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Commercial transactions are built on trust but prudent businesses rarely rely on trust alone. Suppliers extend credit, contractors undertake projects, and financier advance funds with the expectation that contractual obligations will be honoured. To mitigate the risk of default, parties often insist on security.
In Nepal, the most common form of security is the post-dated or undated cheque, popularly known as a security cheque. While convenient, the increasing reliance on security cheques has generated considerable legal uncertainty and commercial disputes. A bank guarantee, by contrast, provides a more reliable and commercially sound mechanism for securing contractual performance.
As per Negotiable Instruments Act, 1977 , cheque is a bill of exchange drawn on a bank and payable on demand. Security refers to any property, or any document relating thereto, that has been or is to be provided as collateral in accordance with the prevailing law at the time of granting or obtaining a loan. The NRB Directive, 2026 has explicitly restricted the licensed financial institutions from extending a loan against any type of cheque as collateral security. Considering the restrictions, licensed financial institutions do not disburse loans against the cheque, however, security cheques are widely in use in commercial transactions between private parties.
A cheque functions primarily as a payment instrument. The drawer instructs a bank to pay a specified amount to the payee from the drawer’s account. It involves only the parties to a commercial transaction. The chances of recovery of payment depend on availability of funds and willingness of the drawer to honour the payment. However, bank guarantee functions as a proper security instrument. It involves financial institutions as guarantors.
The obligation to pay to the beneficiary under the contract between the parties is undertaken by the bank as a guarantor rather than the contracting party. Since the guarantor financial institution is independently liable to the beneficiary once the conditions in the bank guarantee are satisfied, the chances of recovery remain on the higher side.
Bank guarantee is a commitment issued by a bank (Guarantor) on behalf of its client (Applicant), promising to pay a specified amount to a beneficiary (Beneficiary) if the Applicant fails to fulfil a contractual obligation arising from a separate contract between the client and the beneficiary. This arrangement relies on three distinct contracts. The first is the underlying business contract between the applicant and the beneficiary. The second is the contract between the applicant and the bank whereby the bank retains the property of the applicant as a collateral for issuing bank guarantee. The third is the bank guarantee itself, which creates a direct obligation between the bank and the beneficiary. The primary value of a bank guarantee lies in the autonomy of this third relationship.
A guarantee is irrevocable on issue even if it does not state this . The cornerstone of a bank guarantee is its independence from the underlying contract . Once a bank issues a guarantee at the request of an applicant, it creates a new legal obligation that exists regardless of any disputes, disagreements, or misunderstandings between the buyer, seller or contractor in the primary commercial deal . The banks are generally required to honour the claim upon the beneficiary’s first written demand, provided the demand complies with the terms of the guarantee. Meanwhile, if the cheque is dishonoured, the aggrieved party has to undergo the whole litigation process which shall be lengthy. Since the recovery depends on the financial capacity of the drawer, sometimes the chances of recovery will also remain low. There are thousands of cases of cheque bounce running across different courts in Nepal.
Nepali law integrates the bank guarantee into its standard legal and regulatory frameworks. The underlying commercial contract between the applicant and the beneficiary is governed under the National Civil Code, 2017 . At the regulatory level, NRB Directives, 2082, require financial institutions to pay claims within seven working days of a demand. The directive also recognises ICC Uniform Rules for Demand Guarantees (URDG 758) .
The Supreme Court of Nepal consistently upholds the independence of bank guarantees through two primary lines of jurisprudence. First, regarding jurisdiction, the court firmly restricts contractual disputes from entering extraordinary writ proceedings. In the case of Advocate Tej Rawal v. Kailali District , a full bench held that contract terms bind the parties as private law, creates no public duty, and cannot support a writ of mandamus when ordinary civil remedies exist. This aligned with the Supreme Court’s previous view in the case of Siddheshwor Kumar Singh et al. v. Government of Nepal , which ruled that contractual rights must be pursued through statutory or agreed remedies rather than constitutional writs. Similar view was taken by the court in Ram Bahadur Bhandari et al. v. Government of Nepal establishing that contractual breaches require private law remedies rather than extraordinary judicial intervention.
The second line of jurisprudence has been set on the substance of bank guarantees. The Supreme Court has time and again reinforced the independent nature of the bank guarantee. In Himalayan Bank Ltd. v. Nepal Rastra Bank , the Court ruled that while a guarantee originates from an underlying deal, it forms an independent contract; thus, underlying commercial disputes cannot impair the bank’s obligation to pay. The case of Himalayan Industries Pvt. Ltd. v. Ministry of Commerce and Supplies affirmed that banks must honour guarantees immediately upon demand without applicant consent or interference from underlying party disputes. The court reinforced this in NIDC Bank Ltd. v. Lumbini Bank Ltd. et al. by rejecting underlying disputes as valid grounds for refusal. Recently, in the case of Khampache/PSJV v. Jalap Nepal Pvt. Ltd. , the court ruled that banks must honour valid demands immediately, leaving underlying disputes to separate legal remedies.
The legal framework and judicial precedents in Nepal establish why a bank guarantee is a far superior security instrument for commercial transactions compared to a cheque. While a cheque remains tied to the drawer’s account status, operational disputes or potential payment stops, a bank guarantee provides an autonomous, irrevocable financial commitment backed directly by a regulated financial institution.
Furthermore, Nepal’s Supreme Court has consistently barred applicants from using court injunctions or extraordinary writ jurisdiction to block encashment. By severing the payment obligation from commercial disputes, the bank guarantee offers absolute certainty and legal protection that any post-dated or security cheques simply cannot match.
This article was originally published in Business 360. Link.
The Gen Z movement had a profound impact on Nepal’s business sector, administrative structure and judicial system. In the federal election held thereafter, Rastriya Swatantra Party secured nearly a two-thirds majority in Parliament, an extraordinary development in Nepal’s political history. Opportunities to form a government with such a clear mandate arise only rarely. Such a mandate grants the government not merely the authority to govern but also a historic responsibility to reform the institutions of the State.
The government formed with an almost two-thirds majority has generated new hope among the public. It has set an ambitious target of building a $100 billion economy by 2031. Such a target has naturally created optimism among the private sector, businesses and prospective foreign investors. At the same time, however, criticism has emerged that the executive has exercised influence or interfered in the appointment of the chief justice. This criticism raises an important question: can the goal of economic development be achieved without an independent and credible judiciary?
The economic development of any country does not depend solely on policies, plans and investment. Investors commit capital only where there is legal stability, impartial administration and an independent and competent court system capable of resolving disputes. Citizens, too, can trust the state only when they believe that courts are able to deliver justice above considerations of power, position or political influence.
An independent judiciary is therefore not merely a matter of democracy. It is directly connected to the economy, investment, protection of property, enforcement of contracts and public confidence. The trust of citizens, businesses and foreign investors can be sustained only when they perceive courts as impartial, competent and free from political influence.
Against this background, several fundamental questions naturally arise. If public and investor confidence in an independent judiciary weakens, can the government realistically achieve its stated goal of building a $100 billion economy? Does controversy surrounding judicial appointments not undermine the independence and credibility of the judiciary? Is the present constitutional framework for appointing judges sufficient to establish an independent judiciary? And where the principle of seniority has been disregarded, how can the courts preserve their institutional credibility?
Among the three principal organs of the state – legislature, executive and judiciary – the judiciary is the institution most dependent on public confidence, institutional tradition and impartiality. The legislature derives its legitimacy from direct elections. The executive derives its authority from political mandate and parliamentary majority. The judiciary, however, does not receive a direct electoral mandate. Its legitimacy and authority flow from impartiality, independence, competence and public trust.
The Constitution of Nepal envisages an independent, impartial and competent judiciary. However, such a judiciary cannot be created merely through constitutional declarations or legal language. The method of judicial appointment, the criteria applied in appointments, the transparency of the process, and the composition of appointing bodies all determine the judiciary’s actual independence.
The Constitution of Nepal provides for the Judicial Council for the appointment of judges. The Judicial Council comprises the chief justice; the federal minister for law and justice; the senior-most justice of the Supreme Court; one legal expert appointed by the president on the recommendation of the prime minister; and one legal practitioner appointed by the president on the recommendation of Nepal Bar Association.
Similarly, the Constitutional Council, which recommends the appointment of the chief justice, consists of the prime minister; minister for law and justice; speaker of the House of Representatives; chairperson of National Assembly; the leader of the opposition party in the House of Representatives; and deputy speaker of the House of Representatives.
A review of these two institutions shows that the executive and political leadership may exercise direct or indirect influence over the judicial appointment process. The prime minister, minister for law and justice, speaker, deputy speaker, and chairperson of the National Assembly are office-holders who emerge through political processes. The presence of a member appointed on the recommendation of the prime minister also raises legitimate questions regarding the independence of the Judicial Council. Consequently, there is a risk that political calculations, party interests, power-sharing arrangement, or personal proximity may influence judicial appointments.
