Understanding Dolma

1. Cuz'of dolma?

The Provocative Decision

The immediate controversy began with the decision by the interim government to grant a Capital Gains Tax (CGT) exemption to the Dolma Impact Fund (DIF) in November 2025. This executive action involved the fund’s proposed divestment, specifically relating to the sale of its shares in Makar Jitumaya Suri Hydropower. Dolma Impact Fund I holds 2,605,900 shares in Makar Jitumaya Suri Hydropower Company Ltd as promoter shares purchased at face value of Rs. 100/share, now traded at Rs. 552 per share in the secondary market of Nepse, which comest to potential capital gains of Rs. 1.17 billion. The Director General of the Inland Revenue Department (IRD) confirmed that the department officially issued a letter stating explicitly that Dolma would not be liable to pay CGT on this share sale.

The Core Contradiction

The decision is fundamentally controversial because the waiver was granted under the provisions of the Nepal-Mauritius Double Taxation Avoidance Agreement (DTAA), a pact that the Government of Nepal (GoN) has now subsequently decided to annul or terminate. The DTAA, signed in 1999, had historically provided favorable tax treatment by allocating the right to tax gains from the sale of shares only to the resident state (Mauritius), thereby enabling the fund to circumvent domestic capital gains taxation upon exit from Nepali investments, which we will discuss further below.

Institutional Rebellion within Revenue Department

The decision to grant the exemption was highly contested and made by the interim Ministry of Finance (MoF) despite strong administrative opposition. Senior officials at the Inland Revenue Department (IRD) had issued “repeated warnings” against granting such a waiver. This executive override of professional administrative judgment demonstrated a critical systemic vulnerability, suggesting that tax liability could be determined by political discretion rather than stable law. IRD experts explicitly maintained that Dolma was liable to pay tax and that the MoF’s decision was “not justified”. – We will make a more nuanced discussion on this topic below.

The Ghost of Ncell

The concerns raised by the IRD directly referenced the high-profile Ncell tax dispute. The Ncell case, which also involved claims of double taxation based on an offshore transaction structure, established a crucial precedent.

Nepal’s Supreme Court ruled that income derived from the indirect transfer of a Nepali telecom company was taxable in Nepal.
Subsequently, the international ICSID tribunal ruled substantially in favor of the Nepal government in 2023, affirming Nepal’s sovereign right to impose CGT based on the source of the income, regardless of the intermediate offshore holding structure.

The controversial Dolma waiver is seen as directly and actively undermining this hard-won legal principle of source-based taxation established by the Ncell precedent.

The Ncell case mainly revolved around the indirect disposal of ownership in Ncell though a sale of parent company based in a tax haven, which eventually led to the taxes being applied under Section 57 of ITA. However, the transaction of Dolma Impact Fund is a transfer of direct ownership of Dolma Impact Fund in entities in Nepal, which attracts the taxes under Section 95Ka, (and potentially Section 57 should the aggergate of the transfers of ownership should exceed 50% in the past three years).

Timeline for DTAA Termination

The timing of the decision (November 2025) is critical because the official termination of the DTAA is subject to specific treaty protocols outlined in Article 29 of the Nepal-Mauritius agreement.

The treaty stipulates that the formal written notice of termination must be given “not later than 30 June” of a calendar year.
Since the government’s decision was made in November 2025, it missed the June 30, 2025, deadline, meaning the formal diplomatic notice can only be delivered on or before June 30, 2026.
The treaty ceases to have effect for Nepal on income derived on or after the first day of the Nepalese fiscal year following the notice.
Therefore, if notice is given by June 30, 2026, the DTAA will officially cease to have effect from the first day of the Nepalese fiscal year following the notice, which is mid-July 2027.
This legal process creates a consequential ~20-month window of opportunity (from November 2025 to July 2027) for investors utilizing the Mauritian structure to plan and execute tax-free exits from Nepali investments under the treaty’s beneficial regime.

