Royalty Law for Franchise Operation in Nepal

28 May

What Is Royalty Law for Franchise Operation in Nepal?

Royalty Law for Franchise Operation in Nepal refers to the comprehensive legal framework governing the payment, taxation, and repatriation of royalties arising from franchise agreements under Nepalese law. In Nepal, franchising is classified as a form of technology transfer under Section 2(f) of the Foreign Investment and Technology Transfer Act, 2075 (2019). This classification encompasses agreements between a foreign franchisor and a local franchisee concerning the licensing of trademarks, sharing of technological know-how, and use of proprietary business systems. The Foreign Investment and Technology Transfer Regulations, 2077 (2021) establish specific quantitative ceilings for franchise royalty repatriation, while the Income Tax Act, 2058 (2002) imposes a 15% withholding tax on royalty payments to non-resident franchisors. Additionally, the Patent, Design and Trademark Act, 1965 (2022 BS) mandates trademark registration as a prerequisite for franchise agreement approval. For international brands seeking to enter Nepal's growing consumer market, and for local entrepreneurs acquiring foreign franchise rights, a thorough understanding of the royalty caps, tax obligations, trademark requirements, and compliance procedures is essential. This guide has been prepared to explain every aspect of franchise royalty regulation in a manner that is both legally accurate and practically actionable. Attorney Nepal PVT LTD is recognized as a trusted service provider for franchise agreement drafting, trademark registration, and royalty compliance in Nepal.

Legal Framework Governing Royalty Law for Franchise Operation in Nepal

Multiple statutes and regulations are applied to govern franchise operations and royalty payments in Nepal. The primary legislation is the Foreign Investment and Technology Transfer Act, 2075 (2019), which defines franchising as technology transfer and guarantees the repatriation of royalties, technical fees, and franchise fees from approved arrangements. The Foreign Investment and Technology Transfer Regulations, 2077 (2021) establish the quantitative ceilings for royalty repatriation under Schedule 1. The Income Tax Act, 2058 (2002) imposes withholding tax on royalty payments and defines the tax treatment of non-resident franchise income. The Patent, Design and Trademark Act, 1965 (2022 BS) governs trademark rights and mandates registration before franchise agreement approval. The Contract Act, 2056 (2000) provides the general law of obligations for franchise agreements. The Companies Act, 2063 (2006) governs the incorporation of franchisee entities. The Industrial Enterprises Act, 2076 (2020) classifies franchise businesses and requires industry registration. The Consumer Protection Act, 2075 (2018) establishes quality and service standards for franchise operations. The Foreign Exchange (Regulation) Act, 2019 controls foreign currency transactions and outward remittances. Together, these laws create a comprehensive regulatory system through which Royalty Law for Franchise Operation in Nepal is administered.

Legal Framework Summary Table

Legislation	Relevance to Franchise Royalty Law
FITTA, 2075 (2019)	Primary law: franchise as technology transfer, royalty repatriation guarantee
FITTR, 2077 (2021)	Royalty caps, ceiling calculations, approval procedures
Income Tax Act, 2058 (2002)	15% withholding tax on franchise royalties to non-residents
Patent, Design and Trademark Act, 1965	Trademark registration mandatory for franchise approval
Contract Act, 2056 (2000)	General obligations for franchise agreements
Companies Act, 2063	Franchisee company incorporation
Industrial Enterprises Act, 2076	Industry registration for franchise businesses
Consumer Protection Act, 2075	Quality and service standards for franchises
Foreign Exchange Act, 2019	Foreign currency controls and remittance authorization

Franchise as Technology Transfer Under FITTA

Under Section 2(f) of FITTA, franchising is explicitly classified as technology transfer. This classification has significant regulatory implications for royalty payments and compliance obligations.