Political participation is not, in itself, necessarily improper. However, when political actors become overly influential in the appointment of judges, doubts inevitably arise about judicial independence. It is not enough for the judiciary to be impartial; it must also be seen and experienced by the public as impartial. For public trust in judicial decisions to endure, citizens must be confident that the appointment of judges itself is fair, transparent and based on merit.
An independent judiciary is difficult to sustain where the appointment process is vulnerable to conflicts of interest, political influence or attempts to shape the judiciary through appointments. It is precisely for these reasons that several countries have reformed their laws and institutional structures relating to judicial appointments.
The United Kingdom, after a long constitutional and legal evolution, enacted the Constitutional Reform Act in 2005. The act introduced an independent institutional mechanism for judicial appointments and clarified the procedures, criteria and responsibilities governing such appointments. Its objective was to reduce political influence and create an environment in which judges would be appointed on the basis of merit, competence and experience. It also sought to minimise disputes and conflicts of interest associated with judicial appointments.
India’s experience is equally significant. In 1973, during the tenure of Prime Minister Indira Gandhi, the senior-most judge was not appointed chief justice; instead, a judge ranked fourth in seniority was appointed. This led to major constitutional and political controversy. The incident raised serious questions concerning the principle of seniority, judicial independence and executive influence over the judiciary.
In the years that followed, the Supreme Court of India developed the collegium system through constitutional interpretation. The system sought to ensure a decisive role for the judiciary in judicial appointments. Although the collegium system has itself been criticised for its lack of transparency and accountability, its principal purpose was to limit excessive executive influence over judicial appointments.
In 2014, an attempt was made in India to replace the collegium system through the National Judicial Appointments Commission. However, the Supreme Court of India struck down that arrangement. The decision demonstrated that judicial appointments are not merely an administrative issue; they are closely linked to judicial independence, separation of powers and constitutional balance.
Nepal has also institutionalised parliamentary hearings. Their theoretical basis appears, to some extent, to resemble the practice in the United States. In the United States, legislative hearings serve as a check and balance on the president’s role in judicial appointments. Nepal’s system of government, however, is parliamentary in nature and therefore more closely resembles the systems of the United Kingdom and India.
For this reason, parliamentary hearings in Nepal should not remain merely a constitutional formality or a display of political majority. Their purpose should be to examine the proposed appointee’s legal knowledge, integrity, impartiality, professional competence, public conduct and commitment to constitutional values. If parliamentary hearings become a mechanism for legitimising party-based decisions, they risk weakening rather than strengthening judicial independence.
The government has recently formed a committee for constitutional amendment. Constitutional amendment is not an ordinary or casual exercise. A constitution protects the balance of power among state organs, citizens’ rights, institutional accountability and democratic values. If its fundamental features are weakened or narrowed, the very essence of the Constitution may be altered. In such circumstances, there is a risk that the Constitution may no longer function as intended.
Accordingly, any amendment to the constitutional framework governing judicial appointments must be approached with restraint, seriousness and a long-term institutional perspective. The purpose of such reform should not be to expand executive influence. Rather, it should be to make the appointment process more transparent, merit-based, impartial and publicly credible.
Ultimately, an independent judiciary is not merely a legal principle or a constitutional phrase. It is the foundation of democratic protection, citizens’ rights, business confidence, investment security and economic development. A government that seeks to build a $100 billion economy must also strengthen the independence, credibility and institutional dignity of the judiciary.
Economic ambition and judicial independence are not competing objectives; an independent, impartial and competent judiciary is the very foundation of sustainable economic development.
This article was originally published in Business 360. Link.
Cheap electricity alone is not enough to attract data centers. Operators do not move where electricity is cheapest alone. They look for locations where regulation is predictable, institutions are reliable, and digital infrastructure can be trusted at scale. Nepal still has work to do on all three fronts
Assume Meta is exploring South Asia for a new data center. On paper, Nepal may appear attractive: a growing digital economy, improving connectivity, proximity to regional markets, and cleaner electricity for digital infrastructure. For a global technology company, the question is not whether Nepal can host servers, but whether it can be trusted with data at scale. Meta would assess reliable electricity and fiber connectivity, predictable foreign-exchange and environmental approvals, and lawful-access rules that protect hosted data from uncertain regulatory intervention. It would also ask whether critical sectors like banks, telecom companies, payment companies and government agencies can rely on data centers confidently.
The information and communication sector in Nepal is growing faster than the wider economy, with recent national accounts estimating 5.53% growth, compared with GDP growth of 3.85%. As digital infrastructure becomes central to public administration, financial services, cloud adoption and cross-border delivery, the country needs a framework for security, reliability, investor confidence and institutional accountability.
The Data Center and Cloud Service (Operation and Management) Directives, 2024 (the “Directives”), along with the policies and programs for fiscal year 2026/27, are important initial steps in this direction.
The Directives require data center and cloud service providers to be listed with the Department of Information Technology before providing services. Listing requires documents on security and privacy, business continuity, location, tier details, technical manpower, IP pool, physical security and high-level electrical design. Data centers must adopt security standards, protect client data, control unauthorized access, ensure continuity, appoint or obtain compliance support, conduct annual security audits and specify security and backup arrangements in cloud agreements. These provisions create a regulatory perimeter, but not a complete data-hub strategy. If Nepal wants to become a trusted destination for sensitive and cross-border digital infrastructure, reform must address five linked issues.
The first gap is legal status. Nepal should decide whether data centers should be treated not only as commercial service providers, but as a critical national infrastructure. The lapsed IT and Cybersecurity Bill had envisioned critical infrastructure sectors to include energy, ICT, health care, banking and finance. It aimed to prevent cybersecurity threats, enable response and investigation, and impose reporting obligations. Although the Bill did not survive, its logic remains relevant: sectors whose disruption can affect others require heightened protection.
Data centers fit that logic. They support digital systems used by government agencies, banks, telecom operators, hospitals and payment companies. Yet currently they are not recognized as critical infrastructure, despite the risk that even a minor disruption can affect payment systems, public services, communications, business continuity and essential digital access. Nepal should therefore codify a critical infrastructure framework and include data centers within it, with enhanced cybersecurity, resilience, reporting, audit and continuity obligations. Another gap is that the Directives require government data to be stored in at least Tier III facilities, but do not state what sector specific standards should apply to sensitive sectors like banks, insurers, telecom companies, hospitals, payment companies, capital-market institutions or other regulated entities. To resolve this gap, regulators such as, Nepal Rastra Bank, may need to prescribe tier requirements for banks and financial institutions.
The second gap is legal certainty. A credible data-hub economy requires legal trust. Customers must believe that data hosted in Nepal will be governed by predictable and rights-respecting rules. This brings the analysis to data sovereignty, cross-border flows and lawful access.
Consider a hypothetical example. Momo Data Center, a Nepali data center, hosts cloud infrastructure for Meta, with servers physically located in Nepal. The data may include account details, messages, payment information and business data of Meta users in Nepal and abroad. If the Cyber Bureau of Nepal Police suspects that a Facebook account used by Mr. Sujan has hacked other accounts and asks the Department of Information Technology to direct Momo Data Center to provide access, the key question is: access to what? The authority may seek Momo Data Center’s server logs, Mr. Sujan’s account information held by Meta, or the contents of user communications. These are legally different categories. Momo Data Center may control the physical infrastructure, but it does not own the underlying customer data, which may belong to Meta or users such as Mr. Sujan. This shows why the law must distinguish between supervision of the data center operator and access to customer data. The Directives require data centers to comply with directions issued by the Department of Information Technology and law-enforcement agencies. This is important for regulation and security, but it raises whether a data center must provide customer data merely because a department direction has been issued, or whether access must rest on a separate legal basis, such as a court order.
Nepal’s privacy law permits disclosure or use of personal information in limited circumstances, including criminal investigations, court orders or requests by competent authorities. Since the Department regulates data centers under the Directives, one could argue that its directions fall within this framework. Lawful access is not unusual. Every jurisdiction allows state access in appropriate cases. The concern is the lack of clarity on when, how and to what extent access may be exercised.
The existing framework does not provide that detail. It does not clearly state the threshold for access, whether the request must relate to a specific investigation or proceeding, who within the department may authorize it, whether the data center may under any ground decline/seek clarification or challenge an excessive request, whether the customer must be notified, or how requests must be recorded or audited. Without safeguards, directions may be interpreted broadly, creating uncertainty.
The third gap is sustainability design. Nepal’s Environment Protection Regulations, 2020 prescribe an Initial Environmental Examination (IEE) for an information technology industry with investment of Rs 250 million to Rs 2 billion in machinery or equipment, and an Environmental Impact Assessment (EIA) for an information technology industry with investment above Rs 2 billion in machinery or equipment. However, the regulations do not clearly identify data centers as a separate category requiring environmental review.
