- of shares present needed for a special resolution
- 75%
- shareholder cap in a private company (scheme employees not counted)
- 101
- maximum employee allocation in a bank or financial institution public issue
- 0.5%
- design choices: who, how many, price, lock-in
- 4
Many Nepali founders want to give key staff a stake in the business. Some have seen it done by technology companies abroad, some want to keep a senior manager from leaving, and some simply feel that the people who built the company should share in its value. The question we hear most often is not whether the idea is good, but whether it is allowed in Nepal and what it will cost the company and the employee in tax.
The answer is that it is allowed, more clearly now than a few years ago, but the rules are spread across company law, securities law and the income tax law, and none of them gives a complete ESOP code. This guide brings the pieces together and ends with a practical design that a private company can use today.
What does Nepali company law already allow?
Even before the 2025 amendment, the Companies Act, 2063 contained several provisions that refer to an "employee share scheme" or a "scheme of selling shares to employees". As summarised in an ICAN member article on ESOPs, they work as concessions that make such a scheme possible:
| Provision | What it allows |
|---|---|
| Section 56(9) | Existing shareholders have no first right over shares issued under an employee share scheme |
| Section 56(6) | A public company issuing scheme shares does not have to follow the full public issue procedure |
| Section 62 | A company may lend to its employees to buy its fully paid-up shares under a scheme of selling shares to employees |
| Section 64 | Shares may be issued or sold at a discount under an employee share scheme, by special resolution of the general meeting |
| Section 9(3) | Employees holding shares under the scheme are not counted towards the 101-shareholder limit of a private company |
Two other rules sit alongside these. Section 30(2) of the Securities Act, 2063 means no prospectus is needed for securities issued to a company's own employees. And the Companies Directives, 2072 allow shares to be issued as consideration for services, provided the written contract states the value of the service and the number of shares to be issued, with a return filed at the Office of the Company Registrar for shares allotted otherwise than in cash.
The practical meaning is that a company does not need a special licence to give shares to staff. It needs the right resolutions, the right documents and a clear record at the OCR.
What did the 2025 amendment add?
In January 2025 the government issued an ordinance amending a number of business laws, including the Companies Act, 2063. It was later replaced by the Act to Amend Certain Nepal Acts Relating to Improving the Economic and Business Environment and Enhancing Investment, 2081, published in the Nepal Gazette in March 2025. According to a summary of the 2025 Companies Act amendments, the amendment added a dedicated employee share provision (Section 66A) under which:
The company prepares a written plan that states the number of shares, which employees are eligible, the purchase period, the price and the limit per employee.
Only employees in service during the purchase period can take part.
Shares bought under the plan cannot be transferred during a lock-in period that the company fixes.
The plan and the shares issued under it are disclosed in the company's annual report and directors' report.
For a private company, this mainly formalises what careful companies were already doing. For a public company, it gives a clearer route than relying on the scattered concessions alone.
Are there limits for banks, insurers and listed companies?
Yes. Regulated sectors have their own caps on how much of a public issue can go to employees. The ICAN article cites a maximum of 0.5% of the total issue for banks and financial institutions under Section 9(3) of the Banks and Financial Institutions Act, 2073, and 5% for insurance companies under the insurer registration directive. Listed companies also need to work within the Securities Act, 2063 and directives of the Securities Board of Nepal (SEBON), so a listed company should treat any employee scheme as a securities matter as well as a company law matter.
For most private companies, which is where the real demand is, these caps do not apply. The constraints are the company's own articles, the shareholder agreement, and the tax position.
How are employee shares taxed in Nepal?
This is the area where the law is least developed. The Income Tax Act, 2058 has no provision written specifically for employee share schemes or options. Advisers therefore work from the general rules, and the most common reading runs as follows:
Employment income. Section 8 brings into tax all remuneration from employment, including benefits. A share given free or at a discount because of employment is likely to be treated as part of that remuneration.
Valuation. Section 27(1) says a payment made by transferring an asset is quantified at the market value of the asset. For a free share, the benefit is its market value. For a discounted share, it is the market value less what the employee pays.
Timing for the employee. Section 22(2) puts an individual's employment income on a cash basis, so the benefit is normally taxed in the income year the employee actually receives the shares, using the value at that date, not the value when the scheme was announced.
Timing for the company. A company accounts on an accrual basis under Section 22(3), so it generally claims the expense when its obligation to deliver the shares is fixed and the employee's service has been received.
Because the benefit is employment income, the employer must also think about TDS on salary. If the share benefit forms part of remuneration, the payroll calculation for that month or year should include it, even though no cash changes hands. Our guide to TDS rates in Nepal covers the withholding rules in general.
When the employee later sells the shares, the gain over their cost is a separate capital gain. For a resident individual selling unlisted shares, withholding is at 10% under the capital gains provisions, as explained in our guide to mergers and acquisitions in Nepal. The cost for that calculation should include the amount already taxed as employment income, otherwise the same value is taxed twice. Keep the records that prove it.
How should the company account for the scheme?
A company that reports under NFRS applies NFRS 2, Share-based Payment, which follows IFRS 2. For a scheme settled in shares, the company measures the fair value of what it grants at the grant date and spreads that cost over the vesting period as an employee expense, with the matching credit in equity. If an employee leaves before vesting, the expense for that employee reverses.
This means the accounts and the tax return can recognise the cost at different times: the accounts spread it over the vesting period, while tax generally follows the date the shares are actually delivered. The difference needs to be tracked year by year. Companies preparing NFRS accounts for the first time can see our note on whether your company needs NFRS.
