PAN (Permanent Account Number) & VAT registration for tax purposes from the tax office.
Step 4: Open a Bank Account & Bring in Capital
The foreign investors must bring capital from the banking channels by taking approval of the Nepal Rastra Bank in Nepalese or foreign currencies.
Minimum FDI requirement: NPR 20 million (~USD 146,000), except consultancy (NPR 2 million).
Step 5: Obtain Necessary Licenses
The FDI in Nepal must take specific licenses for investment in hydropower from the Ministry of Energy, tourism license from Department of Tourism for tourism related business.
Benefits of Foreign Direct Investment in Nepal
The benefits of FDI in Nepal are mentioned below:
Job Creation and Skill Development
Foreign investment creates the employment opportunities to the skilled, semi-skilled and unskilled manpower of Nepal.
Infrastructure Development and Technology Transfer:
FDI creates the pressure to the government to develop the infrastructure for industries. Advanced technology will be transferred by FDI in return in the country.
Boosting Exports and International Trade:
Export of the country will increase which support the aim of the government to minimize the international trade deficit with other countries.
FAQs on Foreign Direct Investment in Nepal
Can Foreigners Own 100% of a Business in Nepal?
Yes, the foreigners can own fully owned company in Nepal.
What Are the Minimum Capital Requirements?
There is no any maximum limit for the investment but a foreign investor should invest a minimum of twenty million Nepalese Rupees in Nepal in the sectors which is not included in the list Industries or Businesses Restricted for Foreign Investment by the Government of Nepal.
Which Sectors Are Restricted for Foreign Investment?
The list of the sectors which are restricted for foreign investment are as mentioned below:
Poultry farming, fisheries, bee-keeping, and other primary agro-production (fruits, vegetables, oil seeds, pulse seeds, milk industry, etc.)
Cottage and small industries
Personal service businesses (e.g., hair cutting, tailoring, driving)
Industries manufacturing:
- Arms and ammunition
- Bullets and shells
- Gunpowder or explosives
- Nuclear, biological, and chemical (NBC) weapons
- Atomic energy and radioactive materials
Real estate business (excluding construction)
Retail business
Internal courier service
Local catering services
Moneychanger and remittance services
Tourism-related services such as:
- Travel agencies
- Tour guides
- Trekking and mountaineering guides
- Rural tourism and homestays
Mass communication media including:
- Newspapers
- Radio
- Television
- Online news portals
- National language motion pictures
Consultancy services in:
- Management
- Accounting
- Engineering
- Legal
- Language, music, or computer training
Consultancy businesses with foreign investment exceeding 51%
Are there tax incentives for foreign investors in Nepal?
Nepal offers various tax holidays, exemptions, and rebates for FDI in prioritized sectors and remote areas.
Can profits and dividends be repatriated?
Profits, dividends, and other earnings can be repatriated after paying applicable taxes and obtaining approval from Nepal Rastra Bank (NRB).