This creates an interpretive issue. One could argue that the authorities did not specifically envision modern data centers when listing environmental review categories for the information technology industry. At the same time, the requirement may still apply incidentally if a data center falls within the relevant investment threshold. Environmental review may therefore arise because of investment size, not because the law has assessed data centers as distinct digital infrastructure. This is not sufficient. Nepal should not rely only on generic environmental categories for conventional industrial or building projects. Data centers create distinct impacts across the energy system, water resources, waste management, local resilience and climate-related siting risks.
Nepal should, therefore, develop a data-center-specific sustainability framework, framed not only as “environmental impact” but as sustainable digital infrastructure governance. The framework should ask whether the project is sustainable digital infrastructure. Regulators should assess the facility’s power requirement, grid capacity, renewable-energy procurement, responsibility for grid connection or upgrade costs, cooling-water use, backup generator and battery management, e-waste disposal, and whether the site is environmentally sensitive, water-stressed, disaster-prone or insecure. This would reduce ambiguity and attract investment without shifting environmental, energy or infrastructure costs to the public.
The fourth gap is institutional coordination. Once data center regulation is viewed through land, water, electricity, environment, fiber connectivity and physical resilience, the Department of Information Technology cannot assess overall project viability alone. The directives do not fully address the broader approvals and infrastructure conditions required to establish a data center in Nepal. A data center is not merely an ordinary IT service facility. Its operation depends on continuous electricity supply, backup power, cooling systems, water availability, fiber redundancy, secure physical access, disaster resilience and local infrastructure support across regulatory domains. Electricity supply and connection involve the Nepal Electricity Authority; fiber connectivity involves Nepal Telecommunication Authority and service providers; land use and building permits involve local governments; environmental approvals arise under environmental law; and foreign investment and foreign exchange issues involve the Department of Industries and Nepal Rastra Bank.
A project may face delays if land use approval, environmental clearance, electricity connection, foreign investment approval, building permits and security clearances are reviewed separately, without coordinated viability assessment.
Nepal should therefore translate the land-water-energy-infrastructure nexus into institutional design. For major data center projects, a coordinated approval mechanism or single-window review could bring relevant authorities together at the project assessment stage so that grid capacity, water availability, fiber connectivity, environmental suitability, disaster risk, local infrastructure and security concerns are examined predictably, without replacing sectoral regulators. This would improve discipline and investor confidence. Investors would receive a clearer view of site viability before capital commitments. Regulators would assess cumulative project impact instead of isolated components, and infrastructure providers could plan electricity, fiber, road access and public-service requirements in advance.
The fifth gap is foreign-exchange facilitation, directly connected to the directives. If the law requires tier-rating certificates, annual security audits, international-standard compliance and compliance officers or compliance-service organizations, operators must be able to pay the foreign vendors and experts in foreign currency needed to meet those obligations. Foreign exchange facilitation should therefore be treated as digital-infrastructure policy, not banking formality.
Nepal has already seen how foreign-exchange bottlenecks can affect infrastructure sectors. In telecom, reports noted that providers could not pay international vendors for bandwidth, equipment and consultancy services due to foreign-currency recommendation issues. Internet service was reportedly disrupted after an Indian upstream provider cut bandwidth because Nepali providers could not make international bandwidth payments. That experience is an early warning. Both sectors depend on cross-border payments for infrastructure, bandwidth, equipment, maintenance and specialized services. If foreign-exchange approvals become unpredictable, data center operators may face delays in certification, maintenance, security upgrades, connectivity and support. A data center cannot promise international standards while struggling to pay vendors, certifiers, auditors or connectivity providers.
Nepal should create a predictable foreign-exchange facilitation mechanism for listed data center and cloud-service providers. Payments for recognized certification bodies, security audits, critical equipment, software, maintenance, bandwidth, cloud interconnection and specialized technical services should be treated as essential digital-infrastructure payments, subject to documentation, not arbitrary delay.
If Nepal wants to be more than a low-cost location for servers, it must become a jurisdiction that serious data users can trust. That means treating data centers as critical infrastructure, setting clear limits on lawful access, embedding sustainability into sitting and approvals, coordinating infrastructure decisions across agencies, and ensuring predictable foreign-exchange access for essential services. These are not separate reform agendas; they are the foundations of credibility. Nepal’s opportunity is real, but credibility will not be declared, it will be built. And if Nepal builds it well, data centers will not simply store data here; they will anchor the next phase of the country’s digital economy.
As remittances sustain the present, a demographic transition is quietly building, and Nepal’s state architecture may not be ready.
There is a phrase we Nepalis have grown comfortable with: ‘We will deal with it later’. Naturally, later has arrived.
Nepal is on the cusp of a demographic transformation that is set to fundamentally alter its economy, its social contract and more importantly the state’s very structure. While the newly elected government has rightly put its focus on green and digital transitions, a third and arguably more disruptive shift is slowly underway: Nepal’s demographic transition. Unlike floods or earthquakes, this predicament does not arrive with sudden urgency. It accumulates quietly, year by year, in maternity wards, emigration queues and pension ledgers, until one day, the numbers no longer add up.
Since 1991, the elderly population in Nepal has nearly tripled, and the population pyramid indicates a forecasted shift from a youth-dominant structure to one increasingly composed of older individuals. A transition in effect mainly due to declining birth rates and increased youth migration abroad.
The data is unambiguous. Nepal’s population of 29.6 million is ageing. As per the 2021 National Census, the above 60 age cluster grew from 8.1% in 2011 to 10.2% in 2021. Furthermore, as per the Population Division at the National Statistics Office, by 2028, Nepal will reach ‘ageing society’ status, as defined by the United Nations and by 2054 BS, it will be an ‘aged society’. Simultaneously, the total fertility rate decreased from five births per woman three decades ago to 2.1 today, on par with the replacement threshold.
These are not projections in the distant future but the reality that Nepal is already approaching. AIworkshop services
As remittance from the estimated 3.5 to 4.4 million Nepali citizens working abroad account for nearly a quarter of the national GDP, a dependency that the previous governments have tolerated rather than resolved, Nepal’s economy rests on a precarious foundation. Despite a nominally favourable Balance of Payments situation, Nepal is still weak in terms of foreign trade.
In the previous fiscal year, imports were worth Rs 6.57 for every one rupee exported. Our current situation reflects emigration not as an opportunity but a necessity. Our domestic workforce stands at 8.43 million, representing only 39.75% of the population, with unemployment at 10.71%. According to data provided by the Department of Foreign Employment, a total of 839,266 Nepalis received labour permits for foreign employment in Fiscal Year 2081/82 BS.
This is the paradox at the crux of our demographic situation: a country simultaneously exporting its working-age population and watching its elderly population grow. While the support ratio of the number of working-age individuals supporting each elderly dependent, currently stands at 9.9 workers per elderly person; that figure will contract sharply in the coming years.
The question that looms over Nepali policymakers is this: as migrant workers also age and return, and cash flow of remittances plateau or decline, as they inevitably will, and as destination economies automate and tighten immigration – what replaces them? Nepal has no significant industrial base. Its manufacturing sector is nascent. Its services sector remains concentrated in tourism and trade. Inevitably, the cushion that remittance has long provided, absorbing economic shocks for decades, will lose its effect.
As a constitutional socialist republic, although Nepal’s commitments to its elderly citizens are legally enshrined and morally sound, they are fiscally fragile. Under the current social security allowance scheme, all individuals aged 70 and above receive Rs 4,000 per month in old-age allowance, known colloquially as the Briddha Bhatta. A lower age threshold of 68 applies to Dalits, single women and persons with disabilities, among others. As of 2025, 1,857,529 elderly individuals receive the state-implemented old age allowance. AIworkshop services
As the elderly population grows, a cohort that rose by 36.7% between the 2011 and 2021 censuses alone, the pressure upon the state’s finances will compound rapidly. The legal architecture that governs retirement further tightens the timeline: under recent amendments to Nepal’s labour law, the mandatory retirement age is set at 60, while life expectancy has risen to 71.3 years. This creates an 11-year gap, during which the state bears primary financial responsibility for a growing cohort of citizens.
Article 34 of the Constitution of Nepal guarantees the right to employment, and Article 43 enshrines the right to social security. These are not aspirational provisions; they carry the force of enforceable rights. The challenge is that the legal framework surrounding these rights was designed for a demographic reality that no longer exists.
Whilst Nepal’s Labour Act 2017 and the Contribution-Based Social Security Act 2017 have been landmark pieces of legislation, creating a contributory pension framework for formal sector workers, the formal sector employs only a minority of Nepal’s workforce. The vast majority, comprising informal workers, subsistence farmers and returned migrants, participate only on a voluntary basis, with negligible uptake. As the aged population grows and the formal sector remains underdeveloped, the pressure on the socialist system will become legally and fiscally unsustainable.
