Foreign Loan in Nepal — External Borrowing by Nepalese Companies

Nepal Rastra Bank Foreign Investment and Foreign Loan Management Regulation, 2078 — including Fifth Amendment dated 2082/09/14.

NRB currently lists that Fifth-Amendment version as its operative foreign-investment/foreign-loan regulation.

Foreign Loan Still Requires Separate NRB Treatment

The Fifth Amendment significantly liberalised several foreign investment inflow, ownership-change and repatriation processes.

That does not mean foreign loans became ordinary unrestricted bank transfers.

Regulation 7 of the current Fifth-Amendment bylaw requires the applicable prior NRB approval for foreign borrowing. Equity-investment approval and the simplified ordinary FDI inflow route do not replace that loan approval. The lender, purpose, currency, limits and supporting documents must satisfy the approved borrowing framework.

Therefore:

FDI approval ≠ foreign-loan approval.

A company with approved foreign shareholders should not simply receive an intercompany loan without checking the current NRB borrowing procedure.

Who Can Lend?

Depending on the borrower and purpose, the NRB framework permits borrowing from specified foreign lenders such as:

• foreign investor;

• parent company;

• group company;

• foreign financial institution;

• Government/inter-government owned development finance institution;

• other eligible lender under the Regulation.

NRB expressly recognises borrowing by Nepalese companies/industries from their own foreign investors, including Parent Company / Group of Companies.

Foreign-invested Company Borrowing From Parent / Group Company

Eligible foreign-invested companies may borrow from their foreign investor, parent or group company only within the applicable category and approved terms. Establish the current borrowing ceiling, interest limit, purpose, relationship and source of funds from the Nepali fifth-amendment regulation. An older English translation is useful background but cannot replace the operative amended text.

Interest Rate Is Regulated

Foreign lenders and Nepal borrowers cannot necessarily choose any interest rate they want.

NRB's framework uses international benchmark-based interest ceilings.

The official English Third-Amendment version uses benchmark structures such as:

• international one-year benchmark rate plus permitted premium;

• Indian MCLR for qualifying INR loans;

• Chinese LPR for qualifying CNY loans.

The exact current benchmark and permitted margin should be verified against the Fifth-Amendment regulation on the borrowing date.

This is particularly important because benchmark terminology can change.

Loan Amount / Leverage Limits

NRB also imposes borrowing limits for particular lender/borrower categories.

For example, the earlier/currently published framework contains specific multiples of the relevant foreign investor's paid-up capital for parent/group-company borrowing, with conditional treatment for additional borrowing.

Calculate the limit from the current fifth-amendment category and schedule using the actual borrower, lender and capital facts. Foreign ownership does not by itself permit unlimited lending.

Do not assume:

“Foreign shareholder owns the company, therefore it can lend any amount.”

Purpose of Foreign Loan

The borrowing must be used for an approved/permitted purpose.

Depending on the category this may include:

• project financing;

• industrial/project expenditure;

• approved operational/project requirements;

• infrastructure development;

• other permitted use under the Regulation.

The loan agreement and actual use of funds must remain consistent.

Foreign Loan Agreement

A properly drafted foreign loan agreement should address:

• lender;

• borrower;

• principal amount;

• currency;

• purpose;

• drawdown;

• interest rate;

• benchmark;

• repayment schedule;

• maturity;

• prepayment;

• default;

• security;

• withholding tax;

• foreign-exchange approval;

• governing law;

• dispute resolution.

The agreement should generally be made subject to NRB approval where approval remains required.

Do Not Draw the Loan Before Approval

Where prior NRB approval is required, obtain it before drawdown. An agreement may be made subject to the necessary approvals; signing, approval, inflow and recording are separate stages. Do not receive an unapproved loan and assume it can later be regularised.

A practical sequence is a commercial term sheet, a compliant conditional agreement, application and approval, bank instructions, drawdown, recording and permitted use. Regulation8(1) requires the supported recording application within six months of inflow.

Where Is the Application Processed?

NRB states that foreign-investment and foreign-loan foreign-exchange matters can be processed through its Foreign Exchange Facilitation Unit located in the Department of Industry's One Stop Service Centre at Tripureshwor.

The current Fifth-Amendment procedure and authorised-bank delegation should nevertheless be checked for the particular borrowing category.

Source of Foreign Loan

NRB requires documentary evidence identifying the source of foreign loan funds for relevant borrowing categories.

This interacts with:

• AML/CFT;

• bank KYC;

• beneficial ownership;

• sanctions screening.

A loan should not arrive from an unexplained third-party account.

Capital vs Loan

Suppose a foreign shareholder sends: USD 500,000.

