The interim government formed to hold elections following the Gen Z movement has courted controversy by granting a tax exemption to Dolma Impact Fund, which has channelled its investment into Nepal through a “shell company” registered in Mauritius—a tax haven.

The government based its decision on the Double Taxation Avoidance Agreement (DTAA) signed with Mauritius. But this treaty has already been annulled by the government, rendering it inapplicable for future transactions.

The move comes amid persistent ambiguity over whether such foreign investments are taxable under Nepal’s Income Tax Act, 2002. With the law unclear, the election-time government’s decision has stirred debate.

The ruling allows the company to pay less tax on its income in Nepal, financially benefiting the fund and making it easier to repatriate dividends abroad.

Dolma, which has invested in 14 Nepali companies, had long sought this exemption. The issue had been under discussion between the Inland Revenue Department (IRD) and the Ministry of Finance for years, but successive governments had refrained from approving it after repeated warnings from tax officials.

“Previous attempts to exempt Ncell’s income from taxation ended in legal disputes,” said a senior tax administrator, referring to the high-profile telecom case. “We had cautioned that granting Dolma similar relief would create another dangerous precedent.”

The Ncell dispute, also rooted in claims of double taxation, reached the Hague-based international tribunal before Nepal’s Supreme Court and the tribunal both ruled that Ncell’s income was taxable in Nepal.

Despite that precedent, the finance ministry has now chosen to grant Dolma a tax waiver.

Ironically, Finance Minister Rameshore Khanal—who as the finance secretary was a vocal advocate for taxing Ncell—is now defending the exemption for Dolma.

Before finalising the decision, Minister Khanal sought opinions from retired officials of the Ministry of Finance and the IRD.

Those consulted reportedly reminded him that Dolma’s investment had entered Nepal through a Mauritius-based “shell company”, making it a case similar to Ncell’s.

They warned that Dolma’s income should be taxed under the Income Tax Act and that Nepal otherwise risked losing significant revenue.

Despite those warnings, the finance ministry moved ahead and granted the exemption. To justify the decision, it sought legal advice from the Office of the Attorney General, though officials there were reportedly divided.

Nepal and Mauritius had signed a DTAA on August 3, 1999. Dolma, registered in Mauritius, claimed that under the treaty, it qualified for income tax exemption in Nepal.

However, the treaty requires that a Mauritius-based company hold at least 50 percent ownership in the investing entity to be eligible for such benefits.

Documents obtained by the Post show that Mauritian investors hold only 0.75 percent ownership in the company that is channelling investment into Nepal, while 99.25 percent belongs to investors from outside Mauritius.

Given that imbalance, officials at the Attorney General’s Office concluded that the treaty could not serve as a legal basis for tax exemption.

“It is legally untenable for Nepal to offer tax relief under the Mauritius treaty when Mauritian ownership is negligible,” said an official familiar with the internal discussions.

Nonetheless, the finance ministry pressed ahead, disregarding technical and legal objections. Tax experts warn this could open floodgates for other offshore investors to demand similar exemptions, weakening Nepal’s tax base.

“The government seems eager to project a foreign investor-friendly image,” said a senior tax consultant. “But in doing so, it risks undermining the integrity of Nepal’s tax system and losing substantial revenue.”

Dolma Impact Fund’s investors include institutions from Switzerland, Japan, the United Kingdom, the Netherlands, and the United States—countries that do not have DTAAs with Nepal.

Yet, Dolma has relied on the Nepal-Mauritius treaty to seek exemptions on dividends and capital gains from share sales.

A shell company like Dolma’s Mauritius-based entity typically exists only on paper, registered in jurisdictions offering tax loopholes. Such firms lack real operations or assets and are often used to obscure the true origin of investments.

The Panama Papers leak in 2015 exposed several Nepali businesses using similar entities, prompting Nepal Rastra Bank to bar transactions with such companies and require banks to report any prior dealings.

Dolma has invested in Nepal in two phases—$36.6 million (about Rs5 billion) in Phase I and $71.96 million (around Rs10 billion) in Phase II—over half of which has already been deployed.

“Based on market value and earnings, Dolma should pay at least Rs12 to 15 billion in taxes,” said an IRD official. “But under the finance ministry’s interpretation, the fund is exempt, meaning a potential loss of that much revenue to the state.”

According to officials, Dolma had lobbied for nearly two years for taxation under the Mauritius treaty instead of Nepal’s domestic law—a request previous governments had avoided.

“The new government revived the process and ruled that Dolma would be taxed under the Mauritius DTAA, not the Income Tax Act,” said a revenue official. Ironically, just after approving the exemption, the Cabinet annulled the same treaty with Mauritius on October 29.