There is an urgent need for legislative reform. The retirement age framework requires reconsideration. A mandatory retirement age of 60 in a country with a life expectancy of 71.3 years and a shrinking workforce is a demographic and economic liability. Singapore, an age-old aspirant for Nepali politicians is a useful comparator, with its deliberate policy choice to raise its retirement age to 64 by July 2026, recognising what economists call the ‘silver dividend’ or the ‘longevity dividend’: a quantifiable economic benefit of keeping experienced, productive older workers in the labour market longer. Nepal’s legal framework too should incentivise, rather than foreclose, extended labour market participation.
To its credit, the government is not standing entirely still. In its first 50 days, the newly elected government announced the 100-point agenda and under it, the National Commitment Plan was also unveiled, highlighting economic stability and reform as the core objective, with an ambitious goal to achieve an average economic growth rate of 7% within the next five years, per capita income of $3,000, create 1.5 million jobs domestically and most importantly create a $100-billion economy.
The national budget for FY 2083/84 BS, presented by Finance Minister Dr Swarnim Wagle to Parliament centres on digital transformation, structural economic reform and employment-oriented growth. The budget reflects Dr Wagle’s stated ambition to shift Nepal toward a sustainable economy. On social security, the budget has allocated Rs 120 billion and proposed a national campaign, “Those who can, give it up; those who cannot, stay covered”, encouraging economically capable citizens to voluntarily forgo their allowances so that freed resources reach those most in need. These are steps in the right direction. However, the risk is familiar: good policy framed in a budget speech dissolves in implementation. What Nepal requires is not another well-intentioned budget but legislation that endures beyond electoral cycles and the institutional capacity to enforce it.
The United Nations Decade of Healthy Ageing (2021–2030) frames demographic transition not as a burden to be managed but as an opportunity to be seized. Nepal has, today, a support ratio of 9.9 workers per elderly dependent, a ratio that still allows for meaningful investment and structural reform before the demographic balance tilts. A period of grace during which a relatively large working-age population can generate the surpluses necessary to build the infrastructure for an ageing future.
Our neighbours in the north offer lessons, albeit cautionary ones, and our neighbours in the south are currently grappling with a similar transition. Every year without reform is a year of compounding liability, in pension costs, lost productivity and skills, healthcare demand, and eroded state capacity. While green and digital transitions are real and important with global trends, demographic transition as well, is not an issue to be sidelined for later.
This article was originally published in Business 360. Link.
Since the Constitution of Nepal was enacted in 2015, Nepal’s governance system has been divided into three levels: federal, provincial and local. While this setup was meant to distribute powers more effectively, it has also caused confusion, especially around who gets to collect what kind of taxes. One area where this confusion has become a real issue for businesses is house rent tax.
This article breaks down the issue, explains where the confusion lies, and offers practical advice to businesses who may be stuck between two taxing authorities.
According to the Constitution of Nepal, the federal government has exclusive power to impose corporate income tax. On the other hand, local governments (like municipalities and rural municipalities) have the power to levy certain local taxes, including house rent tax.
So far, so good. But the problem begins when both federal and local authorities try to tax rental income, especially when the property is owned by a company (lessor), not an individual.
The Income Tax Act, 2002 (ITA), which is enforced by the federal government, has some clear rules:
This means that for the federal government, rent paid to a person is not taxed as income but rent paid to a company is taxed as a corporate income.
Each local government prepares a finance act every year, outlining the taxes they collect. For example, the Kathmandu Metropolitan City’s Finance Act for 2024 imposes a 10% house rent tax on all rental agreements – whether the property is owned by a person or a company.
That’s where the conflict begins. Local governments are trying to collect house rent tax from everyone, including where the lessor is an entity and already subject to taxes relating to the rent as a corporate income.
The Legal Clash
This overlapping taxation has left many businesses in a tough spot.
If a company rents a building owned by another company, it has to:
Businesses are understandably concerned about double taxation, compliance burdens and the risk of being penalised by either authority. Local governments have refused to undertake local business registrations or renewal demanding proof of payment of rental taxes from businesses.
This issue has been taken to court multiple times in Nepal. A key takeaway from recent rulings, including one from the Supreme Court, is this:
This legal interpretation confirms that there is no conflict between federal and local laws but each must operate within its limits.
If your company is being asked to pay house rent tax to a local ward office – even though the lessor is a company – here are your options:
If a ward office is demanding payment, ask them to provide a formal letter stating their requirement. This creates a paper trail.
If they won’t give you anything in writing, you can send them a letter yourself. In that letter, explain:
Try to get this letter officially registered at the ward office, or send it via postal mail so there’s a record.
If you don’t get a reply within a month or two, or if the ward office insists despite your explanation, you may consider legal action, such as filing a writ petition to challenge the demand.
Most importantly, don’t stop paying TDS to the IRD. Even if local authorities are pressuring you, skipping federal tax payments can lead to fines, penalties and future audits. Verbal confirmations from tax officers won’t hold up during an audit, only the law and proper documentation will.
Nepal’s transition to a federal system has brought many benefits but it’s also led to overlapping tax rules that can be hard to navigate, especially for companies renting office or commercial space. The good news is that the courts have clarified the law: local house rent tax applies only to individuals, not companies. For businesses, the best approach is to stay compliant with federal tax law, document all communications with local authorities and be ready to stand your ground – with legal backing – if necessary.
If your business finds itself caught between two tax offices, don’t panic. With proper documentation and knowledge of the law, you can manage the situation and avoid unnecessary double taxation.
This article was originally published in Business 360. Link.
Over the past few months, green bonds have made quite the entrance in Nepal’s capital markets. The country recently welcomed its first green bond issuances; a public issuance from Nepal Infrastructure Bank and a private issuance to be made by NMB Bank. These exciting developments highlight a growing commitment to sustainable finance and climate-friendly projects. Notably, they come at a time when green bond is dominating the global labelled bond market representing 57% of all such issuances as of December 2024. The question now is whether this marks a fleeting moment of enthusiasm or the beginning of a deeper, lasting shift in Nepal’s financial landscape.
At their core, green bonds are your regular debt instruments having usual features of bond such as face value, coupon rate, maturity date, credit risk, etc. But the twist is in the destination of the funds. Unlike regular bonds, the proceeds from green bonds are ring-fenced. They are earmarked exclusively for projects with environmental benefits, for example renewable energy, energy efficiency and climate resilience.
International guidelines like the Green Bond Principles developed by the International Capital Market Association (ICMA) have set the tone for green bond issuance, and Nepal’s regulations are catching up. The Green Bond Principles of ICMA lay down four key pillars: use of proceeds, project evaluation, management of proceeds, and reporting. They are the backbone of any credible green bond issuance. But how clear is the ‘green’ in Nepal’s context compared to the global standard? That is where the journey gets interesting.
Issuers see green bonds as a way to tap into the large and growing pool of Environmental, Social, and Governance (ESG)- focused investors. This is not merely a trend but a structural shift in global investment behaviour where capital increasingly flows toward projects. Investors, on the other hand, get to align their portfolios with environmental impact without sacrificing returns. It is a win-win at least in theory.
Nepal’s emerging market is still learning the ropes, with everyone figuring out how to make the best of this green opportunity. For example, banks in Nepal may subscribe to green energy bonds to meet Nepal Rastra Bank’s sectoral credit allocation mandates; a participation that simultaneously meets regulatory compliance and delivers environmental impact.
Nepal’s legal framework for green bonds builds upon its existing securities law. The Securities Registration and Issue Regulations gives green bonds a green light, provided they get SEBON’s approval. They have opened the door to foreign investors and have committed more detailed guidance through future directives. So far, no detailed directive has been issued, limiting regulators with lack of clarity and issuers navigating a policy landscape which is more aspirational than actionable.
Meanwhile, Nepal Rastra Bank’s Green Finance Taxonomy (2024) offers non binding guidance, classifying activities based on impact categories into ‘Green’, ‘Amber’, and ‘Red’. Green means good-to-go projects, Amber suggests projects on its way but needs work, and Red is a definite no-go project. The Taxonomy mandates disclosure of where the money is going, independent third-party review of eligibility of project, and impact reporting. But the strength of these rules depends on the enforcement.
Public issuances of green bond still require trustees and credit ratings, which adds a layer of market discipline. But overall, the current framework leans heavily on good intentions and voluntary compliance, rather than enforceable legal obligations.
Here is the tough part: Securities Board of Nepal (SEBON) grants approval for the issuance of green bond but lacks legal authority to enforce compliances with ICMA’s principles. Without clear, enforceable standards for project eligibility, fund management, and accountability, the risk of ‘greenwashing’ looms large. To reduce this risk, Nepal needs binding standards requiring clear categories for projects, processes for selection, transparent fund management, and periodic reporting.
While Taxonomy asks for impact reporting, SEBON does not yet have capacity or internal mechanisms to audit or follow up on disclosures. Missing are real penalties for misreporting or deviation from green use-of-proceeds commitments. As a result, our regulatory framework remains aspirational, with an accountability gap that may weaken credibility. Investor-side, the absence of standardised impact metrics, comparable disclosure formats, and public access to reports undermines investor confidence. Without stronger regulatory backing, Nepal risks being seen as applying green tape instead of fostering genuine green finance ambition.
