When a poor country grants a tax break to a rich foreign investor, it is bound to raise eyebrows. When the reasoning for that break relies on a treaty that clashes with the country’s own tax laws, curiosity turns to concern. That is the situation facing Nepal’s interim government, which last month granted a capital-gains tax exemption to Dolma Impact Fund for (reportedly) six companies. It is a private investment vehicle registered in Mauritius that invests in Nepal (the fund has invested in WorldLink, Fusemachines, Upaya, Cloudfactory and more). The Kathmandu Post’s editorial declared the waiver “unjustifiable”, stirring heated debates and prompting the fund to push back.
At the centre of the dispute is an old and now-abandoned double-taxation avoidance agreement (DTAA) between Nepal and Mauritius. Signed in 1999, the treaty was meant to prevent the same income from being taxed twice—once in each country—and to encourage cross-border investment. In reality it became a well-worn conduit for “treaty shopping”, the practice of routing money through a jurisdiction with lenient tax rules. The Nepal-Mauritius agreement gave a generous privilege: capital gains earned by a Mauritius-based investor from Nepali assets were taxable only in Mauritius. Since Mauritian tax rates on such gains are nil, it effectively exempted profits from Nepali taxation altogether.
For years, the treaty remained on the books despite its flaws. It lacked a “Limitation of Benefit” clause, a safeguard now standard in modern tax pacts to prevent abuse by shell companies (which have no real operations in the country where it is registered—it exists there mostly on paper to manage assets or taxes for business done elsewhere). That omission made it easy for investors from third countries—Britain or America, for example—to set up a paper company in Mauritius to qualify for the treaty’s benefits. Dolma Impact Fund, founded by a British national, is seen to have done precisely that. Though it has channelled over $100m into Nepali ventures, its Mauritian entity holds less than 1% of the ownership, as reported by the Post. The rest comes from investors elsewhere, making its claim to Mauritian “residency” largely nominal.
Nepal’s own laws are stricter. To qualify for treaty benefits, at least half of a company’s ownership must be held by residents of the partner country. On that test, Dolma’s structure clearly fails. Hence, officials in the Attorney General’s Office have reportedly advised that such minimal Mauritian participation cannot justify exemption. The interim government decided to grant the exemption anyway. (The decision is not yet official, however, according to news reports.)
Dolma argues that “the limitation of benefit as provided in Section 73 of the Income Tax Act 2002 does not apply to the DTAA which was signed prior to 2002”. “In addition, there is a clear provision in Section 9 of the Treaty Act 1990 that provision of the treaty signed by Nepal supersedes domestic law in case of inconsistency.” Against this backdrop, the fund insists that it is entitled to the tax exemption.
Nepal has since moved to terminate the treaty. But under its own provisions, the decision takes effect only from the first day of the following fiscal year. That means any transactions concluded before mid-July could still, technically, be covered. The government’s waiver then may rely on a narrow legal technicality.
The episode carries echoes of earlier battles. The Ncell case, involving a telecoms operator that also relied on offshore structuring, showed that Nepal’s courts are prepared to assert the country’s right to tax. Yet the Dolma decision goes the other way. Officials argue that discouraging impact funds could deter scarce foreign capital. Critics, however, counter that predictable enforcement not leniency is what gives investors confidence. The waiver, they say, rewards creative accounting and penalises compliance.
Yet the risks of being seen as capricious or investor-unfriendly are also real. Emerging economies, especially small ones, live with this double bind: to open their doors to capital without letting revenue leak through the cracks.
Ending the treaty was, nonetheless, the right move, some officials say. They argue the agreement had served more as a loophole than a lure, bringing little technology transfer or new investment. Its termination closes a channel for avoidance and gives Nepal a cleaner slate to negotiate fairer arrangements.
Dolma may yet keep its exemption, but the episode has hastened the demise of the very treaty it used. The lesson, for Nepal and for others, is plain. Inconsistent tax agreements are fiscal hazards. Attracting investment means you need to have clear, credible rules—and the discipline to enforce them. In the competition for capital, the rules of the game matter. So does playing by them. ■
