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Foreign Direct Investment (FDI) in Nepal
Nepal has conducted the third Nepal Investment Summit in April 2024 with the objective to promote Nepal as emerging global investment destination. An Ordinance has been passed by the Government of Nepal for amending some legislations including Foreign Investment and Technology Transfer Act, Industrial Enterprises Act among others to streamline the foreign investment procedures.
In Nepal, FDI is approved by the Department of Industries, and in case of project loans, the approval from the Central Bank is also required.
Impact of Taxation to Investors
In case of additional of capital in an existing company, or investment via purchase of shares of a company, there are basically two implications under the Nepalese Income Tax Act 2002:
1. Capital Gain Tax (CGT) to the seller
As per Section 95A of the Act, the Capital Gain Tax (in the form of Advance Tax) shall be levied on the share transfer:
An individual is considered to be resident in Nepal if he/she stays for more than 183 days during a financial year (mid-July to mid-June). A company incorporated under the law of Nepal or having effective management in Nepal is considered to be resident.
Calculation of CGT:
Selling price of shares (Incomings) xxxx
Less: Cost price of shares (Outgoings) (xxx)
Capital Gain xxx
Capital Gain Tax @ respective rate xx
3. Taxation due to Change in Control
As per Section 57 of the Act, where there is change of 50% or more in the ownership of an entity as compared with its ownership in last three years, the entity shall be treated as disposing off the assets and liabilities owned by it at the market price.
Any gain arising on such deemed disposal shall be taxed at the corporate rate applicable to such entity (generally 25%).
Calculation of Tax:
Market Value xxxxx
Less: Book Value (xxxx)
Gain xxx
Tax @ corporate rate (e.g. 25%) xx
The tax has to be paid by the entity whose shares are transferred (not the buyer, or the seller). After the change in control, the entity shall not be allowed to deduct the prior period losses.
For a company, change in shareholding pattern from the significant shareholders (1% or above) having direct or indirect holding shall be considered in the change in control. The provision of change in control shall be applicable in any type of transfers (sale, will, death, surrender and reissue, forfeiture and reissue, redemption, right issue, initial issue or further issue). However, it shall not be applicable in the case of startups, venture capital and private equity fund, where the number of shares and the capital of existing shareholders/partners remain unchanged, and the capital is increased by the addition of new shareholders/partners.
Reference/ Citation
