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Kathmandu, Nov 6: The Interim government sparked controversy by granting the Dolma Impact Fund a tax exemption, allowing the fund to avoid paying taxes on profits from its Nepalese investments.

Dolma channels its investments through a Mauritius-registered shell company, exploiting the now-defunct Double Taxation Avoidance Agreement (DTAA) between Nepal and Mauritius. Although the treaty has been formally annulled, the finance ministry allowed Dolma to retain the exemption for existing investments, raising questions about legality and precedent.

The exemption covers dividends and capital gains from share sales, benefiting Dolma financially and easing the repatriation of funds abroad. The fund has invested in at least 14 Nepali companies, including hydropower projects, hospitals, and tech firms. Its investments in Makar Jitumaya Suri Hydropower alone could generate capital gains exceeding Rs1.17 billion. Under Nepal’s tax law, Dolma would normally owe 25 percent in capital gains tax, but the exemption removes this liability.

The decision overturns years of caution from previous governments and warnings from tax officials. Past disputes, such as the high-profile Ncell case, showed that foreign firms could not avoid taxation under Nepal law, even when citing double taxation treaties. Despite these precedents, Finance Minister Rameshwor Khanal defended the move, emphasizing that the DTAA remains temporarily valid for Dolma’s prior investments and framing it as an effort to encourage foreign Development Finance Institution (DFI) investments in Nepal.

Critics note that Dolma’s Mauritian entity is largely nominal, with only 0.75 percent Mauritian ownership. Legal experts argue that such shell structures do not qualify for treaty benefits, and exemptions could invite similar claims from other offshore investors, eroding Nepal’s tax base. The fund’s investors include institutions from Switzerland, Japan, the UK, the Netherlands, and the US, countries without DTAA agreements with Nepal, yet Dolma relied on the Mauritius treaty to justify exemptions.

The exemption has prompted internal debate and divided opinions from the Attorney General’s Office, while the Department of Inland Revenue has issued official notice confirming Dolma’s tax-free status. Experts warn the government risks undermining tax integrity and losing significant revenue. Meanwhile, Dolma has yet to repatriate profits beyond dividends, and formal notification of the treaty’s annulment has not been received by the fund.

The government plans to amend the Income Tax Act to clarify taxation for DFIs, ensuring that income earned in Nepal is taxed locally while foreign income remains taxable abroad. Until then, Dolma Impact Fund stands exempt on prior investments, marking a controversial move by a government formed in the wake of anti-corruption protests.

People’s News Monitoring Service