Dolma Impact Fund Secures Tax Exemption After Mauritius Pact Cancellation
Background of the Controversial Tax Exemption
In Kathmandu, a recent decision by the interim government has sparked significant debate. The government granted a tax exemption to the Dolma Impact Fund, which channels its investments into Nepal through a "shell company" registered in Mauritius, a known tax haven. This move has drawn criticism due to the complex legal and financial implications involved.
The government's rationale for the exemption was based on the Double Taxation Avoidance Agreement (DTAA) signed with Mauritius. However, this treaty has since been annulled, making it invalid for future transactions. Despite this, the government proceeded with the exemption, leading to questions about the clarity of Nepal's Income Tax Act, 2002.
Legal and Financial Implications
The ruling allows the company to pay less tax on its income in Nepal, providing financial benefits to the fund and facilitating the repatriation of 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.
A senior tax administrator noted that previous attempts to exempt Ncell's income from taxation ended in legal disputes. They warned that granting Dolma similar relief would create another dangerous precedent. The Ncell dispute, rooted in claims of double taxation, reached an international tribunal before Nepal's Supreme Court and the tribunal both ruled that Ncell's income was taxable in Nepal.
Despite this precedent, the finance ministry now chose to grant Dolma a tax waiver. Finance Minister Rameshore Khanal, who previously advocated for taxing Ncell, is now defending the exemption for Dolma. Before finalizing the decision, he sought opinions from retired officials of the Ministry of Finance and the IRD.
Those consulted reportedly reminded him that Dolma's investment 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.
Technical and Legal Objections
Despite these 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 channeling 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.
Broader Concerns and Reactions
Tax experts warn this could open floodgates for other offshore investors to demand similar exemptions, weakening Nepal's tax base. A senior tax consultant noted that the government seems eager to project a foreign investor-friendly image, 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.
Ongoing Debate and Future Steps
The Income Tax Act 2002 is Nepal's principal tax legislation, according to former finance minister and tax expert Bidyadhar Mallik. He emphasized that the law overrides previous treaties unless they explicitly provide otherwise. Claiming exemption solely on a treaty basis is legally unsound.
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. He stated that the DTAA has been annulled, so new investors won't qualify for exemption. 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. He 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.
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."