2. Who is dolma?

The Three-Tiered Architecture

The Dolma structure employs a three-tiered architecture spanning two countries (Mauritius and Nepal) to separate capital pooling, management responsibility, and on-the-ground advisory services.

Dolma Impact Fund I & II (DIF I & II) (Mauritius)
- Function and Legal Status: These are the principal investment vehicles and the direct source of Foreign Direct Investment (FDI) into Nepal. They are formalized as Private Limited Liability Companies incorporated in Mauritius.
- Capital: The funds pool capital from international Limited Partners (LPs).
- Regulation: The Fund entities are registered as holders of a Global Business License (GBL) and rely on DFM, the manager, being regulated by the Mauritius Financial Services Commission (FSC).
Dolma Fund Management (DFM) (Mauritius)
- Function and Legal Status: DFM operates as the General Partner (GP) and the Collective Investment Scheme (CIS) Manager for the funds.
- Fiduciary Responsibility: This entity holds the ultimate fiduciary responsibility for asset management, strategic decision-making, investment performance, and distribution strategies on behalf of the LPs. The CEO of DFM is Tim Gocher.
- Regulation: DFM is regulated by the Mauritius Financial Services Commission (FSC).
Dolma Advisors Private Limited (DAPL) (Nepal)
- Function: DAPL is a consultancy firm and the local operational arm of the structure, providing comprehensive advisory and private sector consulting services to the fund managers. Its services include identifying opportunities, conducting due diligence, and providing investment recommendations.
  The Managing Director and Investment Director of the advisory are Bidhya Sigdel and Shabda Gyawali, resp.
- Location: DAPL is a Private Limited Company based physically in Kathmandu, Nepal.

Key Personnel and Effective Management Risk

The operation of the fund relies heavily on key individuals based in Nepal, whose presence creates a potential legal vulnerability related to taxation:

Key Local Operatives: The team includes Bidhya Sigdel (Managing Director) and Shabda Gyawali (Investment Director). These individuals, along with CEO Tim Gocher, represent a significant physical and economic presence in Nepal.
Role in DAPL: Bidhya Sigdel is listed as the Managing Director of Dolma Advisors Private Limited.
PoEM Risk: The presence and operational involvement of DFM’s CEO, Tim Gocher, and senior executives like Sigdel and Gyawali in Nepal could lead the Nepalese tax authority (IRD) to challenge the structure by arguing that the core decision-making for the Mauritius fund is effectively executed from Nepal, potentially establishing a “Place of Effective Management” (PoEM) in Nepal.

The entire structure functions as a carefully constructed legal firewall, where the Mauritius entities handle the fiduciary and investment roles (accessing the DTAA benefits), while the locally compliant Nepali entity (DAPL) handles advisory tasks, mitigating the severe tax risk associated with having the fund management permanently established in Nepal.

This carefully constructed legal firewall is designed to mitigate not one, but two existential tax risks for the Dolma ecosystem. The first and most discussed risk is that the local advisor, DAPL, could be deemed a Permanent Establishment (PE) of the Mauritius-based manager, DFM. If successful, this would subject DFM’s management fee income to Nepal’s 25% corporate tax. The second, more profound risk is that the Mauritius-based fund manager, DFM itself, could be deemed a tax resident of Nepal because its ‘place of effective management’ is in Kathmandu. If this argument prevails, it could jeopardize the entire fund’s eligibility for the Mauritius treaty benefits, potentially exposing the capital gains of the Dolma Impact Fund (DIF) itself to Nepali taxation. The significant and economic presence of Tim Gocher, Bidhya Sigdel, and Shabda Gyawali in Nepal is the common factor that fuels both of these threats.

3. Why is dolma?

Nepal's FDI Quagmire

The flow of Foreign Direct Investment (FDI) into Nepal is severely constrained by structural and bureaucratic impediments. Nepal has one of the lowest shares of FDI in South Asia (0.5% of GDP in 2018), despite high dependency on remittances (nearly 30% of GDP).