Nepal’s green bond journey so far is encouraging; issuing two inaugural bonds, adopting taxonomy, and mobilising real capital for climate projects. Yet, without legal clarity, effective oversight and incentive structures, ambition risks falling short of delivering measurable impact. The balance between green tape and greenwash will be determined by the strength of Nepal’s regulatory commitment.
With a clear taxonomy, enforceable rules, capacity-building and market incentives, Nepal can transform early enthusiasm into a credible and vibrant green bond market; where ‘green’ truly means green. The next steps will determine whether Nepal’s green bonds become a sustainable finance success story or a cautionary tale of missed green promise.
This article was originally published in Business 360. Link.
Nepal’s tax system is conceptually aligned with global practice in recognising two core principles of taxation: the residency principle and the source principle. Under these principles, a resident is taxed on worldwide income, while a non-resident is taxed only on income that has a source in Nepal. This territorial limitation is enshrined in Sections 6 and 67 of the Income Tax Act of Nepal, 2002 (2058) (ITA).
However, the actual application of the law has not always followed this principle. The operation of Section 89, which imposes withholding tax obligations on payments made under deeds or contracts, has been interpreted in a way that expands Nepal’s taxing jurisdiction beyond what the law itself appears to permit.
This conflict is especially visible in the treatment of composite contracts involving both offshore and onshore activities. Since most large infrastructure and EPC contracts are structured as composite contracts, the way they are taxed directly influences project costs and can determine whether foreign contractors are willing to invest and operate in Nepal.
In a typical composite contract:
The foreign contractor (incorporated and managed outside Nepal) manufactures and supplies equipment from abroad. The entire activity (production, assembly, testing and shipment) occurs outside Nepal. Offshore supply is invoiced directly from the foreign company to the Nepali customer.
The same foreign contractor establishes a branch office in Nepal (Nepal branch) to carry out the onshore part of the contract. The branch is responsible for installation, commissioning, construction and training activities within Nepal. Onshore services are invoiced locally.
The structure is common in large turnkey infrastructure projects (power stations, transmission networks, industrial plants) because it allows technical equipment to be manufactured in specialised facilities abroad, while the installation and project execution are handled through the Nepal branch.
In the past, tax authorities in Nepal insisted on withholding tax (WHT) on offshore supply under Section 89(3) of the ITA. This provision requires a resident payer to deduct 5% WHT when making payments under a deed or contract to a non-resident.
In practice, this meant that:
the tax authorities still required the payer to deduct 5% WHT at the time of payment. The justification provided was that the statutory wording of Section 89 was broad enough to cover any payment under a contract, regardless of the income’s source.
This approach was inconsistent with the charging provisions of the ITA, which restrict tax to income sourced in Nepal.
In recent years, the tax authorities have advanced a new position through a public circular, which may be summarised as follows:
In other words, what was previously taxed through withholding on offshore supply has now been expanded into a doctrine of full attribution of composite contract income to the Nepal branch.
This change raises a fundamental question: Can offshore supply, conducted entirely outside Nepal, be taxed in Nepal simply because it forms part of a composite contract that also includes onshore activities?
Globally, the treatment of composite contracts has been clarified through international guidance and precedents. The OECD Model Commentary provides that only profits attributable to a permanent establishment in the host country can be taxed there. Activities carried out wholly abroad remain outside the host country’s taxing rights. This principle suggests that Nepal’s current practice, taxing offshore supply by attributing it to the Nepal branch, departs from widely accepted international norms.
The evolution of Nepal’s practice on composite contracts reflects a shift from narrow enforcement of Section 89 withholding on offshore supply to a broader doctrine that treats the entire contract as taxable income of the Nepal branch. While this approach simplifies administration for the tax authorities, it risks overreach by disregarding the source principle embedded in Nepali tax law.
The legal position remains that only Nepal-sourced income should be taxable in Nepal. Offshore supply, manufactured and delivered abroad, does not meet this criterion. Until clarified by courts or legislation, foreign contractors will continue to face uncertainty, not over whether tax will be imposed, but over whether the current approach of taxing offshore supply will ultimately withstand judicial scrutiny, and how relief (if any) may be obtained.
Only through consistent alignment between the source principle and the enforcement of Section 89 can Nepal strike the balance between securing tax revenues and maintaining a predictable environment for cross-border investment.
This article was originally published in Business 360. Link.
Despite nearly a decade since the Contribution Based Social Security Act 2017 came into force in Nepal, private sector employer enrollment in the Social Security Fund (SSF) remains low. According to the National Economic Census 2018, Nepal has about 900,000 enterprises but only around 3% are enrolled in the SSF. While government approved retirement funds are not new, the SSF introduced schemes like the Old Age Protection Scheme and Medical Treatment Scheme to distinguish itself. However, several practical challenges have hindered its widespread adoption.
Section 20(1) of the Social Security Act required existing employers to enrol with the SSF within six months of its commencement. Rule 23(2) of the Labour Rules 2018 allowed a two-year period for transferring worker gratuity to the SSF, which implies that the Labour Act 2017 and Social Security Act envisioned a minimum transition period of 2.5 years. The SSF has extended the enrolment deadlines multiple times, with the last extension expiring mid-July 2021. However, the Social Security Act does not specify a general enrolment deadline for newly established employers.
Sections 17(1)(b) and 17(1)(c) of the Social Security Act empower the SSF to order employers who have defaulted in enrolling with the SSF (defaulting employers) to enrol with the SSF and pay outstanding contributions with 10% interest, or to compensate workers if the employment relationship has ended. A recent amendment to Section 9(4) of the Social Security Act (published in the Nepal Gazette on July 30, 2025) expanded SSF’s enforcement powers – such as freezing bank accounts and properties, cancelling licence, and withdrawing passports – to cover defaulting employers as well. Prior to the amendment, Section 9(4) did not prescribe specific enforcement actions for employer’s non-compliance with their enrolment requirement and was limited to sanctioning employers who failed to deposit worker’s contribution amount to the SSF.
Uncertainty persists regarding whether SSF will enforce Section 9(4) against existing employers who wish to enrol after the cutoff date. Also, since the enrolment timeline is unclear for newly registered entities, it is uncertain whether they are subject to Sections 17(1)(b) and 17(1)(c) of the Social Security Act. There is confusion as to whether voluntary compliance after the cutoff date will be met with leniency or severe penalties. In practice, the SSF has not utilised these powers to issue orders or take enforcement actions nor issued clear guidelines, leaving employers in a state of limbo.
The Old Age Protection Scheme pools 28.33% of total contribution (31%), split between the Retirement Scheme (8.33%) and Pension Scheme (20%). To encourage timely enrolment, the SSF provided a facility to employers who joined the SSF before the cutoff date (mid-July 2021) to transfer 20% contribution of their Pension Scheme to a Retirement Scheme and withdraw the full 28.33% upon termination of employment or retirement. This benefit, which workers find crucial, is off the table for those workers enlisted into SSF by employers after mid-July 2021.
This has become a major source of discontent for those workers’ considering enrolment in the SSF at present. Those enrolling after the cutoff date are allowed to withdraw the contributions within Pension Scheme as ‘monthly pension’ only after age 60 and 180 months of contribution.
Section 23(3) of the Social Security Schemes Operational Directives 2018 (Operational Directives) requires three years of continuous contributions to qualify for special loans amounting to 80% of the Retirement Scheme contribution but it does not clearly define what constitutes ‘continuous’. This creates challenges, especially if an employer is unable to make contributions during financial hardships where workers who are kept on extended reserve are owed at least half their monthly remuneration. There is a lack of practical guidance on whether the employer should prioritise immediate liquidity for workers by paying out the half remuneration or deposit the SSF contribution based on half remuneration to maintain the ‘continuous’ status.
Section 57 of the Labour Act exempts employers from procuring medical and accidental insurance should they enlist workers with SSF.
However, SSF’s Medical Treatment Scheme is only activated after three months of continuous contributions and protection for occupation disease under the Accident and Disability Protection Scheme is activated after two years of continuous contributions. Further, this has created confusion about whether employers should be liable for medical treatment or occupational hazard during this vacuum period. As there is no transitional provision to bridge the gap, workers may find themselves without coverage during the first three months or two years of SSF enrolment which could expose employers to several claims.
Another practical issue arises when workers are on unpaid or sabbatical leave or on reserve. Section 8(1) of the Social Security Act attempts to address this by requiring employers to continue making contributions for at least three months after the termination of regular remuneration. Section 8(2) of the Social Security Act allows employers to deduct these amounts from future payables to the worker. There is a lack of clarity about what happens if there is no such outstanding payable remaining or if it is insufficient to fund the recovery.