Technology Transfer Categories Including Franchise

Patent, Design, Trademark, Goodwill and Technological Specificity: Transfer or licensing of patents, designs, trademarks, goodwill, and technological specificity, formula, or process
User's License and Franchise: User's license, technological know-how sharing, or use of technological knowledge through franchise arrangements
Management and Technical Services: Provision of management and technical services, information technology, marketing and market research, finance, accounting, and auditing
Engineering and Outsourcing: Engineering services, outsourcing, human resource outsourcing, digital data processing, and digital data migration
Design and Technical Skills: Design services or other technical skills or knowledge

Regulatory Implications of Franchise Classification

All franchise agreements require prior approval from the Department of Industry
Franchise agreements are permitted even in sectors where direct foreign investment is restricted
Royalty payments are subject to the quantitative ceilings prescribed in FITTR
Repatriation of franchise fees and royalties is guaranteed under Section 20 of FITTA
The aggregate of all fees and royalties is capped regardless of the number of agreements

Trademark Registration: Mandatory Prerequisite for Franchise Approval

Under Nepalese law, trademark registration is mandatory before a franchise agreement can be approved. Foreign brands do not receive legal protection unless their trademarks are duly registered in Nepal.

Trademark Registration Process

Step 1: Trademark Search

A comprehensive search is conducted at the Department of Industry to verify that the proposed trademark is not identical or confusingly similar to existing registered marks
The search covers all 45 classes of goods and services under the Nice Classification

Step 2: Application Filing

The trademark application is filed with the Department of Industry
Required documents include:
Power of attorney from the foreign franchisor
Certificate of incorporation of the foreign company
Trademark specimen and description
List of goods and services
Priority document if claiming convention priority

Step 3: Examination and Publication

The Department of Industry examines the application for distinctiveness and compliance
If accepted, the trademark is published in the Industrial Property Journal
Third parties may oppose the registration within 90 days of publication

Step 4: Registration and Certificate Issuance

If no opposition is filed or opposition is resolved in favor of the applicant, the trademark is registered
The registration certificate is issued
Timeline: Typically 9 to 12 months from application to final registration

Consequences of Non-Registration

Franchise agreements cannot receive DOI approval without trademark registration
Foreign brands lack legal protection against infringement or unauthorized use
Customs recordation to prevent import of counterfeit goods is not available
Royalty repatriation rights cannot be established

Royalty Caps and Ceilings for Franchise Operations

The Foreign Investment and Technology Transfer Regulations, 2077 (2021) establish specific quantitative ceilings for franchise royalty repatriation under Schedule 1.

General Technology Transfer Royalties (Including Franchise)

Basis of Royalty	Local Sales (Excluding VAT)	Export Sales (Excluding VAT)
Gross sales or lump sum	Up to 5% of gross sales	Up to 10% of gross sales
Net profit	Up to 15% of net profit	Up to 20% of net profit

Trademark Usage Royalties (Franchise-Specific)

Industry	Local Sales (Excluding VAT)	Export Sales (Excluding VAT)
Alcohol and tobacco	Up to 2% of gross sales	Up to 5% of gross sales
Other industries	Up to 3% of gross sales	Up to 6% of gross sales

Key Regulatory Provisions

The aggregate royalty and all associated fees repatriated in a fiscal year must remain within the prescribed ceilings
Limits apply regardless of the number of franchise agreements or licensors
Pre-operating fees for bringing the franchise into operation are exempt from ceiling limitations
Royalty calculations must be clearly defined in the franchise agreement and aligned with regulatory expectations

Practical Royalty Rates

In practice, the Department of Industry approves franchise royalty rates based on industry norms and the specific franchise arrangement:

Franchise Type	Typical Approved Royalty Rate	Basis
Fast food and restaurant	3% to 5% of gross sales	Gross sales
Retail and apparel	2% to 4% of gross sales	Gross sales
Education and training	5% to 10% of gross sales	Gross sales
Hospitality and hotel	3% to 5% of gross revenue	Gross revenue
Fitness and wellness	4% to 6% of gross sales	Gross sales
Technology and software	5% to 8% of gross sales	Gross sales

Taxation of Franchise Royalties in Nepal

The Income Tax Act, 2058 (2002) establishes the tax treatment of franchise royalty payments in Nepal.