The existing regulatory framework creates significant operational friction for international private equity (PE) and venture capital (VC) funds.

Multi-Stage Approval Process: Foreign investors are subject to stringent approval requirements. Prior to making any investment in Nepal, investors must obtain approval from the Department of Industries (DoI). The overall process mandates separate approvals from the Department of Industry (DOI) or the Investment Board Nepal (IBN) and recordal process at the Nepal Rastra Bank (NRB) for each investment.
Protracted Timelines: Although the formal legal process typically takes around 6 to 7 months, practical experience demonstrates that securing FDI approvals can be protracted, sometimes extending up to 12 or 13 months. This extended approval timeframe hinders the rapid deployment of capital required by PE/VC funds.
No Streamlined Pooled Fund Vehicle: Nepal’s laws do not provide a clear path or mechanism for an international fund with multiple Limited Partners (LPs) to obtain a single approval for the fund itself. The legal environment lacked a mature framework specifically tailored for international private equity vehicles. This forces the fund structure to obtain new DOI/IBN approval for each downstream investment into a portfolio company, a process deemed impractical for managing multiple small and medium enterprises (SMEs).
Blacklisting Risk: The overall stringent regulatory environment includes an overly broad application of the “blacklisting” regime, which actively discourages standard financial leverage strategies common at the portfolio company level.

Dolma as a Solution: The Pragmatic Fix

Dolma’s offshore structure was specifically designed to mitigate Nepal’s structural and regulatory complexities.

Single FDI Entity: By establishing the Dolma Impact Fund (DIF I and DIF II) as a Private Limited Liability Company in Mauritius, the fund acts as a single FDI entity. This strategically consolidates the interests of its diverse international LPs into one regulated vehicle.
Simplification for LPs: This approach is critical because the Mauritius fund vehicle (DIF) is the official foreign investor of record, insulating the ultimate institutional Limited Partners (LPs) from the direct administrative and legal obligation of registering as foreign investors in Nepal. This pooling simplifies the investment process and manages the complexities associated with channeling capital into an exchange control regulated jurisdiction like Nepal.
Regulatory Familiarity and Efficiency: Selecting Mauritius provides regulatory certainty and familiarity for the global institutional investor base and gives the fund operational efficiency. The structure is often preferred by investors, which alleviates the risks associated with lack of sensitization in complex corporate structures which Nepalese regulators would struggle to fully understand or approve.

The Stated Mission and Achievements

Dolma presents itself as a catalyst for growth and impact, aligning its activities with Nepal’s developmental needs.

Stated Mission: The official press statement from Dolma confirms its establishment was “to pioneer international investment at scale into Nepal to create prosperity and jobs in the context of under-employment and mass-emigration”. The aim is to prove that Nepal honors its laws and treaties, thereby encouraging other investors to follow.
Pioneering Role in the Ecosystem: Dolma Fund Management is recognized as the largest international fund manager dedicated solely to Nepal, managing over USD 108.56 million across its funds. Dolma was the first private equity investment firm in Nepal.
Focus Sectors: Dolma invests in core sectors integral to Nepal’s development, including Renewable Energy (e.g., hydropower and solar), Healthcare (e.g., hospitals and manufacturing), and Technology (e.g., AI and e-commerce).
Job Creation: Dolma reports significant positive outcomes, stating that its portfolio has created over 12,000 jobs. According to 2023 data, the funds report 11,647 jobs created. They particularly focus on creating employment opportunities for the young Nepali workforce to counteract mass-emigration.

The fundamental purpose of the Mauritius structure, while resolving Nepal’s procedural hurdles, also implicitly provides the less-legitimate advantage of tax benefits through the Nepal-Mauritius Double Taxation Avoidance Agreement (DTAA). This DTAA historically allowed the fund to benefit from capital gains exemptions upon exit, which was crucial for achieving the required risk-adjusted returns sought by institutional investors who would otherwise be reluctant to engage with a frontier market lacking treaty security.

