Technology Transfer, Royalty and Foreign Technical Fees in Nepal

Technology Transfer Agreement — TTA

covering qualifying intellectual property, know-how, technical, management or related services.

FITTA defines technology transfer broadly and includes:

• patents;

• designs;

• trademarks;

• goodwill;

• technical specifications;

• formula/process;

• user licences;

• know-how sharing;

• franchise/technical knowledge;

• foreign technical consultancy;

• management services;

• marketing services;

• other technical skills or knowledge.

The agreement must be approved by the foreign-investment approving authority under Section 7 before relying on it as an approved foreign technology-transfer arrangement.

Technology Transfer Is a Form of Foreign Investment

FITTA permits a foreign investor to make foreign investment in an industry through technology transfer.

The commercial conditions are contained in the agreement between:

• Nepalese industry; and

• foreign technology supplier/investor.

However, the agreement cannot simply be privately signed and treated as automatically approved.

Section 7 requires approval by the foreign-investment approval authority.

Technology Transfer May Be Possible Even Where Equity FDI Is Restricted

This is commercially important.

FITTA states that although foreign equity investment may be restricted in activities appearing in the negative list, technology transfer may be permitted into a Nepalese-invested industry with Department approval.

DOI's current foreign-investment guidance also notes:

technology transfer is possible even in areas where foreign investment itself is not allowed.

Therefore: Foreign equity prohibited does not automatically mean foreign technology prohibited.

Common Technology Transfer Arrangements

Possible structures include:

Trademark Licence

Nepal company obtains the right to use a foreign brand/trademark.

Patent Licence

Right to use patented technology.

Know-how Agreement

Foreign party provides specialised technical processes or knowledge.

Franchise

Foreign commercial/technical system licensed to the Nepal company.

Technical Assistance

Foreign party provides ongoing technical expertise.

Management Agreement

Foreign party provides approved management services.

Marketing Services

Foreign technical/marketing expertise falling within the statutory definition.

Each structure should be classified correctly before approval and tax treatment.

DOI Approval

DOI's current Foreign Investment & Technology Transfer Section lists documents for technology-transfer approval including:

• prescribed application;

• Technology Transfer Agreement;

• certified industry-registration certificate;

• passport of foreign individual;

• Board resolution of the Nepal industry;

• foreign company incorporation certificate/profile where applicable;

• Power of Attorney;

• foreign party bio-data/profile.

The exact current IMIS checklist should be used at filing.

Application Through IMIS

DOI's investor manual states that TTA approvals and related applications are processed through:

IMIS

along with other FDI-related services.

The agreement and commercial calculation should therefore be finalised in a form that matches the electronic approval application.

What Should the TTA Contain?

A well-drafted agreement should cover:

• technology/IP being supplied;

• ownership of intellectual property;

• territory;

• licence rights;

• exclusivity;

• technical services;

• training;

• duration;

• royalty calculation;

• minimum/maximum payment where appropriate;

• taxes;

• invoicing;

• foreign currency;

• withholding tax;

• transfer pricing;

• termination;

• post-termination IP use;

• confidentiality;

• dispute resolution.

The commercial formula should be capable of being audited.

Royalty Formula

Royalty may be structured, subject to law and approval, by reference to matters such as:

• net sales;

• production quantity;

• fixed annual amount;

• licence fee;

• another approved basis.

The agreement should define terms such as:

“Net Sales”

precisely.

For example, it should address whether calculation excludes:

• VAT;

• returns;

• discounts;

• excise;

• freight;

• related-party sales.

A vague formula creates future DOI, tax and audit disputes.

Statutory Royalty Limit

Section 7 prohibits an agreement from providing for repatriation of royalty above the prescribed statutory limit.

Therefore the agreement cannot simply provide:

“any royalty percentage agreed by the parties.”

The current industry/category-specific ceiling should be checked before execution.

Special Rule for Liquor Trademark Royalty

FITTA contains a specific restriction for trademark-use royalty/fees relating to liquor industries.

Except for a liquor industry exporting 100% of its liquor production, the royalty/fee for trademark use cannot exceed the prescribed amount, subject to a statutory ceiling of: 5% of total selling price excluding prevailing tax within the Section 20 framework.

This is a specific rule and should not be incorrectly applied as a universal 5% ceiling to every technology-transfer agreement.

Royalty Tax — General Starting Point

Under the Income Tax Act, payment of Nepal-source:

• natural-resource payment;

• royalty;

• service fee;

• commission;

• specified other returns

generally attracts: 15% withholding under Section 88(1), subject to statutory exceptions and applicable tax treaties. IRD's published guidance confirms the 15% general royalty withholding rate.

The precise tax position must nevertheless be checked for:

• recipient residence;

• treaty;

• nature of service;

• source;

• exemptions/incentives.

Treaty Rate

Where the technology supplier is resident in a country with a Nepal Double Tax Avoidance Agreement, the treaty can limit Nepal's source-country taxation on qualifying royalty.

IRD's treaty guidance shows that Nepal's treaties contain specific royalty-tax limits depending on the treaty country.

Therefore use: lower applicable treaty/domestic treatment where legally available after verifying:

• tax residence certificate;

• beneficial ownership;

• treaty eligibility;

• correct income classification.

SEZ Tax Incentive

Qualifying foreign investors in Special Economic Zone industries may receive a 50% Income Tax concession on qualifying foreign technology/management service fees and royalty income under Section 11.

This should be checked separately from the underlying withholding mechanics.

VAT

Cross-border royalty/technical services may also create Nepal VAT implications, including reverse-charge/imported-service treatment where applicable.

