The legal system of Nepal is based on common law with a strong influence of Hindu customary law.

The main forms of business vehicle in Nepal are:

Sole proprietorship (private) firms. Individuals can register sole proprietorship firms under the Private Firm Registration Act 1957, which provides the firm with a trading name. Sole proprietorship firms do not have a separate legal personality and the liability of the proprietor is unlimited. Proprietorship firms are mostly used by individuals undertaking trading activities (such as, retailers, shops and importers of goods), and professional service providers like lawyers and accountants. The advantages of sole proprietorship firms are as follows:

Disadvantages include:

Partnership firms. Partnership firms can be registered under the Partnership Act 1963. They do not have a separate corporate personality and the liability of the partners is unlimited (limited liability partnerships have not yet been introduced in Nepal). There is no restriction on the maximum number of partners in a partnership firm. Partnership firms are mostly used for trading activities (such as, retailers, shops and importers of goods), and professional service providers like lawyers and accountants.

Their advantages include:

Disadvantages of partnerships include:

Limited liability companies. Limited liability companies are incorporated under the Companies Act 2006 (Companies Act). The Companies Act provides for the incorporation of:

Limited liability companies (largely private limited companies) are the most common form of business vehicles. Under the Companies Act, a private company can even be formed by a single shareholder.

The advantages of limited liability companies include:

The disadvantages of limited liability companies are as follows:

Co-operatives. Co-operatives are registered under the Co-operative Act 1992 and are run on the principle of co-operative (that is, business activities of the co-operatives are limited to their members). Co-operatives have a separate legal personality and members enjoy limited liability. At least 25 members are required to form a co-operative. This vehicle is not generally used for ordinary commercial transaction by business entrepreneurs.

Advantages of co-operatives include:

Disadvantages of co-operatives are:

The most common options for foreign companies establishing a business in Nepal are:

Registration of local subsidiary. An overseas company can register either a joint venture company, or a fully owned subsidiary company in Nepal. A private company is the most common corporate vehicle used by foreign companies seeking to establish a business presence in Nepal, for the following key reasons:

Although the existing foreign investment laws do not prohibit foreign investment through any other form of business organisation, in practice, approval for foreign investments are largely only given to companies.

In case of the government projects, the bidding documents can also specifically require the successful bidder to register a company in Nepal. In some cases, unincorporated joint ventures are registered with the tax authority for tax purposes. However, such registration of unincorporated joint ventures is not in compliance with law.

Registration of a branch. The Companies Act 2006 (Companies Act) permits foreign companies to register a branch office in Nepal. The branch can carry out the business activities that the foreign company can carry out in the country of its incorporation. To register a branch office in Nepal, the company must have either (section 154(3), Companies Act):

There is no specific governmental authority responsible for approving branch offices in Nepal. The relevant authorities are the Department of Industries (DOI) under the Foreign Investment and Technology Transfer Act 1992 (FITTA) and Nepal Rastra Bank (NRB) under the Foreign Exchange Regulation Act 1962 (FERA). However, the DOI is not currently providing any approval to foreign entities for establishing a branch office and its approval is only in respect of investment in share capital. Therefore, the option of branch registration is not viable until DOI corrects its current practice in line with the existing laws.

That being said, approval for a branch office will be given for government projects with a government authority.

Registration of a liaison (contact) office. Foreign companies can register a liaison office in Nepal. The liaison office, once registered with the Office of the Company Registrar, is not subject to any periodic renewal requirement and can operate for indefinite period. The liaison office cannot undertake any income generating activities in Nepal.

The following options are available for an overseas company wanting to trade directly in Nepal:

The Partnership Act 1964 is the primary legislation dealing with partnerships in Nepal. Partnership business in Nepal is largely based and established by agreement among the respective partners. The partnership must be registered by submitting an application to the relevant department (typically the Department of Commerce) providing the necessary details of the firm and its partners. Partnership firms do not have a separate legal personality and the liability of the partners is unlimited. Limited liability partnerships do not exist in Nepal.

A joint venture can take the form of a limited liability company (in case of corporate entities) or a partnership firm (in case of individuals) (see Question 2). International joint ventures (JVs) between a foreign company and a local business are common in Nepal.

In order to set up a joint venture between a foreign company and a local company, the foreign investment in the relevant sector should not be prohibited. The foreign company must be satisfied that the following conditions are met:

Section 3 of the Industrial Enterprise Act 1992 (IEA) provides the following seven categories of industries:

The Government of Nepal can decide to include any industry within any category of industry under section 3 of the IEA upon the recommendation of the Industrial Promotion Board (section 14, IEA). In practice, the Government will publish notice of any additional industries in the official gazette.

In addition, Foreign Investment and Technology Transfer Act 1992 provides a maximum amount of foreign investment in the following business activities:

The steps for setting up a foreign joint venture company are as follows:

Trust arrangements (other than trusts with religious or social objectives) are not recognised by the laws of Nepal.