Summary: The Dolma structure in Mauritius acts like a specialized import lane at a complex border crossing. Instead of forcing dozens of separate travelers (the LPs) to individually navigate dense, changing investment forms (Nepal’s regulatory approvals) and face high compliance and transaction costs (Nepali domestic capital gains tax), the fund pools them into one single, internationally recognized container. This streamlined container is designed to move quickly through the limited “treaty lane” (the Nepal-Mauritius DTAA), ensuring a smooth entry and a tax-efficient exit, circumventing the lengthy and uncertain domestic processes that deter most other foreign investment traffic.

4. How is dolma?

The Investor Base: Development Finance Institutions (DFIs)

Dolma Impact Funds are overwhelmingly capitalized by institutional investors, predominantly Development Finance Institutions (DFIs) and Multilateral Development Banks (MDBs). This composition validates the fund’s commitment to high international standards and impact mandates.

Composition: The funds are almost entirely supported by DFIs. These investors include:
- British International Investment (BII – UK), which holds a 20% stake in DIF II.
- US International Development Finance Corporation (DFC).
- International Finance Corporation (IFC – World Bank), which proposed an equity investment of up to $10 million in DIF II.
- FMO (Netherlands), which acted as an anchor investor for the inaugural DIF I through its MASSIF fund.
- Swedfund (Sweden).
- JICA (Japan).
- Other DFI partners include funds from Finland (Finnfund) and Austria (Development Bank of Austria).
Strategic Need: This institutional backing explains the critical need for a robust, internationally recognized structure. DFI LPs prefer to invest via a vehicle domiciled in a financially stable, institutionally recognized offshore jurisdiction like Mauritius, which mitigates the perceived high regulatory risk associated with directly investing in Nepal.

The FDI Flowchart

The capital flow mechanism is structured to insulate the individual Limited Partners (LPs) from Nepal’s specific regulatory risks:

Capital Pooling: International LPs (the DFIs/MDBs) commit capital to the Dolma Impact Fund (DIF I or DIF II).
FDI Vehicle: The DIF entities are registered as Private Limited Liability Companies in Mauritius. This Mauritius-domiciled fund vehicle acts as the single source of Foreign Direct Investment (FDI) into Nepal.
Investment into Nepal: The Mauritius fund vehicle, rather than the individual LPs, enters into definitive transaction documents (like Share Subscription Agreements) and injects capital into Nepali companies. Examples of such investments include Makar Jitumaya Suri Hydropower, Fonepay, and Setikhola Hydropower.
Insulation of LPs: By channeling investment this way, the LPs are insulated from direct Nepali regulatory exposure, avoiding the administrative burden of registering individually as foreign investors in a jurisdiction like Nepal, which has exchange controls.

Mitigating the Permanent Establishment (PE) Risk

The legal design of the Dolma structure is dominated by the necessity to create a “legal firewall” against being declared a Permanent Establishment (PE) in Nepal, a critical tax vulnerability.

The Risk: The central risk is that the Nepal Inland Revenue Department (IRD) could determine that Dolma Fund Management (DFM) (Mauritius) is effectively managed from Nepal via its local advisory arm, Dolma Advisors Private Limited (DAPL). This would constitute a Dependent Agent Permanent Establishment (DAPE).

Consequence: If DFM were deemed to have a PE in Nepal, its management fee income would be subject to Nepal’s domestic 25% corporate tax rate. This represents a massive tax leakage compared to the low effective tax rate DFM aims for in Mauritius (e.g., approximately 2%). Such a ruling would fundamentally undermine the fund’s financial model.

The Mitigation: The Legal Firewall

The entire financial model of the Dolma fund – its ability to collect fees in low-tax Mauritius while operating in high-tax Nepal – hinges on one critical legal question: is the Mauritius-based manager (DFM) a taxpayer in Nepal?

