Foreign investment issues for project companies in Nepal

Foreign investment issues

What restrictions, fees and taxes exist on foreign investment in or ownership of a project and related companies? Do the restrictions also apply to foreign investors or creditors in the event of foreclosure on the project and related companies? Are there any bilateral investment treaties with key nation states or other international treaties that may afford relief from such restrictions? Would such activities require registration with any government authority?

Very few restrictions apply in case of foreign investment in or ownership of a project and related companies in Nepal. All foreign investments in equity, debt or convertibles require prior approval. The Department of Industry grants approval for any investment up to NRs6 billion (approximately $54.45 million). Any approval above this amount is granted by the Investment Board of Nepal. Approval from the Nepal Rastra Bank is also required. The minimum investment for foreign investment has been fixed at NRs50 million (approximately $450,000). Investors cannot invest less than this amount.

Certain sectors such as aviation, consulting and telecommunications require local participation. Foreign investment is restricted to 49% in domestic aviation, 50% in consulting and 80% in telecommunications. Foreign investment of 100% is allowed in major project sectors including construction (both residential and commercial real estate), infrastructure and power.

Although foreign entities and persons cannot directly buy and own land in Nepal, these restrictions do not extend to joint ventures or subsidiary companies, which can buy or lease without prior approval under the same terms as Nepalese nationals.

Nepal has entered into bilateral investment treaties with six jurisdictions: Finland, France, Germany, India, Mauritius and the United Kingdom.

The agreements provide for non-discrimination and most-favoured-nation treatment, and restriction of nationalisation or expropriation, except for public purposes with compensation. Since Nepal adheres to these principles regardless, generally investors from countries with bilateral investment treaties may not be better off in any case.

What restrictions, fees and taxes exist on insurance policies over project assets provided or guaranteed by foreign insurance companies? May such policies be payable to foreign secured creditors?

Foreign insurers cannot directly insure in Nepal. Accordingly, Nepalese project companies must insure with local insurers with back-to-back reinsurance with foreign insurers. The Non-Life Reinsurance Directive 2008 provides guidelines on this matter. Risk must be reinsured with at least three reinsurers where AAA equivalent or higher rated entities can reinsure a maximum of 60% of the risk, while BBB-rated entities can reinsure only 40% of the risk. Nepalese insurers can reinsure only with reinsurers with credit ratings equivalent to or higher than BBB. Cut-through clauses are recognised and are usually required for foreign creditors. Assignments are also required for foreign creditors. Reinsurance proceeds can be assigned and policies can be payable to foreign secured creditors.

What restrictions exist on bringing in foreign workers, technicians or executives to work on a project?

The Labour Act 2017 states that non-Nepalese citizens cannot be engaged in work without obtaining a work permit from the Department of Labour. Work permits are granted only if Nepalese citizens are either unavailable or unqualified for any skilled technical roles, even after publishing advertisements in national daily newspapers and extensive documentary requirements are met. A work permit is granted for a period of five years in case of highly skilled foreign workers and for a period of three years in the case of other foreign workers. However, in the case of enterprises with foreign investment, the Department of Labour may issue work permits to the chief executive and up to three employees by maintaining a record on a fast-track basis. The number of foreign employees cannot exceed 5% of the total number of workers in an enterprise.  

What restrictions exist on the importation of project equipment?

Generally, there are no restrictions on the import of project equipment under Nepalese law other than on the import of explosives and certain radio equipment. The import of explosives and certain radio equipment requires special permits from the relevant government departments. Custom duties and value added tax exemptions are granted to various projects, such as solar, hydropower, wind energy, biogas and hotels. Certain special exemptions are also provided on imports to industries established in special economic zones and to star hotels and resorts. A recommendation from a government authority is required to avail of such exemptions.

What laws exist regarding the nationalisation or expropriation of project companies and assets? Are any forms of investment specially protected (from nationalisation or expropriation)?

The Constitution of Nepal 2015 allows for the expropriation of property only in accordance with the law and public interest after due compensation has been paid. The Foreign Investment and Technology Transfer Act 2019 prohibits the nationalisation of an industry with foreign investment. Direct or indirect expropriation can be undertaken only for public use. The Industrial Enterprises Act 2016 does not allow the nationalisation of any registered industry. The Public-Private Partnership and Investment Act 2019 protects the project from being nationalised for the period of project approval, while expropriation is allowed only for public purposes.