Experts have criticised the move, noting that the interim government—formed on the back of anti-corruption protests—has violated its own moral stance by granting tax relief to a profit-making firm.

“I’ve read the Mauritius treaty—nowhere does it provide for tax exemption,” said former finance minister and tax expert Bidyadhar Mallik. “Under both the treaty and Nepal’s Income Tax Act, Dolma Impact Fund is liable to pay tax. If it disagrees, it can go to court, but the government cannot waive it.”

Mallik said Dolma’s representatives had earlier approached him for a favourable interpretation.

“They wanted me to interpret the law in a way that spares them taxation,” he said. “But no investor earning profits and repatriating dividends can escape taxation. The law cannot be twisted to serve private interests.”

The Income Tax Act 2002 is Nepal’s principal tax legislation, he added.

“It overrides previous treaties unless they explicitly provide otherwise. Claiming exemption solely on a treaty basis is legally unsound.”

Mallik stressed that before granting any tax relief, the government must verify where the investing company is registered, the origin of the funds, and the investor’s tax residency. “Even when a double taxation treaty exists, the provisions of the Income Tax Act still apply. They did so yesterday, and they still apply today.”

Finance Minister Khanal acknowledged that the government had revoked the DTAA with Mauritius but defended the decision to grant Dolma relief under that same treaty.

“The DTAA has been annulled, so new investors won’t qualify for exemption,” he said. “But Dolma will enjoy the benefit for existing investments as the treaty remains valid for six months after formal notification of termination.”

Khanal rejected allegations of external influence, calling the exemption a legitimate state obligation. “Dolma’s investment comes entirely from Development Finance Institutions (DFIs), which are sovereign wealth funds of foreign governments,” he said. “These are tax-paid sources, not private investments.”

He admitted that ambassadors from Switzerland, Japan, the UK, and the US had lobbied for the exemption.

“Earlier governments avoided a decision. We resolved it by granting the exemption for previous investments while cancelling the treaty itself,” he said. “This uncertainty has discouraged further DFI investment in hydropower.”

Khanal added that the government now plans to amend the Income Tax Act for clarity. “The new law will introduce provisions for DFIs, but not under DTAAs. Income earned abroad will be taxed there, and income earned in Nepal will be taxed here.”

IRD Director General Madan Dahal confirmed that the department has already notified Dolma Impact Fund that it is exempt from income tax under government direction.

“The treaty has been revoked. The exemption applies to previous investments, not new ones,” he said.

Meanwhile, Shabda Gyawali, investment director at the Dolma Impact Fund Advisors, said they had yet to receive formal notice about the treaty’s cancellation.

“We have only heard informally about the government’s decision,” he said. “Dolma has not repatriated any money apart from dividends, so it has not benefited from the exemption yet.”

Dolma has systematically pursued government agencies to secure tax relief.

Following the DTAA, Dolma Impact Fund I wrote to CDS & Clearing on July 7, 2025, seeking tax exemption on the sale of shares in Makar Jitumaya Suri Hydropower Company.

CDS sought IRD’s advice, which then referred the matter to Nepse, the stock exchange, and the Finance Ministry to clarify whether capital gains tax would apply.

Dolma Impact Fund I, registered in Mauritius with Permanent Account Number 27277219, has invested in at least six Nepali companies, including Sasto Deal, Swet Ganga Hydropower, Makar Jitumaya Suri Hydropower, Solar Farm, Rhododendron Biotech, and Nidan Hospital.

Dolma Impact Fund I holds 2,605,900 shares in Makar Jitumaya Suri Hydropower Company Ltd. These are founder shares purchased at a face value of Rs100 per share. On Tuesday, the company’s shares were traded at Rs552 per share in the secondary market of Nepse. Even if sold at this rate, Dolma would make a profit—or capital gain—of Rs1.17 billion.

Its wider portfolio includes WorldLink, Century Masala, Foodmandu, Chirayu National Hospital, and several hydropower projects—reflecting its deep presence in Nepal’s investment landscape.

Under Nepal’s laws, foreign investors are subject to a 25 percent capital gains tax on profits from the sale of shares. Based on this provision, Dolma would be liable to pay Rs294.46 million in capital gains tax. However, Dolma appears to have sought to sell these shares. And since the government has already decided to grant a tax exemption, the company will now be exempt from paying the stated amount.

Dahal, director general of the Department of Inland Revenue, confirmed that the department has already issued a letter stating that Dolma will not be liable to pay capital gains tax on the sale of its shares in Makar Jitumaya Suri Hydropower.

“Whether viewed through the treaty or the Income Tax Act, Dolma is liable to pay tax,” Mallik said. “Therefore, the government’s decision to grant a tax exemption is not justified."