Table of Contents
Special Economic Zones (SEZs) are geographically demarcated areas where special fiscal, customs, and administrative provisions apply differently from the general national regime. In Nepal, the Special Economic Zone Act 2073 (2016) establishes the legal framework for SEZ development, offering significant tax exemptions, customs concessions, simplified procedures, and regulatory stability to attract export-oriented industries and foreign investment. This guide covers the legal framework, SEZ Authority structure, licensing procedures, tax incentives, employment provisions, export requirements, and compliance obligations for industries established within Nepal's Special Economic Zones.
Legal Framework
Special Economic Zones in Nepal are governed by comprehensive legislation:
| Legislation | Year | Key Provisions |
|---|---|---|
| Special Economic Zone Act | 2073 (2016) | Primary legislation establishing SEZ framework |
| Special Economic Zone Rules | 2074 (2017) | Implementing regulations and procedures |
| Industrial Enterprises Act | 2076 (2020) | Additional incentives for SEZ industries (Section 29) |
| Income Tax Act | 2058 (2002) | Tax exemption provisions |
| Value Added Tax Act | 2052 (1996) | Zero-rating provisions for SEZ exports |
| Customs Act | 2064 (2007) | Customs duty exemptions and procedures |
Special Economic Zone Authority
The Special Economic Zone Authority (SEZA) serves as the primary regulator for SEZ operations and management, established under Section 14 of the Act.
Key Features
- Autonomous corporate body with perpetual succession
- Separate seal for official activities
- Can acquire, sell, or dispose of movable and immovable property
- Can sue or be sued in its own name
- Head office in Kathmandu Valley with branch offices as needed
Functions, Duties, and Rights (Section 16)
- Recommend SEZ policies to Government of Nepal
- Prepare standards for SEZ establishment, operation, and management
- Issue and renew licenses to SEZ industries
- Determine lease/rental amounts for land, building, and services
- Recommend tax exemptions and facilities
- Provide land and building on lease
- Periodically inspect SEZ industries
- Arrange security, banking, postal, and health services
- Approve imports and exports; issue certificates of origin
Board of Directors (Section 19)
| Position | Role |
|---|---|
| Secretary, Ministry of Industry | Chairperson |
| Joint Secretary, Ministry of Industry | Member |
| Joint Secretary, Ministry of Commerce | Member |
| Director General, Department of Industries | Member |
| Director General, Department of Customs | Member |
| Director General, Department of Internal Revenue | Member |
| Deputy Governor, Nepal Rastra Bank | Member |
| FNCCI Representative | Member |
| Executive Director | Member-Secretary |
Determination of Special Economic Zone
Under Section 3, the Government of Nepal, on the recommendation of the Authority, may prescribe any place within Nepal as a Special Economic Zone by publishing notice in the Nepal Gazette.
Development Models
- Government Exclusive: Developed and operated by GoN exclusively
- Joint Investment: Joint investment of GoN and private sector
- Private Sector: Developed and operated by private sector exclusively
Criteria for SEZ Determination (Section 4)
The Authority considers the following when recommending SEZ locations:
- Access to road and transportation
- Telecommunication services availability
- Electricity and water facility
- Availability of land
- Availability of workers and raw materials
Operational SEZs in Nepal
| SEZ | Location | Strategic Advantage |
|---|---|---|
| Bhairahawa SEZ | Rupandehi District | Near Indian border and Gautam Buddha International Airport |
| Simara SEZ | Bara District | Proximity to East-West Highway and Simara Airport |
| Panchkhal SEZ | Kavrepalanchok District | Access to Kathmandu Valley markets |
Licensing Procedure
Step 1: Application Submission (Section 8)
Investors must submit application in prescribed format to the Authority with:
- Industry summary (not exceeding two pages)
- Detailed feasibility study and business plan
- Company registration and tax certificates
- Environmental Impact Assessment (EIA) or Initial Environmental Examination (IEE)
- Investment structure details
- Technology transfer agreement (if applicable)
Step 2: Evaluation and License Issuance
- Authority conducts necessary inquiry and evaluation
- License issued within 30 days of receiving application
- If rejected, reasons provided within 7 days of decision
Step 3: Appeal Process
