- approvals: recommendation and NRB
- 2
- typical time quoted from a complete file
- 20-30 days
- approved repayment schedule
- 1
When a foreign loan makes sense
Foreign owners often prefer a loan to equity: it can be repaid, interest is deductible, and it avoids raising authorised capital. The approval process, the interest limit and the withholding tax on interest are the points that decide whether it works.
The approval route
Industry registered and tax compliant. The borrower has its registration, PAN and up-to-date returns.
Loan agreement drafted with the amount, currency, interest, tenor, repayment schedule and security.
Recommendation from the ministry responsible for industry, which checks the purpose and the borrower.
NRB approval of the loan terms under the foreign investment and foreign loan bylaw.
Disbursement through a bank, with the inward remittance recorded against the approval.
Repayment of principal and interest through a licensed bank, in line with the approved schedule, after withholding tax.
NRB has eased the rules for foreign equity coming in, so equity may need no separate NRB approval once the investment is approved. Loans still need NRB approval, so do not assume the equity route applies.
The interest cap
The bylaw limits the interest you may pay on an approved loan. Law-firm summaries describe a cap tied to a benchmark rate of the lender's country plus a margin (for example, a benchmark plus 3.5% for industrial borrowers), while project finance is treated differently. The figures differ across sources, so read the current text of the bylaw and the approval letter. Interest above the approved cap cannot be remitted, and may not be deductible.
Tax points
Withholding tax on interest paid to a non-resident applies, at the domestic rate or the rate in a tax treaty where one exists; see the Nepal–India tax treaty.
Interest deductibility can be limited for related-party loans, and for thin capitalisation.
Transfer pricing applies to related-party loans; the rate must be arm's length. See transfer pricing explained.
Mistakes that stop repayments
Money brought in before approval, or in cash, so the record cannot be tied to the loan.
Interest paid above the approved rate, or earlier than the approved schedule.
A loan documented as equity, or equity documented as a loan.
Changes to the loan agreement without going back to NRB.
Where we help
We assemble the approval file, model the interest cap and withholding tax, and set up the records you need to remit repayments. See FDI support and repatriating dividends and capital. The bylaw has been amended several times, so confirm the current rules with the approval authority before you sign.
A worked example: a foreign parent lends to its Nepali subsidiary
A foreign parent wants to lend USD 500,000 to its Nepali manufacturing subsidiary to buy machinery. The loan will run for five years, with interest paid semi-annually. Illustrative.
Step 1: Decide the form. The parent compares equity and loan. Equity needs an increase in capital and the related approvals; a loan can be repaid and its interest is deductible, but is subject to approval, an interest cap and withholding tax. The parent chooses a loan for part and equity for the rest.
Step 2: Check the numbers. The company models the loan: interest at an agreed rate within the cap, repayment in instalments, foreign exchange exposure and tax. It tests whether the debt service fits the forecast cash flow.
Step 3: Draft the agreement. The agreement states the amount, currency, purpose, rate, repayment schedule, security (if any) and the law. A related-party loan needs an arm's length rate; see transfer pricing explained.
Step 4: Apply. The company applies to the responsible ministry for the recommendation and then to NRB with the draft agreement, the company documents, the project details and the financial statements.
Step 5: Receive approval. The approval sets the approved amount, the interest limit and the repayment terms. The company records it.
Step 6: Disburse through a bank. The parent sends the USD to the company's account. The bank issues a credit advice that links to the approval.
Step 7: Service the loan. On each due date, the company deducts withholding tax on the interest, remits the net amount through its bank under the approved schedule and files the tax return.
Step 8: Report and close. The company keeps a loan file with every document and the bank advices and closes it after final repayment.
Equity or loan: a comparison
| Point | Foreign equity | Foreign loan |
|---|---|---|
| Approval | Investment approval from the industry office or the Investment Board | Recommendation and NRB approval of the loan |
| Return | Dividends, after company tax and 5% withholding | Interest, with deductibility and withholding tax |
| Repayment | By sale, liquidation or capital reduction | By schedule under the approval |
| Risk to the company | No fixed repayment | Fixed obligation, currency risk |
| Tax effect | Dividends are not deductible | Interest may be deductible within limits |
| Flexibility | Fewer cash demands | Lower cost if rates are low |
The best answer is often a mix. The interest cap, the withholding tax and the exchange rate risk should be modelled before the choice is made.
Currency risk
A loan in dollars, euros or another currency exposes the company to exchange movements. If the rupee weakens, the cost of repayment in rupees increases. Ways to manage this include:
Matching currency: borrow in the currency in which the company earns, such as export revenue.
Natural hedges: keep foreign currency receipts to meet foreign currency payments.
Staggered repayments: to limit the effect of a single date.
Pricing: build the expected exchange cost into product prices where possible.
Hedging products, where banks offer them, though availability in Nepal is limited.
Accounting for exchange gains and losses follows the reporting standard you use; see NFRS applicability. Tax treatment of exchange differences should be reviewed with your adviser.
Common mistakes
Starting the loan before approval, which leaves the company with money it cannot lawfully repay abroad.
Describing the loan as equity or the reverse in the books and the filings.
Paying interest above the cap or earlier than allowed.
Failing to deduct withholding tax, which falls on the company.
Amending the agreement without approval, which can invalidate the original approval.
Neglecting the repayment file, so that a bank cannot match a transfer to an approval.
Ignoring thin capitalisation and interest limitation rules, which can reduce the deduction.
Records to keep
The loan agreement and every amendment.
The ministry recommendation and NRB approval.
The credit advice for each disbursement.
A schedule of interest and principal, with dates and amounts.
Withholding tax certificates and return acknowledgements.
Bank advices for each repayment.
Board approvals and the minutes.
A summary memo for each year, updated at year end.
We help companies decide between equity and loan, prepare the approval file, model the tax and keep the records that make repayments simple. See FDI support, repatriating dividends and capital and the FDI approval guide. The bylaw is amended from time to time, so confirm the current limits and procedures with NRB and your bank.
Questions people ask
Can a Nepali company borrow from a foreign bank directly? Yes, with the approvals the law requires, and subject to the bylaw's conditions on lenders, purposes and interest. Banks and large companies have specific provisions; ask the central bank for the category that applies.
Do we need approval if the loan comes from a shareholder? Yes. A shareholder loan is still a foreign loan, and it needs the approval and the banking trail like any other. Related-party loans also raise transfer pricing questions.
Can the loan be converted into equity later? Conversion is possible in some cases, but it requires new approvals and a revised investment record. Plan the sequence with advice.
What happens if we repay early? Early repayment needs to match the approval or be approved. Check the agreement for prepayment terms and the bylaw for any limits.
Does the interest cap apply to fees and commissions? The bylaw looks at the all-in cost in some categories, so include fees in your calculation and check with the central bank.
Can a loan fund working capital? Some categories allow it, others are limited to projects or capital expenditure. The purpose in the approval is binding.
What if the lender's country has a benchmark rate that changes? The cap is often tied to a benchmark, so the allowed rate moves. Build the cap into the agreement as a ceiling and check it at each payment.
How is the loan reported in the accounts? As a non-current or current liability according to the maturity, with interest accrued and foreign exchange differences recognised under the standard you follow.
A checklist before you sign
Purpose, amount and currency approved or ready for approval.
Interest, fees and total cost within the cap and arm's length.
Repayment schedule that the company can meet in downside cases.
Tax review: withholding, deductibility and treaty relief; see the treaty guide.
Security and guarantees reviewed by a lawyer.
Clauses on prepayment, default and governing law understood.
Board approval and shareholder consent as required.
A file in place for disbursement and repayment records.