Do not assume:

withholding Income Tax paid = VAT obligation completed.

Income Tax and VAT are separate taxes.

Transfer Pricing

Where the Nepal company and foreign technology supplier are associated persons, the royalty or management fee must also satisfy transfer-pricing principles.

Questions include:

• Does the Nepal entity actually receive the technology/service?

• Is the fee commercially supportable?

• Is the royalty percentage arm's length?

• Is there duplication with another management/service fee?

• Does the Nepal company own valuable local intangibles itself?

An approved DOI agreement does not automatically establish an arm's-length tax deduction.

Deductibility

For Income Tax purposes, the Nepal company must separately establish that the expenditure:

• relates to business/income production;

• is properly documented;

• satisfies withholding requirements;

• meets transfer-pricing requirements;

• is not prohibited/restricted by tax law.

DOI approval and tax deductibility are separate tests.

Royalty Repatriation

Section 20 permits repatriation of: royalty received under an approved technology-transfer agreement after applicable Nepal tax obligations have been fulfilled.

A royalty request follows the approved agreement and current repatriation procedure. FITTA section 20(7) provides seven days for approval when its conditions are fulfilled; the commercial bank’s regulation 6(4) process is a separate fifteen-working-day decision period after a complete file. Check the actual agreement, prescribed royalty limit and settlement documents before scheduling payment.

Documents for Royalty Repatriation

The transaction file should ordinarily include:

• approved TTA;

• DOI approval;

• industry registration;

• calculation of royalty;

• sales/production basis;

• auditor certification where required;

• invoices;

• tax withholding/deposit evidence;

• tax clearance;

• bank details;

• DOI/IMIS documents;

• current NRB/authorised-bank documentation.

Current NRB Schedule 9 requires an auditor-certified technology-transfer payment calculation, the supplier’s invoice, and the approved technology-transfer agreement and approval letter. Reconcile the contractual base, period and tax evidence to those documents. A webpage that still cites the repealed 1992 FITTA should be used only for historical context.

NRB / Foreign Exchange

The remittance must comply with the current: NRB Foreign Investment and Foreign Loan Management Regulation, 2078 — Fifth Amendment included.

Regulation 6(1) includes qualifying royalty earned under a technology-transfer agreement among the specified repatriation categories. The bank application follows Schedule 9 and the applicable competent-authority approval or recommendation. The current bylaw refers liquor-related trademark or royalty matters to the relevant FITTA Rules; it does not make an ordinary foreign-service delegation ceiling a substitute for TTA approval.

Old manuals requiring a different approval chain should therefore be checked against the current regulation before application.

Example

Approved TTA: Royalty = 3% of qualifying net sales.

Qualifying annual net sales: NPR 100,000,000

Royalty: NPR 3,000,000

General domestic royalty withholding starting point at 15%: NPR 450,000

Potential balance: NPR 2,550,000 before considering:

• treaty treatment;

• VAT;

• DOI approved amount;

• transfer pricing;

• other tax/regulatory requirements.

This example should not be used where a treaty or special incentive changes the tax result.

Management Fee vs Royalty

A payment should be classified according to its substance.

Royalty

Payment for right to use:

• IP;

• trademark;

• know-how;

• technology.

Technical Service Fee

Payment for actual technical services.

Management Fee

Payment for management functions.

An agreement combining all three into one vague “technical charge” creates tax and regulatory risk.

Trademark Ownership

Where the Nepal company pays trademark royalty, verify:

• who legally owns the trademark;

• whether the foreign supplier has authority to license it;

• whether Nepal trademark registration/protection is needed;

• whether the licence territory includes Nepal.

Paying royalty to a group company that does not own or control the relevant IP can create significant tax and legal issues.

Renewal / Amendment of TTA

Where the parties change:

• royalty percentage;

• agreement period;

• technology;

• foreign supplier;

• payment formula;

• scope of services,

determine whether DOI approval/amendment is required before implementing the change.

Do not amend the commercial agreement privately while continuing to remit based on an older regulatory approval.

Technology Transfer Workflow

Identify required technology → Classify royalty/service → Draft TTA → Check statutory royalty ceiling → Pass company Board resolution → Apply through DOI/IMIS → obtain TTA approval → receive technology/service → calculate approved royalty → apply transfer pricing → deduct/deposit tax → address VAT → obtain tax clearance → apply for repatriation → complete current NRB/bank process → retain permanent TTA file

Technology Transfer Checklist

• Identify technology/IP

• Verify owner/licensor

• Determine TTA category

• Draft agreement

• Check royalty ceiling

• Check liquor-specific rule if applicable

• Pass Board resolution

• Apply through current IMIS process

• Obtain DOI/TTA approval

• Record service/technology actually received

• Maintain royalty calculation

• Check transfer pricing

• Calculate Income Tax withholding

• Check DTAA

• Check VAT

• Deposit/file tax

• Obtain tax clearance

• Prepare royalty-repatriation application

• Complete NRB/authorised-bank process

• retain FX/remittance evidence

• Monitor agreement expiry/amendments

Common Errors

Paying royalty under an unapproved private agreement

Assuming the 5% liquor trademark ceiling applies to every TTA

Calling ordinary services “royalty” or vice versa

Ignoring transfer pricing because DOI approved the agreement

Using gross sales where the approved agreement defines net sales

Remitting before paying withholding tax

Ignoring VAT on imported services

Using DOI's old 1992-FITTA webpage as the controlling legal authority

Further guidance and practical checks

Technology transfer intersects investment law, intellectual property, Income Tax, VAT, transfer pricing and foreign exchange. The regulatory agreement, accounting treatment and actual commercial substance should all tell the same story.