The company cannot decide afterwards whether to call it:

• share capital; or

• foreign loan

depending on convenience.

Each requires a different approval, accounting and repayment framework.

Equity

Recorded as investment/share capital and generally returned through:

• share sale;

• dividend;

• liquidation.

Debt

Recorded as loan and returned through:

• principal repayment;

• interest.

Interest Withholding Tax

Interest paid by a Nepal resident entity to a non-resident generally requires Nepal Income Tax analysis.

The company should review:

• domestic withholding rate;

• applicable DTAA;

• lender residence;

• beneficial ownership;

• source rule;

• transfer pricing;

• NRB-approved interest rate.

NRB approval of an interest rate does not determine the Income Tax rate.

Transfer Pricing

An intercompany foreign loan also creates transfer-pricing issues.

Review:

• amount of debt;

• interest rate;

• currency;

• tenure;

• security;

• borrower's creditworthiness;

• comparable third-party terms;

• debt/equity characteristics.

A related-party loan can be challenged for tax purposes even where it has NRB approval if its terms are not consistent with Nepal's tax requirements.

Interest Deduction

For Nepal corporate tax purposes, interest deduction should separately satisfy:

• business-purpose requirement;

• documentation;

• withholding;

• applicable interest limitation;

• transfer-pricing requirements;

• other Income Tax Act restrictions.

Foreign-exchange approval does not automatically guarantee tax deductibility.

Repayment of Principal

Loan principal can only be repaid abroad according to:

• approved loan agreement;

• repayment schedule;

• current NRB Regulation;

• authorised-bank procedure.

Maintain evidence showing:

• original foreign-loan approval;

• inward remittance;

• loan recording;

• principal balance;

• prior repayments;

• bank conversion/remittance.

Interest Remittance

Before sending interest abroad, establish:

• interest due under approved agreement;

• current principal;

• approved rate;

• applicable withholding tax;

• tax deposit;

• current foreign-exchange documentation.

For an approved and recorded foreign loan, regulation 9 permits bank processing of qualifying principal and interest payments under the approved repayment schedule without a fresh NRB approval for each payment. The borrower supplies the documents in Schedule 16, and payment must follow the lender/account conditions. Changes outside the approved terms require separate assessment.

Foreign Loan Accounting

On drawdown: Bank / foreign-currency asset — Dr

Foreign Loan — Cr

Subsequent accounting can include:

• accrued interest;

• exchange gain/loss;

• principal repayment;

• withholding tax.

Financial reporting should follow the applicable NFRS/NAS framework.

Foreign-exchange Risk

A company borrowing in:

• USD;

• EUR;

• CNY;

• INR;

• another foreign currency

but earning mainly NPR carries exchange-rate risk.

Example: Loan:

USD 1 million.

If NPR weakens materially against USD, the Nepal-rupee amount needed to repay the same USD principal increases.

Foreign borrowing should therefore be evaluated on:

all-in NPR economic cost, not merely the nominal foreign interest rate.

Security

Where the foreign loan is secured by:

• Nepal assets;

• shares;

• receivables;

• guarantee;

additional approval, registration or company-law requirements may apply.

Do not grant security merely because it appears in the foreign loan agreement.

Foreign Loan Compliance File

Maintain permanently:

• NRB approval;

• lender KYC/incorporation;

• loan agreement;

• source-of-funds evidence;

• bank inward-remittance advice;

• SWIFT;

• loan recording;

• utilisation records;

• interest calculations;

• TDS;

• repayment approvals;

• bank remittance evidence;

• balance confirmation.

Foreign Loan Checklist

• Identify borrower

• Identify lender

• Confirm lender eligibility

• Determine permitted loan purpose

• Check current borrowing ceiling

• Check Fifth-Amendment interest ceiling

• Prepare loan agreement

• Obtain corporate approvals

• Apply for NRB approval

• Obtain source-of-funds evidence

• Coordinate authorised bank

• Draw funds through banking system

• Record foreign loan

• Use funds for approved purpose

• Account for FX differences

• Calculate interest

• Check transfer pricing

• Deduct/deposit tax

• Follow approved repayment schedule

• Retain remittance evidence

Common Errors

Treating a shareholder loan as equity FDI

Receiving money before foreign-loan approval

Using an interest rate agreed commercially without checking NRB ceiling

Ignoring transfer pricing on parent-company loans

Using the loan for a purpose different from the approved purpose

Repaying principal without complete historical foreign-loan records

Using the older English Regulation without checking the Fifth-Amendment Nepali text

Further guidance and practical checks

Foreign debt should be structured simultaneously from the foreign-exchange, tax, accounting and commercial-finance perspectives. A cheap foreign interest rate can become expensive after currency depreciation, withholding tax and compliance costs.