Withholding Tax on Franchise Royalties

Standard withholding tax rate: 15% on franchise royalty payments to non-residents
The withholding tax is treated as a final tax on the non-resident franchisor
No additional tax is payable in Nepal by the non-resident after withholding
The franchisee is responsible for deducting and remitting the tax to the Inland Revenue Department

VAT on Franchise Fees

VAT at 13% applies to franchise fees and ongoing royalty payments
The franchisee must charge VAT on franchise-related supplies if registered
Input VAT credits may be available for VAT-registered franchisees

Tax Treatment for Resident Franchisors

Royalties received by resident persons are included in assessable income
Taxed at the normal corporate tax rate of 25% or individual tax rates as applicable
No withholding tax is deducted when royalties are paid to resident franchisors

Double Taxation Avoidance

Nepal has double taxation avoidance agreements with 11 countries: Austria, China, India, Korea, Mauritius, Norway, Pakistan, Qatar, Sri Lanka, Thailand, and Bangladesh
Under the Nepal-India tax treaty, royalty withholding tax is capped at 15%
Under the Nepal-China tax treaty, reduced rates may apply for certain royalty types
Foreign tax credits are available up to the amount of Nepalese tax payable on the foreign income

Tax Summary Table

Payment Type	Recipient	Tax Rate	Treatment
Franchise royalty	Non-resident	15% WHT + 13% VAT	Final withholding tax
Franchise royalty	Resident	25% (corporate)	Included in assessable income
Technical service fee	Non-resident	15% WHT	Final withholding tax
Franchise fee (lump sum)	Non-resident	15% WHT	Final withholding tax
Dividend	Non-resident	5% WHT	Final withholding tax

Step-by-Step Franchise Registration and Royalty Compliance Process

The procedure for establishing a franchise operation and complying with Royalty Law for Franchise Operation in Nepal involves sequential stages across multiple government agencies.

Stage 1: Trademark Registration

Step 1: Conduct Trademark Search

Comprehensive search at Department of Industry for existing marks
Verification of distinctiveness and availability

Step 2: File Trademark Application

Submission of application with power of attorney, company documents, and trademark specimen
Payment of government fees

Step 3: Respond to Examination and Opposition

Address any objections raised by the examiner
Respond to third-party oppositions if filed

Step 4: Obtain Registration Certificate

Registration certificate issued upon successful completion
Timeline: 9 to 12 months

Stage 2: Company Incorporation

Step 5: Reserve Company Name

Online application through OCR portal
Name reservation approved within 1 to 3 working days

Step 6: Draft MOA and AOA

Memorandum of Association includes franchise business objectives
Articles of Association provide for governance and compliance

Step 7: Submit Incorporation Documents

Documents submitted to OCR including citizenship certificates, photographs, and office agreement
Certificate of incorporation issued within 3 to 7 working days

Step 8: Obtain PAN and Tax Registration

PAN registered at Inland Revenue Department
VAT registration completed if turnover thresholds are met

Stage 3: Franchise Agreement Approval

Step 9: Prepare Draft Franchise Agreement

Agreement drafted in English and Nepali
Essential clauses include:
Grant of rights and territorial boundaries
Term and renewal conditions
Fees and royalties (initial fee, ongoing royalty, advertising contribution)
Intellectual property licensing
Quality standards and operational procedures
Training and support obligations
Non-compete and confidentiality provisions
Termination and dispute resolution

Step 10: Submit Application to Department of Industry

Application submitted to DOI Foreign Investment and Technology Transfer Unit
Required documents include:
Application for licensing of foreign brand
Passport of foreign partner or foreign company registration certificate
Franchise agreement (2 copies)
Certificate of incorporation of local franchisee
Bio-data or company profile of foreign party
Latest audit report and tax clearance certificate
Industry registration certificate of local franchisee
Board resolutions of both companies
Power of attorney

Step 11: DOI Evaluation and Approval

DOI evaluates the franchise agreement for compliance with FITTA and FITTR
Royalty rates are verified against prescribed ceilings
Approval is typically granted within 4 to 6 weeks
The approved agreement specifies permitted royalty rates and repatriation terms

Stage 4: Industry and Operational Registration

Step 12: Obtain Industry Registration

Application submitted to Department of Industry under Industrial Enterprises Act
Industry registration certificate issued

Step 13: Obtain Local Business Licenses

Ward office business registration
Municipal trade license
Sector-specific licenses (food, education, health) if applicable