- Appeal to Ministry of Industry within 35 days of rejection
- Ministry decides within 30 days of appeal submission
- Ministry's decision is final
Step 4: Agreement with Authority (Section 11)
After obtaining license, industry enters agreement covering:
- Lease or rental amount for land, building, and services
- Date of establishment and operation
- Quantity of products to be exported
- Technology transfer matters (for foreign investors)
License Duration and Renewal (Section 9)
- Maximum license period: 30 years (depending on industry nature)
- Renewal application: 35 days before license expiry
- Late renewal: Within 15 days of expiry with special reasons
- Renewal period: 10 years at a time (if operating at 30%+ capacity)
Tax Incentives and Benefits
Income Tax Exemption (Section 27)
| Industry Type | First Period | Second Period | Additional Benefit |
|---|---|---|---|
| All SEZ Industries | 100% exemption for first 5 years | 50% exemption for next 5 years | 50% for 10 more years if using 60%+ domestic raw materials |
| Himalayan/Hilly Region SEZ | 100% exemption for first 10 years | 50% exemption for next 10 years | - |
Dividend Tax Exemption
| Period | Exemption Rate |
|---|---|
| First 5 years from commercial transaction | 100% exemption |
| Next 3 years | 50% exemption |
Note: Industries relocated to SEZ under Section 7(2) are NOT entitled to income tax exemptions.
Value Added Tax (Section 28)
- Zero-rate VAT on goods and services exported outside Nepal
- Zero-rate VAT on raw materials sold to SEZ industries
- Zero-rate VAT on materials produced within SEZ for export
Condition: VAT facility not applicable if there is no export.
Customs Duty Exemption (Section 29)
Industries receive customs duty exemption under bank guarantee on:
- Raw materials, auxiliary raw materials, packaging materials
- Plants, machinery, equipment, instruments, and spare parts
- Up to 3 vehicles depending on industry size and nature
Additional Customs Benefits
- Customs duty refund for goods sold to SEZ industries by importers
- Sales between SEZ industries treated as export (customs concession applies)
- Sales from non-SEZ to SEZ industries deemed as import (export facility applies)
Rent/Lease Concession (Section 26)
| Year | Discount on Rental/Lease |
|---|---|
| First Year | 50% discount |
| Second Year | 40% discount |
| Third Year | 25% discount |
Export and Domestic Sale Requirements
Mandatory Export (Section 13)
All materials or services produced in SEZ must be exported. However, up to 25% of total production may be sold in the domestic market.
Domestic Sale Procedure
- Domestic sale does not require Authority approval
- Industry must inform Authority in advance with prescribed details
- Applicable customs duties and taxes must be paid on domestic sales
Consequences of Exceeding Domestic Sale Limit
- Fine equal to amount of excess local sales
- Loss of tax incentives and benefits for that fiscal year
- Possible license cancellation or industry closure
One-Window Service (Section 33)
SEZ industries receive all services from a single point:
- Tax concessions and benefits
- Company and industry registration and renewal
- Administrative formalities
- Visa processing
- Infrastructure services
Foreign Investment Benefits
Repatriation Rights (Section 31)
Foreign investors may repatriate in convertible foreign currency:
- Sale proceeds of equity (full or partial)
- Dividend amounts
- Principal and interest of foreign loans
Foreign Currency Transactions (Section 32)
- License-holders may open foreign currency accounts in commercial banks
- Transactions may be conducted in foreign currency
- Currency for repatriation as per agreement with Authority
Visa Facilities (Section 34)
| Category | Visa Type | Duration |
|---|---|---|
| Study/Research for investment | Non-Tourist Visa | 6 months |
| Foreign investors and families | Business Visa | Until investment exists |
| Investment of USD 10 million+ | Residential Visa | Until investment exists |
| Foreign workers | Non-Tourist Visa | As per work permit |
Employment Provisions
Nepali Workers Priority (Section 38)
- Workers must be Nepali citizens primarily
- Recruitment through public notification
- Foreign workers only if Nepali skills unavailable
Work Permits for Foreign Nationals
| Position Type | Maximum Work Period |
|---|---|
| Technical positions | 5 years |
| Highly technical positions | 7 years |
| Management/State-of-art work | Longer period (Authority approval) |
Salary Repatriation
Foreign workers may repatriate up to 60% of net remuneration in convertible currency.
