Repatriation of Profits in Nepal

I. Introduction to Profit Repatriation from Nepal

Profit repatriation is a critical aspect of foreign investment in Nepal, allowing international businesses to transfer their earnings back to their home countries. As Nepal continues to attract foreign direct investment (FDI), understanding the legal framework and procedures for profit remittance becomes increasingly important for investors and businesses operating in the country.

Nepal’s government has implemented policies to encourage foreign investment while maintaining control over capital outflows. The process of repatriating profits involves navigating a complex set of regulations, tax considerations, and procedural requirements. This comprehensive guide aims to provide a detailed overview of the profit repatriation process in Nepal, including the legal framework, step-by-step procedures, required documentation, and relevant authorities involved.

II. Legal Framework for Profit Remittance

The legal foundation for profit repatriation in Nepal is primarily established by the following key legislations:

1. Foreign Investment and Technology Transfer Act (FITTA) 2075 (2019)
2. Foreign Exchange (Regulation) Act, 2019
3. Income Tax Act, 2058 (2002)
4. Nepal Rastra Bank Act, 2058 (2002)

The FITTA 2075 is the cornerstone legislation governing foreign investment in Nepal. Section 10 of the Act explicitly allows for the repatriation of profits earned by foreign investors. It states that foreign investors have the right to repatriate the following:

• Amount received from the sale of shares of foreign investment
• Profit or dividend from foreign investment
• Payment of principal and interest on foreign loans
• Amount received under technology transfer agreement
• Amount received as compensation for nationalization or acquisition of property

The Foreign Exchange (Regulation) Act, 2019 provides the regulatory framework for foreign exchange transactions, including profit remittances. It empowers the Nepal Rastra Bank (NRB) to regulate and monitor foreign exchange transactions.

III. Profit Remittance Procedure

The process of repatriating profits from Nepal involves several steps and requires approval from multiple government agencies. Here’s a detailed breakdown of the procedure:

A. Step 1: Calculation of remittable profits

The first step in the profit remittance process is to accurately calculate the amount of profit eligible for repatriation. This calculation must be based on the company’s audited financial statements and should consider the following factors:

• Net profit after tax
• Dividend declared (for dividend remittances)
• Any restrictions on profit remittance as per the company’s articles of association or investment agreement
• Compliance with minimum retained earnings requirements, if any

It’s crucial to ensure that the calculation is accurate and in line with Nepali accounting standards and tax laws.

B. Step 2: Tax clearance and compliance check

Before applying for profit remittance, the company must obtain a tax clearance certificate from the Inland Revenue Department (IRD). This certificate confirms that the company has fulfilled all its tax obligations, including:

• Payment of corporate income tax
• Withholding tax on dividends (if applicable)
• Any other applicable taxes

The tax clearance process involves submitting the company’s audited financial statements, tax returns, and proof of tax payments to the IRD. The department will review these documents and issue a tax clearance certificate if all obligations are met.

C. Step 3: Application to Nepal Rastra Bank

Once tax clearance is obtained, the company must submit an application for profit remittance to the Foreign Exchange Management Department of Nepal Rastra Bank. The application should include:

• A formal request letter detailing the amount to be remitted and the purpose of remittance
• Copy of the tax clearance certificate
• Audited financial statements
• Board resolution approving the profit remittance
• Other supporting documents as required by NRB

D. Step 4: Approval process

The NRB will review the application and supporting documents to ensure compliance with foreign exchange regulations and investment laws. This process may involve:

• Verification of the company’s foreign investment approval
• Checking compliance with sector-specific remittance rules, if any
• Ensuring the remittance amount does not exceed the approved foreign equity
• Confirming that the remittance is within any applicable limits or restrictions

If the application meets all requirements, the NRB will issue an approval letter for the profit remittance.

E. Step 5: Fund transfer through banking channels

Upon receiving approval from the NRB, the company can proceed with the actual transfer of funds. This must be done through authorized banking channels. The company will need to:

• Present the NRB approval letter to their bank
• Complete the bank’s foreign remittance forms
• Provide any additional documentation required by the bank
• Pay applicable banking fees and charges

The bank will then execute the foreign exchange transaction and transfer the funds to the designated overseas account.

IV. Documents Required for Profit Remittance

To successfully complete the profit remittance process, companies typically need to prepare and submit the following documents:

1. Audited financial statements for the relevant fiscal year
2. Tax clearance certificate from the Inland Revenue Department
3. Board resolution approving the profit remittance
4. Copy of foreign investment approval from the Department of Industry
5. Proof of share ownership (share certificates or company register)
6. Bank statements showing the inward remittance of foreign investment
7. Calculation of remittable amount, certified by a chartered accountant
8. Declaration of compliance with minimum retained earnings requirements (if applicable)
9. Copy of technology transfer agreement (for royalty or fee remittances)
10. Any sector-specific approvals or licenses
11. Passport copies of foreign shareholders (for individual investors)
12. Power of attorney (if the application is submitted by a representative)

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V. Remittance Advisory Services

Given the complexity of the profit remittance process in Nepal, many companies choose to engage remittance advisory services. These services are typically provided by law firms, accounting firms, or specialized consultancies with expertise in Nepali foreign exchange regulations and investment laws.

