Franchise Agreement in Nepal

A Comprehensive Guide to Drafting and Registering Franchise Agreements in Nepal

Introduction

Expanding a business into Nepal or structuring a domestic franchise requires a careful understanding of the local commercial landscape. Although Nepal does not have a single, standalone "Franchise Act," franchising is fully recognized and regulated through a combination of corporate, intellectual property, contract, and foreign investment laws. This guide breaks down the essential legal framework, structure, registration processes, royalty limits, and compliance requirements for establishing a franchise agreement in Nepal.

Legal Framework Governing Franchise in Nepal

Because franchising touches multiple areas of commerce, operations must align with several key legislative instruments:

• Foreign Investment and Technology Transfer Act (FITTA), 2019: Governs international franchise arrangements, classifying them under "technology transfer" (which explicitly includes know-how sharing and user licenses) and requiring Department of Industry (DOI) approval.
• Patent, Design and Trademark Act, 1965 (PDTA): Protects the core intellectual property of the brand under trademark licensing. Registering your trademark in Nepal is mandatory to secure legal protection and obtain regulatory approvals.
• Companies Act, 2063 (2006) & Industrial Enterprises Act, 2076: Govern the corporate incorporation of the local operating entity and its registration with industrial authorities.
• Competition Promotion and Market Protection Act, 2063 (2007): Prohibits anti-competitive practices and the abuse of dominant market positions during franchise operations.

Essential Clauses in a Franchise Agreement

A well-drafted franchise agreement in Nepal must clearly outline operational, financial, and legal terms:

• Grant of Rights: Defines the scope, territorial boundaries, and exclusivity of the franchise.
• Term and Renewal: Establishes the initial duration and renewal conditions, ensuring alignment with official technology transfer approval windows.
• Fees and Royalties: Details initial fees, ongoing payment schedules, and tax withholding considerations.
• Intellectual Property Protection: Protects trademarks, copyrights, and trade secrets, emphasizing that the brand must be registered locally.
• Quality Standards: Mandates operational procedures and compliance with national consumer protection laws.
• Training and Support: Outlines initial know-how transfer and ongoing assistance.
• Non-Compete and Confidentiality: Sets reasonable post-termination restrictions to protect business secrets.
• Termination and Dispute Resolution: Specifies grounds for termination, notice periods, asset disposition, and governing arbitration mechanisms under the Arbitration Act, 2055.

Step-by-Step Registration Process

Establishing a legally valid franchise requires navigating several sequential administrative steps:

1. Trademark Registration (9–12 Months): Foreign and domestic brands must register their trademarks with the Department of Industry (DOI) under the PDTA. Unregistered brands receive no statutory protection and cannot secure franchise approvals.
2. Company Incorporation (7–10 Days): The local operating entity (franchisee) must incorporate as a private limited company with the Office of the Company Registrar (OCR).
3. Department of Industry Approval (15–30 Days): International franchise and technology transfer agreements require formal approval from the DOI under FITTA. This requires submitting incorporation documents, audited financial reports, board resolutions, and the agreement itself.
4. Tax Registration (3–5 Days): Register with the Inland Revenue Department for a Permanent Account Number (PAN) and, if turnover exceeds statutory thresholds, Value Added Tax (VAT).
5. Sector-Specific Licensing: Obtain local municipal business licenses, health/food safety permits, or tourism clearances depending on the industry.

Royalty Structures and Tax Implications

Under the Foreign Investment and Technology Transfer Regulations (FITTR), permitted royalty caps depend on the type of agreement:

• General Technology Transfer: Up to 5% of total local sales and 10% of export sales, or up to 15% of net profit locally and 20% for exports.
• Trademark Usage Only: 3% of local sales (2% for alcohol and tobacco) and 6% of export sales.

Tax Obligations

• Corporate Income Tax: Standard rate is 25% for private limited companies (higher for specific sectors like banks or telecom).
• Withholding Tax: Royalty payments sent to foreign franchisors attract a 15% withholding tax, which may be reduced under applicable bilateral double tax avoidance treaties.
• VAT: A 13% rate applies to standard goods and services.

Common Franchise Models

• Product Distribution Franchise: Focuses on selling the franchisor's goods under their brand (common in automotive and petroleum sectors).
• Business Format Franchise: The most comprehensive model, transferring complete operational systems, training, and marketing frameworks (popular in fast-food and retail).
• Manufacturing Franchise: Grants rights to produce goods using proprietary methods (e.g., beverage bottling).
• Master & Area Development Franchises: Grant regional or nationwide exclusivity, often including the right to sub-franchise.

Conclusion

Setting up a franchise in Nepal requires handling trademark protection, company registration, and government approvals under FITTA. Getting your agreement right from the start protects your brand, prevents expensive legal disputes, and keeps your business running smoothly.