As Nepal targets an ambitious growth plan to become a $100 billion economy in the next five years, strategic foreign direct investment is a cornerstone of achieving this vision. Tax treaties and bilateral investment protection agreements (BIPA) between nations are crucial, especially with Gulf Cooperation Council (GCC) nations, given that we have close to 3.5 million Nepali migrants in these countries. Hence, GCC is key to Nepal, as it is a major source of remittance income. Currently, Nepal has only 11 tax treaties, including Qatar, but no other GCC nations have a tax treaty or BIPA with any GCC country yet.

While Nepalis appreciate the government’s ongoing efforts to ratify double tax treaties, this process might indeed take a few years. In the meantime, if the country reforms its current tax regulations to attract a Sovereign Wealth Fund (SWF), there is no doubt it can attract significant investment opportunities in Nepal. Given the wealth and investment power of GCC SWFs, Nepal can benefit by crafting a tax framework that draws inspiration from the US IRC Section 892. By tailoring tax incentives to prioritise these wealthy investors, Nepal stands to gain immense financial investment in sectors integral to its economic blueprint.

Understanding the SWF

SWF is a state-owned investment fund that collects the government’s excess money and uses it for domestic and foreign investment. Some of the largest SWFs in the world include the Abu Dhabi Investment Authority, the Norges Bank Investment Fund, the Kuwait Investment Authority and the Qatar Investment Authority, which manage trillions of dollars. Although GCC SWFs are the largest investors in the world, the irony is that currently, there is no US tax treaty with these countries of the GCC, and this can certainly impact GCC private investors doing business in the US in terms of a 30 percent withholding tax on interest or dividend income derived from their US investments.

However, SWF investors in the US enjoy the special privilege under the unique US tax code section. Under Internal Revenue Code (IRC) Section 892, foreign governments are generally exempt from US income taxation on certain qualified income received from US investments.

How the US Section 892 rule works

In general, IRC Section 892 applies to foreign governments or their integral parts, such as a bureau, SWF or other body that constitutes a governing authority of a foreign country. It also applies to a controlled entity (CE) of a foreign government, which is separate in form from a foreign sovereign but wholly owned and controlled by a foreign government. To qualify for the Section 892 exemption under US tax rules, foreign governments or their controlled entities cannot engage in commercial activity anywhere in the world.

The US tax rules specify certain activities that are not considered commercial for these purposes. These activities include holding investments in stocks, deposits, bonds, securities, loans, financial instruments, and limited partnership interests in funds and are therefore exempt under Section 892, as they are not considered commercial activities.

How can Nepal have its own SWF?

Since Nepal’s foreign currency reserve is around $21.5 billion as of May 2026 (per the latest Nepal Central Bank figure), it is sufficient to import goods and services for the next 16-18 months. However, if this remittance inflow trend continues, Nepal should consider having a necessary reserve balance for up to one year and utilise the excess funds in economic developmental activities such as infrastructure, hydro, tourism, agriculture, etc., which will in turn create more employment in the country. However, as Nepal can no longer rely on foreign remittance forever, Nepal should also consider creating its own SWF to make domestic large-scale infrastructure investments by partnering with foreign governments in the form of partnership or joint venture projects.

In order to set up SWF in Nepal, as the first step, the Ministry of Finance, with the Prime Minister’s Cabinet’s approval, should submit the consultation paper to the finance committee of the Federal Parliament for extensive dialogue before the SWF bill can be passed in the parliament. The purpose of the final bill will be to effectively transfer certain capital from the nation’s foreign reserve to the new fund, which will be used to support the long-term development of Nepal.

Once Nepal’s SWF is established with a proper bilateral investment protection treaty and a proper double taxation treaty in place, foreign investors with joint venture projects will find comfort and safety in deploying their capital in Nepal.

Proper governance of SWF

Given that the creation of a SWF will be a new concept, one also has to be very careful in setting this up with proper regular governance procedures in place. As we are dealing with the nation’s excess foreign reserve, there has to be an oversight committee—from the Central Bank, the National Planning Commission and the Ministry of Finance—to properly manage the fund, as well as an investment committee that will supervise where to invest these excess funds in domestic nation-building activities partnering with foreign sovereign wealth funds. This will also give reassurance to foreign SWFs that their domestic partner is also their peer, and any eligible income can also be exempt under concepts like Section 892.

To bring similar tax rules in Nepal, the Ministry of Finance and tax policy experts should also revisit our current tax law, i.e., the Nepal Income Tax Act 2002, and see if amendments can be made. The focus will be to introduce a certain tax exemption concept for foreign SWFs investing in Nepal, similar to the US Section 892 rules. This indeed requires a detailed analysis of the impact this amendment would have on the nation’s tax revenue before it is introduced to the federal parliament for approval.

Emphasising innovative tax policies for foreign SWFs and fostering a welcoming business environment, Nepal’s new SWF, with proper governance and effective guardrails in place, could substantially increase foreign direct investments, catalyse sustainable economic development and achieve the nation’s vision of becoming a $100 billion economy in the next five years.