Remittance advisors can assist with:

• Calculating the remittable amount in compliance with Nepali laws
• Preparing and reviewing all required documentation
• Liaising with relevant government authorities
• Navigating sector-specific regulations
• Advising on tax implications of profit remittance
• Ensuring compliance with foreign exchange regulations
• Expediting the approval process

While not mandatory, engaging a remittance advisor can significantly streamline the process and reduce the risk of delays or rejections due to compliance issues.

VI. Typical Timeframe for Remittance Process

The duration of the profit remittance process in Nepal can vary depending on several factors, including:

• Completeness and accuracy of submitted documents
• Complexity of the company’s financial structure
• Sector-specific regulations
• Workload of relevant government departments

On average, the process typically takes between 4 to 8 weeks from the initial application to the final fund transfer. However, it’s important to note that this timeframe can be longer in cases where additional scrutiny is required or if there are compliance issues that need to be addressed.

VII. Limits and Restrictions on Remittances

While Nepal’s foreign investment laws generally allow for the repatriation of profits, there are certain limits and restrictions that investors should be aware of:

1. Sector-specific restrictions: Some sectors may have specific limits on profit repatriation as part of their investment approval conditions.
2. Minimum retention requirements: Certain industries may be required to retain a portion of their profits in Nepal for reinvestment or as a financial buffer.
3. Foreign exchange availability: In rare cases, the NRB may temporarily restrict remittances due to foreign exchange shortages.
4. Compliance with investment agreements: Any restrictions agreed upon in the original investment approval must be adhered to.
5. Proportional remittance: The amount remitted must be proportional to the foreign equity stake in the company.
6. Annual remittance limits: While not universally applied, some sectors may have annual caps on the amount that can be remitted.

VIII. Relevant Laws and Authorities

The key laws governing profit remittance in Nepal include:

• Foreign Investment and Technology Transfer Act (FITTA) 2075 (2019)
• Foreign Exchange (Regulation) Act, 2019
• Income Tax Act, 2058 (2002)
• Nepal Rastra Bank Act, 2058 (2002)
• Companies Act, 2063 (2006)

The primary authorities involved in the remittance process are:

1. Nepal Rastra Bank (NRB): The central bank responsible for foreign exchange regulation and approval of remittances.
2. Department of Industry (DOI): Oversees foreign investment approvals and monitors compliance with investment terms.
3. Inland Revenue Department (IRD): Responsible for tax clearance and ensuring tax compliance before remittance.
4. Ministry of Industry, Commerce and Supplies: Formulates policies related to foreign investment and may be involved in high-value or strategic sector remittances.

IX. Remittance Practices in Nepal

Profit remittance practices in Nepal have evolved over the years, reflecting the country’s gradual opening to foreign investment. Some key observations on current practices include:

1. Increased transparency: The government has made efforts to make the remittance process more transparent and predictable.
2. Digital transformation: There’s a growing trend towards digitalization of the application and approval process, although paper documentation is still required.
3. Sector-specific approach: Remittance policies are increasingly tailored to specific sectors, recognizing the unique needs of different industries.
4. Balancing act: Nepal continues to balance the need to attract foreign investment with the desire to retain capital within the country for development purposes.
5. Regular policy reviews: The government periodically reviews and updates remittance policies to align with economic goals and international best practices.

X. Conclusion

Profit repatriation is a crucial aspect of foreign investment in Nepal, providing investors with the assurance that they can access their earnings. While the process involves multiple steps and requires careful navigation of regulatory requirements, it is generally achievable with proper planning and compliance.

As Nepal continues to develop its economy and attract foreign investment, it’s likely that the profit remittance process will further evolve. Investors should stay informed about any changes in regulations and seek professional advice when necessary to ensure smooth and compliant profit repatriation.

By understanding the legal framework, following the prescribed procedures, and maintaining good relationships with relevant authorities, foreign investors can successfully repatriate their profits from Nepal while contributing to the country’s economic growth.

FAQs:

1. What types of profits can be remitted? Foreign investors can remit dividends, capital gains from the sale of shares, royalties, and technical service fees, subject to applicable laws and investment agreements.
2. Are there limits on the amount that can be remitted? Generally, there are no fixed limits, but remittances must be proportional to the foreign equity stake and comply with any sector-specific restrictions.
3. What taxes apply to profit remittances? Remittances are subject to withholding tax, typically at 5% for dividends. Other remittances may have different rates as per the Income Tax Act.
4. How long does the remittance approval process take? On average, the process takes 4-8 weeks, but it can vary depending on the complexity of the case and the completeness of documentation.
5. Can profits be remitted in foreign currency? Yes, approved remittances can be made in convertible foreign currencies through authorized banking channels.
6. Are there sector-specific remittance rules? Yes, some sectors may have specific remittance rules or restrictions as part of their investment approval conditions.
7. How does Nepal monitor profit remittances? Nepal Rastra Bank and the Department of Industry monitor remittances through the approval process and regular reporting requirements for foreign-invested companies.
8. Can retained earnings be remitted later? Yes, retained earnings can generally be remitted in future years, subject to approval and compliance with any retention requirements.