If the Inland Revenue Department (IRD) can prove that the local advisor, Dolma Advisors Private Limited (DAPL), is a “Permanent Establishment” (PE) of DFM this would subject DFM’s global management fees to Nepal’s 25% corporate tax rate, obliterating its financial structure.

To prevent this, Dolma has erected a legal firewall. But a closer look reveals that this firewall is under extreme pressure from its own design, and the very mechanisms one would expect to find in such a structure could be the IRD’s best evidence for a PE.

The defense starts with two public-facing facts:

The “Independent” Contract: A form of advisory agreement definitely exists between DAPL and DFM. This is the core legal shield against the PE risks. This document almost certainly defines DAPL’s role as “non-binding, non-exclusive, and non-discretionary.” This is standard legal text intended to classify DAPL as an “independent agent” that merely gives advice, which DFM is free to ignore.
The “Separate” Ownership: DAPL is 100% owned by Pooja Gurung, a Nepali national. This is, on its face, a structural necessity to comply with Nepal’s 51% foreign ownership cap on consultancy services and establishing independence from the DFM’s owner.

This firewall is immediately compromised. First, the 100% owner of DAPL is the wife of DFM’s CEO, Tim Gocher – a “related party” connection that no tax authority would ignore. Second, DAPL’s actual role goes far beyond passive advice. It’s quite evident in the investment circle in Nepal that the DAPL team, led by Bidhya Sigdel and Shabda Gyawali, and the frequent and economically significant presence of Tim Gocher in Nepal is the fund’s engine room. They are responsible for deal sourcing, investment management, and representing the fund in Nepal. These high-risk, “core” activities already blur the line, making DAPL look far more like a dependent agent.

The entire financial model of the Dolma fund hinges on defending against two distinct but related tax threats, both arising from the substantial operational presence of its key decision-makers in Nepal.

Threat 1: DAPL as a Permanent Establishment (PE) of DFM

The Risk: That Dolma Advisors (DAPL) is not an independent firm but a dependent agent through which the Mauritius fund manager, Dolma Fund Management (DFM), conducts its core business in Nepal.
The Consequence: If DAPL is deemed a PE of DFM, then the management fees earned by DFM for managing the Dolma Impact Fund become subject to Nepal’s 25% corporate income tax. This would severely impact DFM’s profitability.
The Firewall: Typically entities setup some form of non-binding contract and the separate ownership of DAPL as the primary defenses against these specific threats.

Threat 2: DFM as a Tax Resident of Nepal (via Place of Effective Management)

The Risk: That the real, top-level strategic decisions for the fund manager (DFM) are made by its CEO and key executives from within Nepal. This could lead to DFM itself being considered a tax resident of Nepal based on its “Place of Effective Management” (PoEM).
The Consequence: This is the nuclear option. If DFM is a Nepali tax resident, the entire foundation of the structure crumbles. The Dolma Impact Fund’s (DIF) reliance on the Nepal-Mauritius DTAA – which is between Nepal and Mauritius – would be invalidated. The fund’s capital gains from exits in Nepal could then be fully subjected to Nepali tax under domestic law. This threat targets the fund’s investment returns, not just the manager’s fees.
The Firewall: Maintaining that all substantive management decisions for DFM are formally made in Mauritius is the defense against this threat – a claim which could be challenged by the operational reality in Kathmandu.

The Cracks in the Firewall

This is where the inherent logic of institutional investment creates a revealing paradox. Dolma’s sophisticated DFI backers – entities like the IFC, BII, and DFC, known for their rigorous governance standards – have committed over $100 million. From a corporate law and fiduciary duty perspective, it is virtually unthinkable that such lenders would leave the on-the-ground management of their capital in Nepal to a locally-owned entity without implementing stringent controls to mitigate their risk.

While the specific contracts are private, a logical analysis of standard practice in such cross-border fund structures allows for educated speculation. If one were to hypothesize the necessary safeguards, these potential mechanisms appear less as a defensive “shield” for Dolma and more as potential “evidence” that the Inland Revenue Department (IRD) could use to build its case.