Employment Terms (Section 40)
- Facilities, security, working hours, leaves, medical treatment, bonus, and insurance as per contract
- Contract terms cannot be less than prevailing labor law guarantees
- Social security provisions determined by industry
Restriction on Strikes (Section 42)
Workers and employees shall not stage closures, strikes, or campaigns adversely affecting industry and production.
Protection and Guarantees
Protection Against Nationalization (Section 25)
Industries established and operational in SEZ shall not be nationalized.
Guarantee of Benefits (Section 36)
- Provisions curtailing benefits shall not be made
- Benefits provided for the period prescribed in the Act
- Contrary provisions in other laws shall not apply to SEZ industries
Stability Clause: Tax incentives and benefits cannot be taken away by subsequent Finance Acts, ensuring long-term investment security.
License Cancellation (Section 10)
Authority may cancel license if industry:
- Fails to renew license within prescribed period
- Does not establish and operate as per agreement timeline
- Fails to fulfill obligations under Section 12
- Sells products exceeding domestic sale limit
- Abuses available privileges
- Obtained privileges through false description
Consequences of Cancellation
- Agreement automatically revoked
- No compensation claims for investment made
- Loss of all privileges from date of cancellation
- Must manage immovable property within 1 year
- Property belongs to GoN if not managed within deadline
- Appeal to High Court within 35 days
Dispute Settlement (Section 51)
Three-Tier Process
- Mutual Consultation: Disputes settled amicably with Ministry presence
- Arbitration: Under UNCITRAL Rules if consultation fails
- Arbitration Venue: Kathmandu; Nepal law applies
Foreign Investment Disputes
Disputes related to foreign investment settled according to foreign investment agreement provisions (for industries with specified investment amounts).
Reporting Compliance (Section 52)
- Annual report to Authority within 3 months of fiscal year end
- Report includes: export volume, income/expenditure details
- Fine up to NPR 25,000 for non-compliance
Additional Facilities under Industrial Enterprises Act
Section 29 of the Industrial Enterprises Act 2076 provides additional benefits:
- Forest possessory rights for forest-based industries
- Exemption on fees for self-generated electricity
- Additional facilities for export-oriented industries in SEZ
- Additional facilities for industries using maximum domestic raw materials
- Exemption on demand charges for electricity non-supply periods
Need Legal Assistance?
Our legal team provides comprehensive SEZ advisory services including license applications, agreement drafting, tax planning, compliance management, and dispute resolution for industries in Nepal's Special Economic Zones. Contact us for professional consultation.
Frequently Asked Questions
A Special Economic Zone is a geographically demarcated area established under the Special Economic Zone Act 2073 (2016) where special fiscal, customs, and administrative provisions apply differently from the general national regime. SEZs are created to promote export-oriented industries, attract foreign investment, generate employment, and facilitate technology transfer. The SEZ Authority regulates these zones under the Ministry of Industry, Commerce and Supplies.
The Special Economic Zone Authority (SEZA) is an autonomous corporate body established under Section 14 of the SEZ Act with the following characteristics:
- Perpetual succession with separate seal
- Can acquire, sell, or dispose of property
- Can sue or be sued in its own name
- Head office in Kathmandu with branch offices as needed
- Functions include: issuing licenses, determining lease amounts, recommending tax exemptions, inspecting industries, and providing one-window services.
| Industry Type | First Period | Second Period | Additional |
|---|---|---|---|
| All SEZ Industries | 100% exemption for 5 years | 50% for next 5 years | 50% for 10 more years (if using 60%+ domestic raw materials) |
| Himalayan/Hilly Region | 100% exemption for 10 years | 50% for next 10 years | - |
Note: Relocated industries are NOT entitled to these exemptions.
