Overview Of The New Foreign Investment Act 2019August 12, 2020 Wednesday
The Foreign Investment and Technology Transfer Act 2019 (2075) (“FITTA”) has replaced the Foreign Investment and Technology Transfer Act 1992. It received presidential accent on 27 March 2019. The FITTA intends to reform the existing legal framework of foreign investment in Nepal to facilitate investments. This article provides an overview of key provisions and changes in FITTA compared to the previous law.
Q1. What is considered as ‘foreign investment’?
The FITTA considers the following as foreign investment:
- Investment in shares of an industry;
- Investment through purchase of shares or asset;
- Investment through lease of airlines, ships, machineries and equipment;
- Technology transfer i.e. licensing of foreign intellectual property, franchising, management, advisory and market services;
- Investment in capital investment funds;
- Investment in secondary stock market;
- Investment by issue of securities in foreign stock markets; and
- Re-investment of profits.
Under the previous FITTA, technology transfer was not treated as investment but as a separate category, and loan was treated as foreign investment. However, while technology transfer and lease have been classed as investment, foreign loan has been removed and treated separately. The intent and logic of these changes are unclear.
Investment in capital investment funds and secondary stock market is not allowed currently until government publishes notification in the gazette.
Q2. What approvals are required?
The FITTA requires that foreign investment and technology transfer should be approved by the approving authority. It provides for two different approving authorities. They are:
- Department of Industry (“DOI”) as approving authority for foreign investments of under NPR 6 billion (~USD 53 million).
- Investment Board of Nepal (“IBN”) as approving authority for foreign investments above NPR 6 billion (~USD 53 million).
Section 15(2) of the FITTA specifies that the approval will be provided within 7 days once complete application documents are submitted. The regulations are yet to be drafted, so it is not clear on what documents need to be submitted to obtain the approvals.
Under the previous foreign investment laws, there is a requirement of second approval for foreign investment from central bank of Nepal-Nepal Rastra Bank (“NRB”) through a separate application under the Foreign Exchange Act 1962. Section 16(1) of the FITTA provides that only notification to the NRB after obtaining the first approval from DOI will suffice to bringing funds, but sub-section (2) provides that procedures set out by NRB needs to be fulfilled. While this ambiguity needs to be urgently clarified, it is prudent for investors to apply for obtaining second approval from NRB until further official information.
Industries registered under the authority of different provinces of Nepal will require recommendation from Ministry of Industry of such state to approve foreign investment.
The FITTA also provides for “automatic approval” and “single point service center”. Automatic approval provision is not effective yet until further notifications from the government.
Q3. What procedures need to be fulfilled after obtaining approval?
These matters are not contained in the FITTA. However, investors should be aware that following registrations, consents and approvals will be required after foreign investment approval prior to commencement of business:
- Company registration;
- Local authority registration;
- Tax registration;
- Industry registration;
- Approval from NRB (as discussed in Q2);
- Environmental approvals (if applicable); and
- Specific sectoral business licenses (if applicable).
Q4. Is there a minimum investment amount?
Minimum investment has been set at NPR 50 million (~USD 450,000). A foreign investor is required to invest such amount as a minimum.
Q5. What is the timeline for investment?
Timeline for investment will be specified in the regulations. Approval will be revoked if investment is not undertaken within the time specified without reasonable cause.
Q6. What bank accounts can investors open?
Investors can open Nepali rupees accounts in a licensed bank and financial institution in Nepal. However, opening of foreign currency accounts will require approval from NRB.
Q7. Can companies with foreign investment borrow money from their parent company or foreign banks?
Companies with foreign investment can only borrow from local sources and foreign banks and financial institutions. FITTA does not allow companies shareholder loans. Recommendation from Ministry of Industry and approval from NRB is required to borrow money from foreign banks. Currently, NRB has imposed interest rate cap of One Year Libor + 5.5% on foreign commercial borrowing and other requirements to evidence that borrowing was not possible from local banks and financial institutions.
Q8. How can investors repatriate earnings or gains from sales of their shares?
The FITTA allows investors to repatriate dividends, profits, earnings, proceeds of sale of shares and also, proceeds of liquidation and amounts recovered from legal proceedings, which were allowed but not clear in the previous legislation.
Investors, however, will have to evidence that they have “complied with laws, agreements and obligations” in order to be allowed to repatriate. This is a very difficult test in law and is bound to create more uncertainty and discourage foreign investment. In addition to this, applicable taxes should also be paid.
Approval is required from the approving authority and the Nepal Rastra Bank for each repatriation.
Q9. What obligations are imposed on investors?
Investors have the obligations to:
- Notify change in ownership of holding company’s shareholders and pay taxes applicable on change in ownership;
- Bring investment amount in the prescribed time period; and
- Comply with the act, regulations, other laws, or any conditions imposed when providing approval.
Q10. Can the investment approval be revoked?
The foreign investment approval granted under FITTA may be revoked if:
- The investor does not make investment within the prescribed time period without reasonable justification; and
- The investor breaches the act, regulations, or any conditions imposed during approval after fulfilling procedures set out in the regulations.
The approval is automatically deemed revoked without notification if:
- The investor does not start bringing in the investment amount without reasonable cause within 2 years from the date of approval;
- The shares of the investment are transferred to Nepalese investor; and
- Revocation of industry registration or dissolution of the company.
Q11. Are business visas or work permits available?
Business visa is available to the investor and his/her family member, or 1 authorized representative of the investor and his/her family member. Maximum of 2 person and their family members can obtain business visas if the investor is a company.
Non-business visa, i.e. granted upon obtaining work permit, are only available for high-skilled and technical workers after evidencing that equivalent workers are not available in Nepal after undergoing a vacancy procedure. It should be noted that this provision contradicts the provision in the Labour Act 2017 which provides for 3 work permits on fast track basis and it is uncertain what will apply. Labour Act limits foreign workforce to maximum 5% of total workers.
Q12. What sectors are allowed for investment?
Investment is only allowed in sectors classed as industries by the Industrial Enterprises Act 2016. It is also proposed to be amended soon.
Q13. What are the sectors restricted for investment?
The sectors restricted for investment are:
- Primary agriculture sectors such as fish farming, animal husbandry, horticulture, milk business and others;
- Small and cottage enterprise;
- Personal service business such as tailoring, driving, barber shop;
- Arms and ammunition industry;
- Buying and selling of land and houses (other than construction industry);
- Retail business;
- Remittance service;
- Local catering, travel agency, trekking agency, homestay and rural tourism;
- Mass-media business such as newspapers, radio, TV and online news;
- Movies of national language;
- Management, accounts, engineering and legal consulting services, language training, music training, computer training; and
- Other consulting services over 51% shareholding.
Please note that this guide is published for information only and should not be considered as legal advice. You are requested to seek legal advice for specific factual situations.