Consider these plausible scenarios, drawn from the typical playbook of international private equities:

Hypothetical 1: Mechanisms of Ultimate Control. It would be a fundamental requirement of prudent fund management for DFM to retain some form of unilateral termination right over its arrangement with DAPL. Furthermore, to protect the fund’s continuity, it is logical to suspect the existence of an escrow arrangement for DAPL’s shares. This would provide a mechanism for DFM or the LPs to assume control of the local advisory entity in a scenario where the current owner fails to cooperate or the structure is challenged. From a legal standpoint, however, such controls are a double-edged sword. The very existence of a clause allowing a client to fire an “independent” advisor or seize its ownership stakes would be powerful evidence for the IRD to argue that DAPL lacks true autonomy and operates as a dependent extension of DFM.
Hypothetical 2: Aligned Economic Incentives. Similarly, the critical nature of the roles played by key personnel like Bidhya Sigdel and Shabda Gyawali makes it reasonable to infer that their long-term financial incentives (such as a share of the fund’s profits or assured engagement through long term contracts) are structured through agreements that are protected independently of the DAPL entity’s legal status. This ensures their loyalty is anchored to the success of the Mauritius fund. While a standard practice for retaining key talent, this economic structure could be interpreted to mean that DAPL itself is not the true employer of these individuals in a substantive sense, but rather a administrative conduit, further reinforcing the argument for economic dependence.

If such control and incentive structures are indeed in place, they would paint a picture of an entity – DAPL – that cannot act with true independence and is economically and operationally subordinate to its foreign principal. This is precisely the fact pattern tax authorities use to establish a Dependent Agent Permanent Establishment.

In this speculative landscape, the one verifiable safeguard that would be expected, and that DFIs universally mandate, is a robust Transfer Pricing (TP) Policy. Such a policy would serve to defensibly justify that all payments from DFM to DAPL are made at fair, “arm’s-length” market rates. A TP policy is a crucial defense against claims of profit shifting. However, it primarily addresses the price of transactions. It does not, by itself, negate the underlying argument about the nature of the relationship. A meticulously documented TP policy can prove that DAPL was paid fairly for its services, but it cannot disprove that DAPL was, in substance, a dependent agent with no meaningful ability to operate independently of DFM.

5. Brilliant dolma?

The Mauritius structure represents a strategic legal choice designed to offer the stability and predictability demanded by global institutional investors in a frontier market setting like Nepal.

The Crown Jewel: Article 13 of the Nepal-Mauritius DTAA

The primary benefit derived from domiciling the fund in Mauritius stems from the favorable treatment of Capital Gains Tax (CGT) under the Nepal-Mauritius DTAA, which was signed in 1999. The treaty structure concerning capital gains (Article 13) is a major outlier among Nepal’s DTAAs.

Comparative Analysis of DTAA Provisions on Capital Gains from Shares (Non-Real Estate Companies)

Country	Treaty’s Stance on Capital Gains from Shares	Taxing Right for Nepal?	Alignment with Model Conventions
Mauritius	Exclusive taxing right to the Resident State (The seller’s country). Gains from the alienation of shares fall under the residual clause, Article 13(5).	No.	OECD Model (Most beneficial for investors).
India, Qatar	Specific clause stating: “Gains… may be taxed in that State.” This grants a broad right to tax capital gains arising from the alienation of any shares in a Nepali company.	Yes, for all shares.	Stricter than the UN Model (0% threshold).
China, Pakistan, Sri Lanka	Specific clause for shares representing a participation of 25% or more.	Yes, for substantial stakes.	UN Model (Requires minimum threshold, typically 25%).
Austria, Norway, South Korea	No specific clause for taxing shares (Residual Clause applies).	No.	OECD Model.