The complexity is further exacerbated by inconsistencies between the Social Security Act and sector-specific laws. For instance, the Working Journalist Act 1993 and its Rules mandate a lump sum gratuity payment at termination, that too, to only permanent workers who have completed five years of continuous service. In contrast, the Social Security Act requires monthly contributions to the SSF, from the first date of appointment, irrespective of regular or non-regular status. The SSF has indicated that media and communication entities are expected to prioritise compliance with the Social Security Act, including full deposits, even where inconsistencies with the Working Journalist Act may exist, creating compliance dilemmas for employers in this sector.
SSF should issue clear guidelines to address existing gaps. The Operational Directives could also be revised to eliminate vacuum periods within various scheme structures. Coordinating with sector-specific stakeholders is essential to resolve compliance dilemmas. It is natural that employers/citizens are wary to trust a new scheme like SSF, unlike Citizen Investment Trust or Employees Provident Fund which have existed for much longer. A coordinated, transparent and pro-worker approach will be crucial for the SSF to gain public confidence.
This article was originally published in Business 360. Link.
Nepal’s investment landscape has entered a transformative phase with the Ordinance Amending Several Acts Related to Economic and Business Environment Reform and Investment Enhancement (the Ordinance) which was later passed by the parliament dated March 31, 2025 (2081.12.18 B.S.). A key feature of this reform is the amendment to the Foreign Exchange (Regulation) Act, 2075 (FERA), which formally permits outward investment by Nepali companies and institutions. Combined with recent regulatory guidance from Nepal Rastra Bank (NRB), this change represents a significant step toward enhancing capital mobility and integrating Nepali enterprises into the global economy.
Nepal’s investment landscape has entered a transformative phase with the Ordinance Amending Several Acts Related to Economic and Business Environment Reform and Investment Enhancement (the Ordinance) which was later passed by the parliament dated March 31, 2025 (2081.12.18 B.S.). A key feature of this reform is the amendment to the Foreign Exchange (Regulation) Act, 2075 (FERA), which formally permits outward investment by Nepali companies and institutions. Combined with recent regulatory guidance from Nepal Rastra Bank (NRB), this change represents a significant step toward enhancing capital mobility and integrating Nepali enterprises into the global economy. Tigerconservation awareness
The Ordinance introduces Sub-section (g)(4) under Section 2 of FERA, expanding the definition of foreign exchange transaction to include outward investment by Nepal-incorporated entities. Previously, domestic enterprises had limited legal avenues to invest abroad, with Nepali citizens primarily able to invest only through funds earned or held abroad. Under the new framework, companies can now invest in unlisted shares of foreign entities, acquire listed shares (up to 20% of issued capital), reinvest income earned from such investments, establish branch or liaison offices, and hold funds in foreign bank accounts. This broadens opportunities for Nepali firms to participate in international markets and align with global investment practices.
The Ordinance also clarifies eligibility for outward investment. Permitted categories include industries exempted under the Act Restricting Investment Abroad, 2021 (ARIA), which has not been issued by the government of Nepal, IT companies classified under prevailing industrial law, funds earned by Nepali citizens abroad, and foreign currency received as royalty from technology transfer under the Foreign Investment and Technology Transfer Act, 2075 (FITTA). The ARIA previously prohibited outward investment except where explicitly allowed, and violations carried significant penalties. This amendment, therefore, marks a fundamental shift from restrictive practices to enabling a more outward-looking investment regime.
A noteworthy addition is the introduction of Employee Stock Purchase Plans (ESOPs), allowing foreign parent or sister companies to provide share ownership to Nepali employees of local subsidiaries without remittance of foreign currency. This reform aligns employee incentives with corporate performance, strengthens talent retention, and fosters greater participation in global corporate growth.
While FERA establishes the legal foundation, it delegates authority to NRB to set sectoral limits, approval procedures and compliance requirements applicable for outward investment. To operationalise this framework, NRB issued the Fourth Amendment to the Foreign Investment and Foreign Loan Management Bylaw, 2021 (2078), specifically enabling outward investment for IT companies. This regulatory move is historic, creating Nepal’s first structured legal pathway for IT firms to invest abroad.
Permitted Sector: Only IT companies, as defined under Annexure 7a of the Industrial Enterprises Act (IEA), may invest abroad. IT companies include those engaged in technology parks, software development, BPO/KPO, cloud computing/data centres, web services, digital signatures, and other IT-related services.
Operational Requirement: Companies must have exported IT services and earned foreign currency in each of the last three fiscal years. As per NRB requirements, the foreign currency must be accounted for in the company’s Nepal-based bank account. Once properly accounted, the funds may be used for direct investment abroad in accordance with the approved outward investment application.
Investment Limit: The investment ceiling is the lower of 50% of foreign currency earnings over the last three years or $1,000,000 (or equivalent), whichever is lower and cannot exceed the company’s paid-up capital, ensuring prudent capital deployment.
Application process: Applications for outward investment must be submitted to the Foreign Exchange Facilitation Unit of Nepal Rastra Bank at the One-Stop Service Centre in Tripureshwor, Kathmandu. The application should include the company’s registration certificates, Memorandum and Articles of Association, PAN certificate, audited financial reports, tax clearance, shareholder and director registers, board resolutions, and details of beneficiaries, including their names and bank account information. However, a major challenge arises because the prevailing laws particularly ARIA and FERA restrict Nepali entities from opening foreign bank accounts or establishing subsidiaries abroad without prior NRB approval. Conversely, NRB Bylaws require disclosure of the subsidiary’s name and bank account details at the time of application, creating a procedural contradiction. Although the Bylaws stipulate that NRB must issue approval within 15 working days and no security deposit or government fee is required, in practice, the process often faces delays, and the statutory timeline is rarely met.
Compliance Requirements: Audited financial statements of the foreign investee and Nepali parent company must be submitted within six months of fiscal year-end, unless audits are not mandatory abroad. NRB may also request reports or statistics to monitor compliance.
Repatriation of Returns: Any profits, dividends or income earned abroad must be repatriated through proper banking channels. No prior NRB approval is required for inward remittances, facilitating seamless capital flows. Tigerconservation awareness
These reforms are landmark steps for Nepal’s outward investment landscape. By providing a clear legal and regulatory framework, domestic enterprises particularly IT firms can engage globally, attract foreign partnerships, and strengthen competitiveness. Procedural clarity, compliance guidelines and repatriation mechanisms provide predictability and reduce regulatory risk. However, challenges remain. Companies must also navigate cross-border regulatory risks, reporting obligations, tax implications and repatriation rules.
Further, NRB Bylaws require the submission of details regarding the name, address and bank account number of beneficiaries in the foreign country. This implies that if any IT company intends to set up a subsidiary abroad, such subsidiary must have legal incorporation to provide its name and open a bank account overseas. On the other hand, ARIA defines investment as a foreign bank account, which restricts opening a bank account or transferring funds from Nepal to a foreign bank account without NRB approval. In this context, investors face a dilemma: they cannot open a foreign bank account without NRB approval for foreign exchange, while NRB does not issue such approval without an existing bank account detail disclosure. This issue should be clarified through amendments to ARIA and NRB Bylaws.
In the context of investment in an existing company abroad, notarised documents of the investee company and ultimate beneficiary must be submitted to NRB for approval. When investing in companies with multiple layers of ownership, furnishing documents for the ultimate beneficiary can be inconvenient, as foreign entities may not have access to or permission to share such information. Therefore, documents disclosing the immediate beneficiary of the company or a declaration from the investing company regarding its shareholders or beneficiaries should be sufficient for NRB’s screening process.
Nepal’s amendment to the Foreign Exchange Regulation Act (FERA) and corresponding NRB regulations mark a decisive shift from an inward-focused economy toward global participation. The new framework provides structured legal channels for Nepali enterprises to invest abroad, attract partnerships and integrate into international markets. However, while FERA envisions broader outward investment, NRB Bylaws currently limit it to the IT sector, leaving other potential areas such as investment in foreign securities and non-IT companies. To realise FERA’s full intent, comprehensive legislative alignment is essential.
This article was originally published in Business 360. Link.
Double Taxation Avoidance Agreements (DTAAs) are designed to prevent the same income from being taxed in both the source country and the residence country. By allocating taxing rights between contracting states, DTAAs promote certainty, reduce fiscal barriers to cross-border trade and investment, and serve as a cornerstone of international tax cooperation.
Nepal has signed DTAAs with 11 countries with the same objective.
Despite entering into DTAAs, the practical implementation of DTAAs in Nepal has remained legally contested and administratively inconsistent. While treaties are intended to override conflicting domestic law under Nepal’s Treaty Act 1990, tax authorities generally apply domestic provision restrictions even where the treaty does not provide for such limitations.
Nepal’s power to enter into DTAAs originally existed under the Income Tax Act 1974 (ITA 1974). Pursuant to that authority, Nepal has entered into a majority of its existing DTAAs. The domestic legal status of these treaties is governed by Nepal Treaty Act 1990 (Treaty Act). The spirit of the said Act, as reflected in judicial interpretation, is that treaty obligations should prevail, and where any change in domestic law is required for the implementation of a treaty, such change should be duly carried out.