The Companies Act 2006 is the primary legislation in relation to private companies. Private companies are registered with the Office of Company Registration (OCR). All the statutory records of the company such as the register of shareholders, register of directors, registered office of the company are also maintained with the OCR.

For more information on the OCR see box: The regulatory authorities.

Companies are tailor-made. Nepal does not use shelf companies.

The following documents must be filed electronically or physically with the Office of Company Registration (OCR):

The registration fee payable depends on the authorised capital of the company. For example:

The OCR will typically provide a certificate of incorporation in fifteen days from the filing of the documents. A private company can commence its business immediately after the certificate has been issued.

The memorandum of association (MoA) and the articles of association (AoA) are the fundamental documents of company that are required during incorporation. These documents are public and can be obtained by any shareholders and stakeholders in case of a private company, and by any one in case of a public company, on payment of a certain fee. Companies also have the authority to enact its bye-laws and regulations.

The MoA contains information such as the share capital of the company, types of shares, and rights vested in shares. It must be signed by each of the promoters and their witness. The AoA contains information on convening meetings, appointment of directors, power and duties of board of directors, accounts of the company for internal management and attaining the objects contained in MoA.

Although not mandatory, the shareholders of the company can enter into a shareholders' agreement (or consensus agreement) executed by all the shareholders of the company in relation to the operation of the company. This must also be submitted to the OCR on incorporation.

The company must have its annual financial statement (balance sheet, profit and loss account, and description of cash flow) audited by a qualified auditor (Companies Act 2006). These audited financial statements, along with the auditor's report must be approved by the shareholders at the annual general meeting and submitted (together with the decision of the shareholders approving these documents) to the Office of Company Registration (OCR).

Tax returns are filed under a self-assessment system and must be certified by the auditor and submitted along with the audited accounts within the stipulated time.

The branch office of a foreign company must also prepare annual financial statements to reflect transactions undertaken Nepal and submit these documents to the OCR. The branch office must also submit a copy of the annual financial statement, audit report and report of board of directors prepared for every financial year pursuant to the law of the country where its registered office is situated, no later than three months after they have been finally prepared.

Private companies must include Private Limited (Pvt. Ltd.) after its name. Every company must place a signboard containing its name and address in Nepali language outside its registered office.

Contracts or deeds must be signed by a person duly authorised to sign on behalf of the company. To obtain regulatory approvals from the Department of Industries and Nepal Rastra Bank, all the parties must sign on the same document (counterparts are not permitted). The parties must initial on every page of the contract or deed (including any schedules and annexures) and insert their full signature on the signature page. In addition, parties that use seals or stamps must affix this on every page of the contract or deed (including the schedules, annexures and the signature page).

Every document must be witnessed by at least one witness for each party. Contracts in Nepal are not subject to stamp duty or other taxes.

The minimum number of members for a private company is one and the maximum number is 50. A single member can form a private company in Nepal. A single member company is not required to call for general meeting or board meeting and can conduct activities through the single member's written decision.

A minimum paid up capital of NPR10 million is required for the formation of a public company. There is no minimum share capital requirement for private companies. However, the minimum foreign investment requirement is NPR5 million.

The promoters of a private company that has taken loan from any other company cannot transfer, or create security interest over, the shares of the company issued in their name until both:

There are no other statutory restrictions on the transfer of shares in a private company. However, the shares of a private company cannot be transferred to any person other than the existing shareholders of the company without complying with any provisions contained in the memorandum of association, articles of association or the consensus agreement entered between the shareholders of the company.

The Companies Act 2006 provides the following protection for minority shareholders:

Additional protection can be given to minority shareholders in the articles of association and shareholders agreement. For instance, the shareholders can agree to provide veto rights to certain shareholder(s) on specific matters.

The quorum requirement at shareholder meetings for a private company is contained in its articles of association.

Shareholders are entitled to voting rights at the rate of one vote for each share held. However, this can be varied by an agreement between the shareholders, provided that it is not prejudicial to the interests of the company and other minority shareholders.

Special resolutions (that is, at least 75% of the votes) are required for certain corporate actions such as amending the memorandum of association or articles of association of a company, altering the share capital of the company and voluntary liquidation.

Corporate actions such as appointment of directors and distribution of dividends require an ordinary resolution of the shareholders (that is, at least 50% of the votes).

Voting majorities required by law cannot be disapplied for protection of minority shareholders. See Question 15 for rights that may be conferred to minority shareholders for protection of their rights.

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The laws of Nepal generally do not discriminate between foreign shareholders and domestic shareholders. All the shareholders are treated equally without any restrictions.

However, foreign investment is prohibited in the following business activities (Foreign Investment and Technology Transfer Act 1992):

In addition, there are certain sectors where foreign investment is restricted to as certain percentage (see Question 6).

The foreign exchange transactions in Nepal are regulated by the Foreign Exchange Regulation Act 1962 (FERA). This Act restricts foreign exchange transactions that do not have prior approval from the Nepal Rastra Bank (NRB).