Dividend tax exemptions for SEZ industries:
- First 5 years from commercial transaction: 100% exemption
- Next 3 years: 50% exemption
This provides significant benefits for shareholders of SEZ companies, making investment more attractive for both domestic and foreign investors.
VAT Benefits (Section 28):
- Zero-rate VAT on goods/services exported from SEZ
- Zero-rate VAT on raw materials sold to SEZ industries
- Zero-rate VAT on materials produced within SEZ for export
Customs Duty Benefits (Section 29):
- Exemption on raw materials under bank guarantee
- Exemption on machinery, equipment, spare parts
- Up to 3 vehicles exempted depending on industry size
- Customs duty refund for goods sold to SEZ industries
Licensing procedure:
- Submit application with prescribed documents to SEZA
- Authority evaluates and issues license within 30 days
- If rejected, reasons given within 7 days
- Appeal to Ministry of Industry within 35 days
- Ministry decides within 30 days (final decision)
- Enter agreement with Authority covering lease, operation date, export quantity
License duration: Maximum 30 years, renewable for 10 years at a time.
Export requirements under Section 13:
- All products/services must be exported
- Exception: Up to 25% may be sold domestically
- First year: 100% domestic sale permitted (as per amended Act)
- Second year onwards: Minimum 60% export required
Domestic sale procedure:
- No Authority approval required
- Must inform Authority in advance
- Pay applicable customs duties and taxes
Consequences under Section 43:
- Fine equal to amount of excess local sales
- Loss of tax incentives and benefits for that fiscal year
- Possible license cancellation
- Possible industry closure
The Authority must provide opportunity to submit clarification before taking action.
Rental/lease discounts under Section 26:
| Year | Discount Rate |
|---|---|
| First Year | 50% |
| Second Year | 40% |
| Third Year | 25% |
Example: Bhairahawa SEZ currently charges NPR 20 per square meter monthly.
Foreign investment benefits:
- Repatriation: Sale proceeds, dividends, loan principal and interest in convertible currency
- Foreign currency accounts: Can open accounts in commercial banks
- Transactions: Can conduct business in foreign currency
- Visa facilities:
- Business visa until investment exists
- Residential visa for USD 10 million+ investment
- Non-tourist visa for foreign workers
Employment provisions under Sections 38-40:
- Nepali workers have priority (recruitment through public notification)
- Foreign workers permitted only if Nepali skills unavailable
- Work permits: 5 years (technical), 7 years (highly technical)
- Foreign workers may repatriate 60% of remuneration
- Employment terms as per contract (not less than prevailing law)
- Strikes and closures are prohibited
Yes. Section 25 provides that industries established and operational in SEZ shall NOT be nationalized. Additionally, Section 36 provides stability guarantee:
- Provisions curtailing benefits shall not be made
- Benefits provided for prescribed period
- Contrary provisions in other laws do not apply
- Tax incentives cannot be withdrawn by subsequent Finance Acts
License cancellation grounds under Section 10:
- Failure to renew license within prescribed period
- Not establishing/operating as per agreement timeline
- Failing to fulfill obligations under Section 12
- Exceeding domestic sale limit
- Abusing available privileges
- Obtaining privileges through false description
Consequences: Agreement revoked, no compensation, loss of privileges, must manage property within 1 year. Appeal to High Court within 35 days.
Dispute settlement under Section 51:
- First: Mutual consultation in presence of Ministry
- Second: Arbitration under UNCITRAL Rules (if consultation fails)
- Venue: Kathmandu; Nepal law applies
For foreign investment disputes: Settled according to foreign investment agreement provisions (for industries with specified investment amounts).
Prohibited industries under Schedule-3 of SEZ Rules:
- Tobacco, bidi, cigarettes, and cigar manufacturing
- Alcoholic beverages including beer and spirits
- Explosives manufacturing
- Weapons, ammunition, and gunpowder production
- Industries violating environmental standards
All other industries are permitted, with priority given to export-oriented, technology-intensive, and employment-generating enterprises. Industries must be environment-friendly, economically feasible, and export-oriented.
