Foreign Investment in Nepalese Hydropower Sector

FinLex Associates

Foreign investment in the hydropower sector of Nepal is primarily regulated by several legislations, including:

Foreign Investment and Technology Transfer Act of 2019 (FITTA)
Foreign Exchange (Regulation) Act of 1962 (amended in 2019), and
Public Private Partnership and Investment Act of 2019.

1. What Percentage of Investment is Allowed for Foreign Investors?

Foreign investors can fully engage in the hydropower sector, with the option to invest up to 100%.

2. What are the Steps for Approval of Foreign Investment in the Hydropower Sector?

SN	Steps	Authority	Tentative Timeline	Applicable Government Fee
1.	Receive in-principle Approval of Foreign Investment	DOI/IBN	30 days	Deposit maximum up to NPR 20,000 (Approx. 200 USD) depending upon the estimated level of the fixed assets at DOI. The deposit amount is refundable.
2.	Incorporation of Company	OCR	5 days	Depends as per the authorized capital
3.	Industry Registration	DOI	10 days	NA
4.	VAT Registration	IRD	2 days	NA
5.	Business Registration at Local Level	Ward Office	2 days	Different local levels have different rates
6.	Receive the NRB approval to inject the foreign investment amount in Nepal	NRB	30 days	NA
7.	Apply to receive the hydropower survey license	DOED	45 days	Depends as per the capacity of hydropower
8.	Apply to receive the license for generation / transmission and distribution of electricity	DOED	45 days

To initiate the investment process, the Department of Industry (DOI) is responsible for granting the necessary approvals. However, for projects that exceed 200 MW or involve investments over 6 billion Nepalese Rupees, additional approval from the Investment Board of Nepal (IBN) is required.

Steps Overview:

Submit an application to the DOI.
If applicable, seek IBN approval for larger projects.
Wait for the approval

3. Is It Mandatory to Issue Shares to Local People?

While foreign investors can fully finance their projects, there is encouragement for local participation. Many developers have started to issue shares to local communities, fostering a sense of ownership. However, it is important to note that this is not a strict requirement. If you prefer not to distribute shares, you can still proceed with your project.

4. What Fiscal Incentives are Provided to Hydropower Project Developers?

Hydropower developers in Nepal benefit from several attractive fiscal incentives:

Corporate Tax Rate: A favorable rate of 20%.
Income Tax Holiday: A complete exemption for the first 10 years of commercial operation, followed by a 50% exemption for the next 5 years—an enticing offer!
Tax Benefits: A 100% VAT exemption on imported machinery, and 0% VAT on transactions involving machinery—very advantageous for investors!
Customs Benefits: A low customs duty of only 1% on construction equipment imports, easing the financial burden.
Loss Carry Forward: Investors can carry forward losses for up to 12 years, providing a helpful financial cushion.

In summary, Nepal's hydropower sector is very welcoming to foreign investors, offering a range of incentives to encourage participation.

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Disclaimer:

This information is provided for educational purposes only and should not be construed as legal advice. FinLex Associates retains exclusive rights to the content.

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Frequently Asked Questions (FAQ) on Foreign Investment in Hydropower Projects in Nepal

Yes, foreign investors are allowed to invest up to 100% in hydropower projects.
The process involves submitting an application to the Department of Industry (DOI) and, for larger projects, obtaining approval from the Investment Board of Nepal (IBN).
No, while it is encouraged, there is no legal requirement to issue shares to local people.
Developers benefit from a 20% corporate tax rate, a 10-year income tax holiday, VAT exemptions, low customs duties, and the ability to carry forward losses for up to 12 years.