The Mauritius treaty is strategically designed to be a magnet for investment because it adopts the strict OECD Model approach for shares. By channeling investment through a Mauritian entity that is considered a resident of Mauritius, the capital gain realized on the sale of shares in a Nepali operating company is taxable only in Mauritius. Given that Mauritius often does not tax such gains for qualifying foreign entities, this results in a complete exemption from CGT upon exit from Nepal.

The "No LOB/PPT" Advantage

The specific version of the Nepal-Mauritius DTAA (signed in 1999) provides virtually no treaty-based tools for Nepal to prevent capital gains tax avoidance.

Absence of LOB/PPT: The 1999 DTAA lacks a comprehensive Limitation on Benefits (LOB) clause or a Principal Purpose Test (PPT) clause.
Treaty Shopping Conduit: This structural absence makes the DTAA highly susceptible to “treaty shopping”. An entity in Mauritius could acquire and subsequently sell shares in a Nepali company while claiming complete exemption from CGT under Article 13(4) of the treaty.

The reliance on this treaty has been criticized because external observers noted that in the case of DIF I investments, Mauritian investors held a tiny percentage of ownership (0.75%) compared to non-Mauritian investors (99.25%) in the underlying vehicle, raising concerns that the structure was established primarily to secure DTAA benefits (tax avoidance).

Dolma's Strongest Legal Defence

Dolma’s strongest argument rests on the supremacy of the DTAA over subsequent domestic legislation. The key legal sequence is as follows:

DTAA Precedes Domestic Tax Law: The Nepal-Mauritius DTAA was signed in 1999. The domestic law intended to curb treaty shopping, the Income Tax Act (ITA 2002), was enacted after the DTAA entered into force.
Treaty Precedence is Mandated: The Treaty Act 1990 provides a clear statutory principle (Section 9) that the provisions of an international treaty signed by Nepal supersede domestic law in case of inconsistency.
LOB Inapplicability: Therefore, Dolma’s legal defense maintains that the subsequent Limitation of Benefit (LOB) provision in Section 73(5) of the ITA 2002 does not apply to the DTAA. This means the government’s obligation is to honor and uphold the treaty, granting the capital gains exemption.

This provides a robust legal shield, although the Supreme Court has previously suggested that LOB provisions may be applicable in interpreting treaties to prevent “treaty shopping arrangements”.

Another strong “Business Case” Defence

Dolma counters the notion that its Mauritian structure is merely a tax-avoidance vehicle by presenting a compelling business rationale centered on operational necessity and investor security.

Strategic Hub for DFIs: Dolma emphasizes that Mauritius is a globally recognized hub for fund structuring, offering a flexible legal and administrative framework.
Pooling Capital for Diverse LPs: The fund pools capital from DFIs and MDBs located in diverse jurisdictions, including the UK, US, Japan, Netherlands, and Sweden. These investors require a single, regulated conduit (the Mauritius fund vehicle) to provide regulatory certainty and familiarity, mitigating the high regulatory risk associated with direct investment into Nepal.
Compliance and Predictability: Mauritius offers a transparent and predictable environment, ensuring tax neutrality and investor protection through its wide network of DTAAs and compliance with international standards (such as exhaustive anti-money laundering and transparency procedures). This approach proves that Nepal “honours its laws and treaties,” which encourages other international investors to follow.

Local Regulatory Inadequacy: The structure also overcomes the practical difficulties of investing directly into Nepal, as the country’s domestic laws lack a clear legal path for single approval for a fund with multiple international Limited Partners. Using the single Mauritius-domiciled entity simplifies this process.

6. But is it dolma?

Dolma’s legal defense for exemption of the capital gain taxes is formidable, but it is not impervious. Nepal is not powerless. While a blunt “treaty override” would violate international law, the state possesses sophisticated, treaty-compliant arguments that could be used to challenge the structure. The potential counter-attack focuses on piercing the corporate veil to assert that the economic reality of the operation is rooted in Nepal, not Mauritius.