In addition, a person residing in Nepal must obtain approval from the NRB for any indirect or direct (section 9C, FERA):

Nepalese laws do not permit foreign ownership of real estate without approval from the Government of Nepal. This includes creation of security interest over real estate in favour of foreigners. Real estate is also one of the sectors in which any foreign shareholding is not permitted.

However, there are no restrictions on the occupation of real estate by foreigners.

Unless otherwise specified by the articles of association, a person proposed to be appointed as a director of a company (other than independent directors and directors nominated by institutional shareholders) must hold at least 100 shares in the company.

In addition, a person is disqualified from being appointed as a director if (Companies Act 2006):

Companies in Nepal have a unitary board structure. The board of directors can form sub-committee(s) to discharge of any specific business.

A public company's board must consist of a minimum of three and maximum of 11 directors. If the number of directors is less than seven, at least one independent director must be appointed. If the number of directors is more than seven, at least two independent directors must be appointment. The number of directors for a private company is provided for in its articles of association.

A corporate/institutional shareholder can appoint a director in proportion to the shares held by it. The corporate shareholder can also appoint an alternate director to attend the meeting on behalf of their director.

The maximum limit on number of members in a public company has not been specified by law, however, the minimum is seven. A private company can be formed by a single person and the maximum limit on the number of members is 50 (excluding employee shareholders).

Employees do not have a statutory right to board representation.

The maximum number of members in a public company has not been specified by law. The minimum number of members is seven.

A minimum paid up capital of NPR10 million is required for the formation of a public company. Unless a public company is listed on the stock exchange, there are no requirements for the minimum number of shares to be held by the public. However, in the event a public company proposes to issue its shares to more than 50 persons, then it must comply with certain public issue requirements, including the publication of a prospectus.

The main taxes that businesses are subject to in Nepal are as follows:

Tax returns are filed under a self-assessment system and must be certified by the auditor and submitted along with the audited accounts within the stipulated time.

The following companies are considered to be resident in Nepal for tax purposes in any fiscal year:

Resident businesses are taxed on their worldwide income. In addition, a foreign permanent establishment of a non-resident person situated in Nepal is also considered to be a resident of Nepal for tax purposes.

Section 2 (ay) of the ITA read with Sections 2 (ay) and 2 (aab) of the ITA defines ''foreign permanent establishment'' as a foreign company, trust, partnership that:

A permanent establishment is subject to:

Non-resident businesses are taxed on income having source in Nepal.

Profits remitted to foreign entities are taxed in the following manner:

The dividend is considered as finally taxed after withholding at the rate of 5%. The payments made to non-residents after deducting the applicable taxes on royalties or interest are considered finally taxed and no additional tax is payable in Nepal.

If Nepal has entered into a Double Tax Avoidance Treaty (DTA) with another country, and a person's same income is taxable in both countries, the beneficial tax provisions (exemption or lower rate of tax) under the DTA would be applicable (section 73(1) , Income Tax Act).

However, the benefits under the DTA will not be applicable if (section 73(5), Income Tax Act) both:

Nepal has entered into DTAs with the following ten countries:

Section 33 of the Income Tax Act 2002 deals with transfer pricing under the ''arm's length principal". The Inland Revenue Department (IRD) has the power to distribute, apportion or allocate amounts to be included or deducted in computing income between associated persons in order to assess the taxable income or tax liabilities.

The IRD can re-characterise any income, loss, amount, source or types of payment or apportion the expenses between the associated persons for this purpose if the transaction has not been carried out in accordance with the arm's length principal.

The IRD can also re-characterise certain transactions (such as transactions for use of property under a financial lease) to affect the deductibility of interest payments.

The Fiscal Act, which is introduced each fiscal year, provides for tax exemptions and grants for certain types of businesses based on factors such as:

For example, entities with an exploration licence that will commence commercial operation by 15 April 2019 are entitled to:

Labour Act 1992 and Labour Rules 1993 are the main laws regulating employment relationships. The Bonus Act 1974 and the Bonus Rules regulate profit sharing, the Trade Union Act 1992 and the Trade Union Rules 1993 regulate the formation of trade unions.

Labour laws apply to all foreign and national employees and workers in Nepal. Foreign Employment Act 2007 and Foreign Employment Rules 2008 apply to Nepalese citizens working abroad. The labour laws generally apply to employers employing ten or more employees. Only limited provisions including minimum wages will apply to the employers employing less than ten employees.

Foreign nationals must obtain a working visa from the Immigration Department after obtaining the approval from Department of Labour to work in Nepal. This is issued for a period not exceeding one year at a time and can be renewed for a further period if the approval is extended by the Department of Labour.

The draft bill on Foreign Investment and Technology Transfer Act 2013 (2070) (Draft FITTA) was introduced in 2013. The Draft FITTA has proposed a number of changes to the current foreign investment laws. One of the proposed changes is raising the minimum amount of foreign investment in any industry from USD50,000 to USD200,000. Further, the Draft FITTA is also proposing to prohibit foreign investment in hydropower with installed capacity of less than 30 MW. The status of the draft bill is not publicly available. The labour laws are also undergoing reform and new bills have recently been registered with the Parliament.