IMAGE: SAMURAI SPY
Nepal is on the cusp of a transition. In 2026 it is scheduled to graduate from the ranks of the world’s least-developed countries, a milestone that promises both opportunity and peril. To propel its economy forward, the Himalayan nation knows it needs more foreign investment. The government in Kathmandu speaks enthusiastically of being “open for business”. It has passed laws designed to woo international capital and simplify its entry. Yet for all the official warmth, the reality on the ground remains decidedly chilly. Foreign investors still find Nepal a frustrating and difficult place to do business, a lesson in the gap between legislative intent and practical execution.
The legal framework, on paper, appears quite welcoming. The Foreign Investment and Technology Transfer Act (FITTA) of 2019 is the centrepiece of Nepal’s reform effort. It promises “national treatment” to foreign firms, a pledge not to nationalise them, and quicker approval processes. The law mandates that investment applications be approved within seven days and requests to repatriate profits within fifteen. It also established a “single window” service centre, intended to be a one-stop-shop for navigating various ministries and the central bank. For very big projects, exceeding $46m, a high-level Investment Board, chaired by the prime minister, is the point of contact. In a further liberalising step in 2023, the government created an automatic approval channel for smaller investments in energy, tourism and information technology.
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Yet these legal provisions have not crushed the formidable barriers that foreign companies face. The single window, while an improvement, has not ended bureaucratic torpor. Corruption, red tape and a weak regulatory environment persist. The online company registration system, meant to take as little as three days, is rated poorly by users. Officials frequently demand additional documents be submitted in person, creating opportunities for delays and graft. The problem is not a lack of laws, but a deficit in their implementation and the will to enforce them consistently.
Nepal also maintains a long list of sectors where foreign investment is wholly prohibited or severely restricted. The forbidden fields are extensive, ranging from primary agriculture and cottage industries to tailoring, driving and even travel agencies. Foreign ownership in management consultancies or legal services is capped at 49%. Although some of these protections for domestic businesses are common in developing economies, the sheer breadth of Nepal’s list signals a continued wariness towards foreign competition in many parts of the economy.
Perhaps the biggest deterrent for international investors is the uncertain and sometimes aggressive tax regime. A landmark case involving Axiata, a Malaysian firm that owned Nepal’s largest private telecoms company until its exit in 2023, illustrates the peril. In 2019 the government slapped the company with a $450m tax bill related to its 2016 acquisition of the business from a Swedish firm. The Supreme Court upheld the decision, setting a precedent that makes buyers liable for the historical tax debts of the sellers they are buying from.
This approach sent a chill through the investment community. Axiata took the dispute to international arbitration but lost. At least two American-owned subsidiaries are also embroiled in tax disputes where the government has threatened criminal charges against their overseas directors. Such actions create a climate of fear that no streamlined application process can easily offset.
Further complicating matters is Nepal’s shift to a federal structure, which has introduced new layers of government and regulatory confusion. Although the constitution reserves major taxes for the federal government, local authorities are exploring their own revenue-raising powers. For a country that still prohibits all outward investment by its own citizens (a relic of 1964 legislation), the path to a mature, integrated global economy is steep. A planned revision of foreign-exchange rules, which would annul the outward-investment ban, is a necessary but long-overdue step.
Nepal’s ambitions are not in doubt. Its need for foreign capital to build infrastructure, develop its vast hydropower potential and grow its private sector is acute. The Investment Board has energetically hosted summits to attract big investors. But the country finds itself in a difficult bind. It is competing for capital in a region with larger, more established economies, while offering a business environment perceived as high-risk. The government’s rhetoric and its laws point in one direction, but its bureaucratic habits and adversarial tax enforcement point in another. For Nepal to succeed in its post-2026 future, it must not just open the door to investment. It should ensure that those who step across the threshold do not immediately trip over the rug. ■