Stage 5: Royalty Payment and Repatriation

Step 14: Calculate Royalty Amount

Royalty calculated based on approved methodology (gross sales or net profit)
VAT-excluded sales figures extracted from audited financial statements
Amount verified against annual ceiling

Step 15: Deduct Withholding Tax

Franchisee deducts 15% withholding tax from gross royalty payment
Tax remitted to Inland Revenue Department
Tax deduction certificate obtained

Step 16: Obtain Auditor Certification

Certified auditor prepares royalty certification statement
Auditor verifies compliance with approved agreement and FITTR ceilings

Step 17: Submit Repatriation Application

Application submitted to Nepal Rastra Bank or authorized commercial bank
Documents include approved franchise agreement, auditor certification, invoice, and tax evidence
Repatriation processed within 15 working days for complete applications

Documents Required for Franchise Royalty Compliance

Proper documentation is essential for the successful approval and repatriation of franchise royalties. The following documents are required at various stages.

Trademark Registration Documents

Power of attorney from foreign franchisor
Certificate of incorporation and MOA/AOA of foreign company
Trademark specimen and description
List of goods and services
Priority document if applicable

Franchise Agreement Approval Documents

Application for licensing of foreign brand
Passport of foreign partner or foreign registration certificate
Franchise agreement (2 copies)
Certificate of incorporation including MOA/AOA of local franchisee
Bio-data or company profile of foreign party
Latest audit report and tax clearance certificate
Industry registration certificate of local franchisee
Board resolutions of local and foreign companies
Power of attorney

Royalty Calculation and Tax Documents

Audited financial statements of franchisee
Royalty calculation statement certified by registered auditor
Invoice or bill issued by foreign franchisor
Withholding tax payment receipt
VAT payment evidence
Tax clearance certificate

Repatriation Documents

Approved franchise agreement
Auditor-certified royalty statement
Foreign franchisor invoice
Tax clearance and withholding tax evidence
NRB or bank application form
Bank account details of foreign franchisor
Self-declaration of compliance

Documents Summary Table

Document Category	Specific Documents	Submitting Authority
Trademark	Power of attorney, company docs, trademark specimen, goods/services list	Department of Industry
Agreement Approval	Application, franchise agreement, company docs, audit report, resolutions	Department of Industry
Royalty Calculation	Audited financials, auditor certification, franchisor invoice	Internal/IRD
Tax Compliance	Withholding tax receipt, VAT evidence, tax clearance	Inland Revenue Department
Repatriation	Approved agreement, auditor statement, tax evidence, bank application	Nepal Rastra Bank/Commercial Bank

Types of Franchise Models in Nepal

Five primary franchise models are practiced in Nepal, each with distinct royalty structures and compliance requirements.

Product Distribution Franchise

Allows franchisees to sell franchisor's products under the brand name
Limited operational control from franchisor
Common in automobile dealerships, petroleum distribution, and retail electronics
Royalty typically based on gross sales of licensed products

Business Format Franchise

Most comprehensive model transferring complete business systems
Includes trademarks, operational procedures, training programs, and marketing strategies
Common in fast-food chains, retail outlets, and hospitality
Royalty typically 3% to 6% of gross sales

Service Franchise

Grants rights to provide services under the brand name
Common in education, consultancy, fitness centers, and professional services
Royalty typically 5% to 10% of gross sales or fees

Manufacturing Franchise

Grants rights to produce products using proprietary methods
Common in beverage bottling and food processing
Royalty typically based on production volume or net profit

Master Franchise

Provides exclusive nationwide rights with authority to sub-franchise
Requires specialized provisions addressing sub-franchisee relationships
Higher initial fees and ongoing royalties
Master franchisee typically pays 5% to 8% of gross system-wide sales

Area Development Franchise

Grants rights to open and operate multiple units in a defined region
Requires territorial exclusivity clauses
Development schedule and opening milestones are mandatory

Franchise Model Comparison Table

Model	Control Level	Typical Royalty	Best For
Product Distribution	Low	2% to 4% of product sales	Retail, automotive
Business Format	High	3% to 6% of gross sales	Food, hospitality
Service	Medium	5% to 10% of fees	Education, fitness
Manufacturing	High	Per unit or net profit	Beverages, food
Master Franchise	Very High	5% to 8% system-wide	National expansion
Area Development	High	4% to 6% of regional sales	Regional expansion

Post-Registration Compliance for Franchise Operations

Ongoing compliance is mandatory to maintain franchise approval, royalty repatriation rights, and legal operation.