This principle also mirrors international treaty law under the Vienna Convention on the Law of Treaties, which requires that treaties be performed in good faith and prohibit states from invoking internal law as justification for failure to perform treaty obligations. While Nepal has signed the Vienna Convention but has not formally ratified it, these principles are widely recognised as forming part of customary international law.
In theory, therefore, Nepal’s DTAA obligations should prevail over inconsistent provisions of domestic tax law.
The Income Tax Act 2002 (ITA 2002) introduced a major structural change to Nepal’s international tax regime. Section 73(5) provides that tax exemptions under any DTAA shall apply in Nepal only if at least 50% of the ownership of the foreign entity is beneficially held by residents of the treaty partner country.
This provision operates as a statutory limitation of benefits rule introduced unilaterally into domestic law. The difficulty is that all of Nepal’s DTAAs were signed before 2002 and do not contain such ownership conditions. Among Nepal’s treaties, only the Nepal-India DTAA explicitly includes a limitation of benefits clause.
As a result, Section 73(5) has created a fundamental legal conflict. From a treaty law perspective, Nepal cannot unilaterally impose new eligibility conditions on treaty benefits without renegotiating the treaty with the counterpart state. However, in practice, tax authorities in Nepal routinely apply Section 73(5) as a screening test before granting any treaty relief.
The courts of Nepal have considered DTAA related disputes in only a limited number of cases. However, the approach of the court has generally favoured domestic tax administration over treaty.
In Dwarika Nath Dhungel v. Large Taxpayer Office, the Supreme Court upheld the validity of Section 73(5) as a mechanism to prevent treaty shopping. However, the court did not examine whether domestic law could override treaty obligations already undertaken by Nepal, nor did it assess the retrospective application of Section 73(5) to treaties signed before 2002.
In Pro Biotech Industries Pvt Ltd v. Large Taxpayer Office and Due Soft Overseas Nepal Pvt Ltd v. Department of Revenue Investigation, the dispute revolved around whether withholding tax was applicable on payments made to Indian entities for sales commission and service fees in the absence of a permanent establishment in Nepal. The Supreme Court held that since the Nepal-India DTAA did not specifically exempt such income, Nepal was entitled to levy withholding tax.
These decisions illustrate that the domestic tax provisions are being applied as the primary reference point, even in treaty cases.
One of the most significant areas of DTAA dispute in Nepal concerns capital gains arising from the sale of shares in Nepali companies by foreign investors. Several of Nepal’s treaties, allocate taxing rights over such gains exclusively to the residence state of the seller. The treaty does not impose any beneficial ownership requirement (except Nepal-India treaty) for claiming this relief. However, the tax authorities would still apply Section 73(5) of the ITA 2002. From a legal standpoint, this approach conflicts directly with DTAA, Treaty Act, and international treaty law. The treaty bases taxing right on the residence of the entity, not the nationality or residence of its investors.
Further, the implementation problem is not limited to capital gains. It is equally visible in cross-border service payments. A recurring asymmetry exists in how service fees are taxed for example between Nepal and India. When an Indian resident makes payment to a Nepali resident for services, withholding tax is generally not applied in India. However, when a Nepali entity makes payment to an Indian resident for similar services, Nepal’s tax authorities routinely impose withholding tax. The Revenue Tribunal in Nepal has affirmed this practice on the basis that the Indian recipient can claim foreign tax credit in India. This approach, however, misunderstands the function of tax treaties.
The purpose of a DTAA is not merely to enable credit mechanisms but to allocate taxing rights in the first place. If a treaty provides that certain service income is taxable only in the residence state in the absence of a permanent establishment, the source state should refrain from taxing that income.
The institutional position of the tax authorities on DTAA implementation became clearer through a public notice issued by the Inland Revenue Department dated November 12, 2025. The notice stated that Nepal has notified those DTAA counterpart countries with which Nepal had signed DTAAs prior to 2002 about the application of Section 73(5).
This notice confirms that the tax administration intends to apply domestic ownership restrictions irrespective of when the treaties were signed, i.e., before or after the enactment of the Income Tax Act 2002. The implication is that treaty benefits will be filtered through Section 73(5) as a matter of administrative policy, even where the treaty itself does not contain any such limitation.
The present approach to DTAA implementation in Nepal has two primary consequences:
First, it creates legal uncertainty for foreign investors. Treaty protections form a central part of investment structuring. When such protections are denied through administrative interpretation or domestic law, Nepal’s investment climate is directly affected. Accordingly, the supremacy of treaties, particularly DTAAs, should be reaffirmed through Parliament, especially in the context where judicial decisions on DTAAs have not been fully consistent with treaty principles.
Second, the retrospective application of Section 73(5) to treaties signed before 2002 undermines legal predictability and investor reliance. This raises serious concerns relating to fairness and legitimate expectation. Therefore, where Nepal seeks to introduce ownership-based eligibility conditions, such conditions should be implemented through bilateral treaty amendments, not through unilateral domestic legislation.
This article was originally published in Business 360. Link.
Over the last two decades, competition law has undergone a significant transformation. Traditionally, competition law focused almost exclusively on product and service markets, targeting cartels, price-fixing, bid-rigging and market allocation among sellers. However, following the Silicon Valley no-poach conspiracy, a landmark case that exposed anticompetitive practices in the labour market by high-tech companies, the applicability of competition law in the labour market emerged as a nascent concept. Several jurisdictions like the USA, Japan, Hong Kong and Portugal have released public documents condemning no-poach agreements, but its legality remains a question mark in other jurisdictions.
A no-poach agreement broadly refers to an arrangement between two or more employers under which they agree not to solicit, recruit, hire or employ each other’s employees. These agreements can take various forms, ranging from reciprocal arrangements to restrictions imposed by one employer on hiring a counterparty’s employees, restrictions on mere solicitation to outright prohibition on employing counterparty’s employees.
At the core, these deals limit worker mobility, downsize labour market competition, and sometimes extend beyond mere non-solicitation to outright bans on employment. While the proponents might argue these provisions protect investments in training or trade secrets, several jurisdictions view them as tools to stifle competition in labour inputs.
A no-poach agreement broadly refers to an arrangement between two or more employers under which they agree not to solicit, recruit, hire or employ each other’s employees. These agreements can take various forms, ranging from reciprocal arrangements to restrictions imposed by one employer on hiring a counterparty’s employees, restrictions on mere solicitation to outright prohibition on employing counterparty’s employees.
At the core, these deals limit worker mobility, downsize labour market competition, and sometimes extend beyond mere non-solicitation to outright bans on employment. While the proponents might argue these provisions protect investments in training or trade secrets, several jurisdictions view them as tools to stifle competition in labour inputs.
A competitive labour market is generally characterised by multiple employers competing to hire workers, a large pool of workers with comparable skills, competitive wage-taking behaviour, and free mobility of labour. In such a setting, employees are paid market-equilibrium wages and can move to better-paying firms if wages are suppressed. No-poach agreements undermine these conditions by restricting employers from hiring or soliciting each other’s employees. By eliminating competition for talent, these arrangements suppress wages, restrict labour mobility and distort competition in the labour input market.
From an economic perspective, no-poach agreements operate as monopsony power in the labour market, where there is a single buyer in the market, restricting competition. While monopsony was traditionally associated with a single dominant employer, modern economic analysis recognises that coordinated conduct among multiple employers can produce similar effects. By agreeing not to hire or solicit each other’s employees, employers effectively behave as a single buyer of labour. For affected workers, the practical choice of alternative employers disappears, even though multiple firms formally exist. This loss of competition weakens workers’ ability to negotiate higher wages, better benefits or improved working conditions. Existing labour market frictions such as high switching costs, limited information, search difficulties and regulatory barriers already restrict worker mobility. No-poach agreements exacerbate these conditions by contractually limiting employment opportunities, further entrenching employer power and suppressing labour market competition.
Recognising these harms, several jurisdictions have treated no-poach agreements as a form of anti-competitive conduct. In the United States, the Department of Justice considers naked no-poach agreements to be per se violations of competition law, while ancillary restraints are assessed under the rule of reason. Naked no-poach agreements are stand-alone arrangements between competing employers whose sole purpose is to restrict the hiring or solicitation of each other’s employees, without being connected to any legitimate business collaboration. In contrast, ancillary no-poach restraints arise within the context of a broader, lawful commercial relationship, such as a joint venture or franchise arrangement, where the hiring restriction is intended to support a legitimate business objective. Such restraints are assessed under the rule of reason, meaning their legality depends on whether they are reasonably necessary and whether their pro-competitive justifications outweigh their anticompetitive effects.
The European Union applies an ‘object or effect’ (similar to that of the US) under Article 101 of the Treaty on the Functioning of the European Union (TFEU), and India evaluates such agreements based on their appreciable adverse effect on competition, balanced against any pro-competitive justifications. These approaches reflect a growing consensus that labour markets should be protected from cartel-like restrictions in the same manner as product and service markets.