A worked example: a Kathmandu IT company
The following figures are illustrative only.
A private IT company in Kathmandu has 100,000 shares of NPR 100 each. A recent investment round valued the shares at NPR 400 each. The founders want to give four senior staff 1,000 shares each, about 4% of the company in total, to be delivered after two years of service at a price of NPR 100 per share.
| Item | Per employee (NPR) |
|---|---|
| Shares delivered after two years | 1,000 |
| Market value per share at delivery (assumed unchanged) | 400 |
| Market value of 1,000 shares | 400,000 |
| Price paid by employee | 100,000 |
| Benefit likely taxed as employment income | 300,000 |
| Employee's cost base for a later sale | 400,000 |
Three things follow from this example. First, the company is issuing at par, not below it, so the discount rule in Section 64 is not needed, but the shares are still being sold well below their market value, which is what creates the taxable benefit. Second, the employee will owe tax on NPR 300,000 in the year of delivery without receiving any cash, so the company should either time delivery for a month when the employee can bear it or consider a partial cash bonus to cover the tax. Third, if the shares are later sold for NPR 600 each, the capital gain is NPR 200,000 per 1,000 shares, not NPR 500,000, because the cost base includes the amount already taxed.
Valuation is central. If the "market value" is disputed, the taxable benefit is disputed too. A documented valuation at the time of delivery protects both the company and the employee. Our guide on how to value a private company in Nepal sets out the methods normally used.
What design works for a private company today?
For most privately held Nepali companies, a simple share purchase plan works better than an option plan copied from another country. A practical design:
Check the articles and the shareholder agreement. Many agreements give investors a right of first refusal or a veto over new issues. Get their consent in writing before anything is promised to staff.
Pass the resolutions. A board resolution to adopt the plan and, where shares are issued at a discount or the articles require it, a special resolution of the general meeting, which needs 75% of the shares represented at the meeting.
Write the plan. State the number of shares in the pool, who is eligible, the price, the purchase or vesting date, the limit per employee and the lock-in period. Use the plan contents listed in the 2025 amendment as the minimum.
Decide what happens when someone leaves. The plan should say whether the company or the founders can buy the shares back, at what price, and within what time. A leaver clause agreed in advance avoids the disputes described in our article on when a partner wants out.
Value the shares at each issue date. Keep a written valuation on file. It supports the tax calculation and the NFRS 2 measurement.
Run the payroll and TDS impact. Add the benefit to the employee's employment income in the right month and deduct TDS accordingly.
File with the OCR. Record the allotment and the updated shareholder register, and keep copies of the plan and resolutions.
Disclose. Include the scheme in the annual report and directors' report.
Is a phantom or cash-settled scheme an alternative?
Some companies decide that issuing real shares is too complex for now, especially if investors resist dilution. A cash bonus linked to the company's value, sometimes called a phantom share plan, gives staff a share of the upside without changing the shareholder register. It is simpler to administer, it is taxed as ordinary employment income when paid, and it can be converted into a real share plan later. The trade-off is that the company must have the cash to pay when the bonus falls due, and employees do not get voting rights or dividends. For a founder who mainly wants retention for two or three senior people, this is often a sensible first step, and our guide for founders before bringing in an investor explains why keeping the cap table clean matters.
Checklist before you announce a scheme
Investors and co-founders have agreed in writing
Articles of association permit the issue, or have been amended
Board and, where needed, special resolutions are passed and minuted
A written plan covers number, eligibility, price, timing, limits and lock-in
A leaver and buy-back clause is agreed
A valuation is on file for each issue date
Payroll and TDS treatment of the benefit is worked out
OCR filings and the share register are updated
NFRS 2 expense and disclosure are in the accounts
How we help
We help companies design employee share and phantom plans that fit Nepali company and tax law, value the shares, model the cost to the company and the tax to the employee, and set up the payroll and reporting. See our financial advisory and modelling service, or contact us to talk through a scheme for your company.
Frequently asked questions
Is ESOP legal in Nepal?
Yes. The Companies Act, 2063 has long contained concessions for employee share schemes, including issuing shares to employees without a pre-emptive offer and, by special resolution, at a discount. A 2025 amendment added a dedicated provision requiring a written plan and a lock-in.
Does a private company need approval from a regulator to give shares to employees?
A private company generally needs its own board and shareholder resolutions and OCR filings rather than a separate approval. Banks, insurers and listed companies have additional sector and securities rules, including caps on employee allocations in public issues.
Is the value of free shares taxable for the employee?
It is likely to be treated as employment income under Section 8 of the Income Tax Act, 2058, valued at market value under Section 27(1), in the income year the shares are received. The Act has no ESOP-specific rule, so the treatment should be confirmed before the scheme starts.
Do employees under a share scheme count towards the 101-shareholder limit?
No. Section 9(3) of the Companies Act, 2063 excludes employees who hold shares under a scheme of selling shares to employees, including those who have since left service, from the count.
Can the company lend employees money to buy the shares?
Yes. Section 62 of the Companies Act, 2063 generally bars a company from financing the purchase of its own shares, but it allows loans to employees to buy fully paid-up shares under a scheme of selling shares to employees.
Should we use options or shares?
In Nepal today, shares or a short purchase window are easier than long-dated options, because the tax timing for options is not settled. A phantom cash plan is another option if dilution is a concern.
General information only, not advice. Company, securities and tax rules change, and the Income Tax Act, 2058 has no specific provision for employee share schemes; confirm the current law and get advice on your facts before adopting a plan.