Annual Reporting to DOI

Annual progress reports detailing production, sales, employment, and royalty payments
Financial statements demonstrating compliance with royalty ceilings
Changes in ownership, business scope, or franchise terms must be reported

Tax Compliance

Monthly VAT returns if registered
Quarterly advance tax payments
Annual income tax returns within 3 months of income year-end
Withholding tax remittance on each royalty payment

Trademark Renewal

Trademark registration valid for 7 years from registration date
Renewal application submitted before expiry
Continuous use of trademark must be demonstrated

Franchise Agreement Renewal

Technology transfer approvals commonly granted for maximum 5 years
Renewal application submitted 90 days before expiry
Historical compliance with royalty caps and payment patterns evaluated
Updated financial projections and business plans required

Compliance Calendar Table

Compliance Item	Frequency	Deadline	Authority
DOI annual progress report	Annual	As prescribed by DOI	Department of Industry
Royalty payment reporting	Per payment	With each royalty remittance	DOI/NRB
VAT return	Monthly	Within 25 days of month-end	IRD
Advance tax installment	Quarterly	Mid-Jan, Mid-Apr, Mid-Jul	IRD
Income tax return	Annual	Within 3 months of income year-end	IRD
Trademark renewal	Every 7 years	Before expiry	Department of Industry
Franchise agreement renewal	Every 5 years	90 days before expiry	Department of Industry

Common Challenges in Franchise Royalty Compliance

Several practical challenges arise in the application of Royalty Law for Franchise Operation in Nepal.

Trademark Registration Delays

The 9 to 12 month trademark registration timeline delays franchise launch
Foreign brands cannot secure DOI approval until registration is complete
Expedited procedures are not available under current law
Early filing is essential to minimize market entry delays

Royalty Ceiling Interpretation

FITTR does not clarify whether ceilings apply per agreement or in aggregate
Regulatory practice treats caps as applying to total royalty outflow
Multi-brand franchisees or group structures face compliance complexity
Careful structuring and documentation is required

Local vs Export Sales Allocation

Separate royalty caps for local and export sales create calculation complexity
No statutory methodology is provided for mixed revenue streams
Franchise agreements must clearly define allocation mechanisms
These mechanisms must be approved by DOI at the agreement stage

Front-End Fee Classification

Initial franchise fees, set-up fees, and training fees are common
Regulatory practice holds that aggregate fees must remain within ceilings
Defensible classification between franchise fee and standalone service is critical
Drafting precision and regulatory negotiation determine outcomes

Tax Treaty Utilization

Many franchisors are from countries without DTAA with Nepal
Standard 15% withholding tax applies without treaty relief
Structuring through treaty jurisdictions may be considered
Anti-avoidance provisions must be observed

Frequently Asked Questions

What is Royalty Law for Franchise Operation in Nepal?

It is the legal framework governing the payment, taxation, and repatriation of royalties arising from franchise agreements, classified as technology transfer under FITTA 2075 and subject to royalty caps under FITTR 2077.

Is franchising legally recognized in Nepal?

Yes, franchising is fully legal and recognized as a form of technology transfer under FITTA. However, Nepal does not have a standalone Franchise Act; franchising operates under multiple laws including FITTA, Companies Act, Contract Act, and intellectual property laws.

What is the first step for foreign brands seeking to franchise in Nepal?

Trademark registration with the Department of Industry is mandatory. Without trademark registration, foreign brands cannot obtain DOI approval for franchise agreements and receive no legal protection in Nepal.

How long does trademark registration take in Nepal?

Trademark registration typically takes 9 to 12 months from application to final approval. Some sources indicate preliminary registration may occur within 4 to 5 months.

What royalty rates are permitted for franchise operations in Nepal?