Section 3 of the Competition Promotion and Market Protection Act, 2063 prohibits agreements entered into with the object of restricting or limiting competition in relation to goods and services. Section 3(3) further provides that any agreement made in violation of this provision is automatically void. If said to fall under section 3, this structure indicates an object-based or per se approach, under which certain agreements are unlawful by their nature, without requiring a detailed analysis of their effects.
However, this provision applies only to goods and services and does not define the term ‘service’. It is therefore unclear whether restrictions in the labour market fall within the scope of Section 3, under the scope of ‘service’. While courts could interpret ‘service’ broadly to include labour markets, comparative practice generally treats labour markets as a distinct category rather than classifying them as services. If courts adopt a strict or literal interpretation of Section 3, no-poach agreements may fall outside its scope altogether.
That said, competition law in principle does not distinguish between different types of markets, and there is no economic justification for treating labour markets differently from markets for goods or services. A purposive interpretation of the Act, guided by its preamble and its objective of protecting competition and consumer welfare, could therefore support the application of competition law to labour market restraints. If no-poach agreements restrict labour mobility in a way that reduces innovation, efficiency, or product quality, the resulting harm may ultimately be felt by consumers in downstream markets. In such cases, courts may be inclined to assess no-poach agreements using an effects-based or rule-of-reason approach, despite the apparently object-based structure of Section 3.
In the absence of clear judicial precedent or regulatory guidance, the application of Nepal’s competition law to no-poach agreements remain uncertain and will largely depend on how courts interpret the scope and purpose of the Act.
Section 517 of the National Civil Code, 2074 (Civil Code) of Nepal renders void any contract that restrains a person from exercising a lawful profession, trade or business, unless such restraint is permitted by law. The Civil Code also invalidates contracts that are contrary to law, relate to matters prohibited by law, or pursue an illegal objective. For a contract to be enforceable, its purpose must therefore be lawful and consistent with public policy.
In the context of no-poach agreements, Nepali law does not expressly state whether such arrangements are illegal or contrary to law. However, strong arguments can be made that no-poach agreements impose unreasonable restrictions on labour mobility by limiting workers’ access to employment opportunities and their ability to exercise a lawful profession. Because these agreements are typically concluded between competing employers and not with the consent of employees, they are difficult to justify on pro-competitive grounds, particularly when they operate as naked horizontal restraints. As a result, no-poach agreements may be vulnerable to being declared void under Section 517 of the National Civil Code.
In Nepal, no-poach agreements continue to remain uncertain as neither the competition law nor the civil code address them expressly. While the Competition Promotion and Market Protection Act may offer a possible avenue for scrutiny, its applicability to labour market restraints remains unclear due to its focus on goods and services. By contrast, Section 517 of the National Civil Code provides a more direct basis to question no-poach arrangements, as it invalidates contracts that unreasonably restrict the lawful exercise of a profession or trade. Until courts or regulators provide clearer guidance, the treatment of no-poach agreements will remain unsettled, and there needs to be legal clarity to ensure that labour markets are not insulated from competition principles.
This article was originally published in Business 360. Link.
For a significant period, the Nepali corporate landscape was characterised by a traditional and well-established structure. Within this framework, the standard for professional success was largely defined by the security of a consistent monthly salary, the cultural staple of the Dashain bonus, and the long-term assurance of retirement benefits. Ownership and equity were historically concentrated within founding groups and family-led enterprises, which was the standard practice for the country’s developing market.
However, as the digital economy began to take root in Kathmandu and the tech corridors of Lalitpur, this conventional model started to broaden. The rise of high-growth ventures has prompted a transition toward more modern, inclusive philosophies of corporate participation. The emergence of high-growth startups and the entry of global tech players created a demand for talent that a simple salary could no longer satisfy.
For years, legal practitioners and entrepreneurs navigated a murky ‘grey zone’ to reward loyalty but the recent fourth amendment of the Companies Act, 2063 has finally brought the sun up over this landscape. With the introduction of Section 66A, the Employee Stock Option Plan (ESOP) has transitioned from a boardroom myth to a statutory reality, fundamentally altering the jurisprudence of employment in Nepal.
The legal journey to Section 66A was born out of necessity. Before this amendment, a company wishing to grant equity to its staff was met with a wall of regulatory silence. The Companies Act, 2063, had no specific mechanism for issuing shares to employees as compensation. Companies were forced to experiment with phantom stocks, contractual agreements that mimicked share ownership through cash bonuses, or bonus share issuances that often ran afoul of tax and securities regulations. These workarounds were legally fragile and did little to provide employees with the psychological and financial security of true ownership.
The new amendment changes this by providing an explicit statutory framework. Now, a company can legally reserve a portion of its authorised capital specifically for an ESOP pool. This is a monumental shift; it recognises that in a modern economy, ‘labour’ is not just a recurring expense to be paid off, but an intellectual investment that deserves a share in the capital it helps create.
From a procedural standpoint, the law ensures that this power is not abused. Implementing an ESOP is not a decision that can be made behind closed doors by a handful of directors. Under the new provisions, any company intending to offer stock options must pass a Special Resolution during its General Meeting. This requires a 75% majority vote from existing shareholders, a high legal bar that ensures the dilution of equity is transparent and collectively sanctioned. For the legal professional, this means the ESOP Scheme document has become one of the most critical pieces of corporate drafting.
ESOP Scheme must meticulously define the vesting period, the duration an employee must remain with the company before they earn the right to their shares, and the exercise price, which is the pre-determined rate at which the employee can eventually buy the stock. By codifying these terms, the law provides a predictable roadmap for both the employer and the employee, reducing the likelihood of the protracted litigation that often plagues informal equity promises.
Perhaps the most culturally significant aspect of the 2081 amendment is the ‘startup exception’ embedded within the new framework. Traditionally, the law viewed promoters and employees as two mutually exclusive categories. A founder who owned more than 10% of a company was generally barred from participating in employee benefit schemes to prevent self-dealing. However, the reality of the startup world is that the founder is often the most critical, underpaid employee in the room.
The new law acknowledges this by allowing promoters of government-recognised startups to participate in ESOP schemes for the first five years of the company’s life. This is a progressive legal acknowledgement of sweat equity. It allows a young entrepreneur in a rented office in Kupondole to legally earn their stake through their labour, rather than just through their initial capital injection. It bridges the gap between the visionary who starts the company and the talent required to scale it.
Beyond the domestic startup scene, the legal evolution of ESOPs has addressed a long-standing tension within Nepal’s foreign exchange framework. It is a common misconception that the Foreign Exchange (Regulation) Act, 2019, imposes an absolute prohibition on holding foreign assets. In reality, the law has historically permitted Nepali citizens to hold investments abroad, provided those assets were acquired using income earned while residing or working outside the country. The statutory restriction is primarily aimed at ‘capital flight’ – the act of remitting funds from Nepal’s domestic reserves to invest in foreign markets.
In the context of ESOPs for employees physically based in Nepal, the legal friction often arose because these individuals were earning their livelihood locally, yet being granted equity in a foreign parent entity. Recent regulatory shifts and the spirit of the new Companies Act have finally addressed this ‘non-cash’ acquisition. By distinguishing between the prohibited outward remittance of currency and the permissible receipt of equity benefits that do not deplete domestic reserves, the law has cleared a path for Nepali talent to participate in global wealth-creation engines without the risk of regulatory non-compliance.
However, the transition to an equity-heavy compensation model is not without its legal and fiscal pitfalls. The most daunting challenge lies in the intersection of corporate law and the Income Tax Act, 2058. In the eyes of the Inland Revenue Department (IRD), an ESOP is not just a gift, it is a taxable benefit. The moment an employee ‘exercises’ their option, converting their right into actual shares, the law treats the difference between the fair market value and the exercise price as employment income. For an employee at a successful, high-valuation company, this can create a massive tax liability. They may find themselves owning shares worth millions of rupees on paper, but they have no liquid cash to pay the 36% or 39% tax that the government demands. This paper wealth trap is a significant hurdle. Legal practitioners are now tasked with drafting sophisticated exit strategies, such as cashless exercise options or company-funded buy-back schemes, to ensure that a reward for a decade of hard work doesn’t result in a personal financial crisis for the employee.
The institutionalisation of ESOPs in Nepal is a sign of a nation’s mturing corporate identity. It signals to the world, and to the thousands of talented young Nepalis who look toward the airport for their future, that Nepal is ready for a modern partnership between capital and labour. It is a legal acknowledgment that the true value of a 21st-century company does not lie in its land, its buildings, or its machinery, but in the collective brainpower of its people.
By giving employees a stake in the future, Nepal is not just changing its laws, it is changing its destiny. The ‘Jagir’ mentality is slowly being replaced by an ownership mindset, ensuring that when a Nepali company succeeds, the wealth created is shared by those who stayed, worked and believed in the vision. The law has finally caught up to the ambition of the people and the result is a more equitable, vibrant and innovative corporate future for the country.
This article was originally published in Business 360. Link.