FITTR Schedule 1 permits up to 5% of gross local sales and 10% of export sales for general technology transfer including franchise. For trademark-only licenses, 3% for local sales (2% for alcohol/tobacco) and 6% for exports.

What taxes apply to franchise royalty payments?

Royalty payments to foreign franchisors attract 15% withholding tax under the Income Tax Act 2058. VAT at 13% applies to franchise fees. Tax treaties with 11 countries may provide reduced rates.

Are there sector restrictions for foreign franchises?

Unlike general foreign investment, FITTA does not impose industry-specific restrictions on franchise businesses. Franchising is permitted across all sectors, including some sectors where direct FDI is restricted.

What documents are required for DOI approval of franchise agreements?

Required documents include licensing application, foreign company registration, franchise agreement (2 copies), local company incorporation, investor profile, audit report, industry registration, board resolutions, and power of attorney.

Can franchise agreements be terminated early?

Yes, franchise agreements can be terminated for material breach, insolvency, quality violations, or by mutual agreement. Termination clauses must specify notice periods, asset disposition, and post-termination obligations.

How are franchise disputes resolved in Nepal?

Disputes are typically resolved through arbitration under the Arbitration Act 2055. International franchises often specify international arbitration under ICC or UNCITRAL rules.

What is the typical term of franchise approval in Nepal?

DOI commonly approves franchise and technology transfer agreements for a maximum of 5 years, subject to renewal based on historical compliance with royalty caps and payment patterns.

Can a foreign franchisor own equity in the Nepali franchisee?

Yes, foreign franchisors can hold equity in the franchisee company under FITTA, subject to sector-specific foreign investment limits. 100% foreign ownership is permitted in most sectors.

What happens if royalty ceilings are exceeded?

Exceeding prescribed royalty ceilings may result in repatriation denial, regulatory penalties, restrictions on future approvals, and potential reclassification of excess payments as non-deductible expenses or deemed dividends.

Is VAT applicable on franchise royalties?

Yes, VAT at 13% applies to franchise fees and ongoing royalty payments as per the VAT Act 2052. The franchisee must charge and remit VAT if registered.

Can master franchise arrangements be established in Nepal?

Yes, master franchise arrangements providing exclusive nationwide rights with sub-franchising authority are permitted. Specialized agreement provisions addressing sub-franchisee relationships are required.

How CorporateNp Assists with Royalty Law for Franchise Operation in Nepal

Navigating the Royalty Law for Franchise Operation in Nepal requires precise coordination across trademark registration, franchise agreement drafting, DOI approval, tax compliance, and royalty repatriation. Attorney Nepal PVT LTD provides comprehensive legal and advisory services to foreign franchisors, master franchisees, and local entrepreneurs seeking to establish and maintain franchise operations in Nepal.

Services Provided

Trademark search, application, and registration with Department of Industry
Franchise agreement drafting and review in English and Nepali
Technology transfer agreement structuring for royalty ceiling compliance
DOI approval application preparation and submission
Tax optimization strategies for franchise fee and royalty payments
Withholding tax compliance and VAT advisory
NRB repatriation application preparation and coordination
Master franchise and sub-franchise agreement structuring
Dispute resolution through arbitration or litigation
Ongoing compliance management including renewal applications and regulatory reporting

Expertise and Credentials

Deep expertise in FITTA, FITTR, Income Tax Act, Patent and Trademark Act, and Contract Act
Established relationships with the Department of Industry, Nepal Rastra Bank, and Inland Revenue Department
Proven track record of successful franchise registrations, trademark approvals, and royalty repatriations

Call to Action

Foreign franchisors and local franchisees are encouraged to contact CorporateNp for a consultation before initiating franchise operations or royalty arrangements in Nepal.

Disclaimer

The information provided in this guide is intended for general informational and educational purposes only. It does not constitute legal, tax, or business advice. Laws and regulations in Nepal are subject to frequent amendment, and individual circumstances may vary. Readers are strongly advised to seek independent professional advice from qualified legal counsel or tax advisors before making decisions related to franchise agreements or royalty payments. CorporateNp disclaims any liability for actions taken based on the contents of this guide.

References

For further reading and official guidance, the following authoritative sources are recommended.