The following table outlines Nepal’s primary lines of legal assault:

Challenge	Legal Basis	Core Argument	Potential Outcome
1. Place of Effective Management (PoEM)	Nepal-Mauritius DTAA (Article 4) & Income Tax Act	The key management and commercial decisions for the fund are made by personnel (Gocher, Sigdel, Gyawali) physically present in Nepal. The location and activities of the fund manager can be a decisive factor in determining the “effective place of management” (EPOM) of a Limited Partnership (LP) for tax purposes. The determination of EPOM is based on where the key management and commercial decisions of the entity as a whole are, in substance, made.	DFM deemed a tax resident of Nepal, subjecting its fee income to 25% tax and undermining DTAA benefit claims.
2. Treaty Purpose (Vienna Convention)	VCLT Article 31 (Good Faith Interpretation)	The DTAA’s purpose is to prevent “double taxation” and “fiscal evasion,” not to enable double non-taxation for conduit companies.	Treaty benefits are denied based on a restrictive interpretation aligned with its object and purpose.
3. Domestic Law Traps (Not a Direct Challenge)	Section 57 of Income Tax Act & Disclosure Laws	These provisions operate independently of the DTAA and can impose taxes on the portfolio company or complicate exits via disclosure. Already tested under the Ncell Case.	Significant tax liability imposed on the Nepali company itself upon exit, degrading investment value.

Challenge #1: The Place of Effective Management (PoEM) Attack

This is Nepal’s strongest and most direct challenge. The argument targets the very heart of the fund’s claimed residency.

The PoEM Test: Under the DTAA and Nepal’s Income Tax Act, a company’s residency can be determined by its “place of effective management” – the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are, in substance, made.
The Narrative for Nepal: The Inland Revenue Department (IRD) could build a case that the strategic decisions for the Dolma Impact Fund – which companies to invest in, at what valuation, when to exit – are not made in a boardroom in Mauritius. Instead, they are driven by CEO Tim Gocher, Managing Director Bidhya Sigdel, and Investment Director Shabda Gyawali from their offices in Kathmandu. Their continuous, substantive presence and decision-making authority in Nepal could be used to argue that the real “place of effective management” is Nepal.
Invoking the Tie-Breaker: If both countries claim residency, Article 4 of the DTAA provides a tie-breaker clause. Nepal could argue that since the PoEM is in Nepal, the fund should be considered a Nepali tax resident, thereby nullifying its claim to the Mauritius treaty benefits for capital gains.

Challenge #2: The Treaty Purpose Argument (Vienna Convention)

This is a more nuanced, principle-based attack using international law.

The Vienna Convention Principle: The Vienna Convention on the Law of Treaties (VCLT) requires that treaties be interpreted in good faith in accordance with their “object and purpose.”
The DTAA’s Stated Purpose: The preamble of the Nepal-Mauritius DTAA explicitly states its purpose is “the avoidance of Double Taxation and the Prevention of Fiscal Evasion.”
The Argument: Nepal could argue that granting a capital gains exemption—resulting in double non-taxation—to a Mauritian entity with minimal economic substance (where Mauritian ownership was a mere 0.75% in DIF I) constitutes “fiscal evasion,” not its prevention. This abuse of the treaty’s purpose would allow a court to interpret the capital gains article restrictively, denying the benefit to deter abuse. This approach is supported by the Ncell precedent, where Nepal’s Supreme Court showed a willingness to curb treaty shopping.

Challenge #3: Domestic Laws as Independent Traps

Even if the DTAA challenge fails, Nepal’s domestic laws contain powerful provisions that can significantly impact the fund’s returns.

Section 57 – The Change in Control Tax (CCT): This is a major structural risk for any private equity exit. Section 57 of the Income Tax Act, 2002 states that if ownership of a Nepali company changes by 50% or more within a three-year period, the company itself is deemed to have sold all its assets at market value. Consequence: The resulting gain is taxed at the corporate level (25%). This tax liability falls on the Nepali portfolio company’s balance sheet, directly reducing its enterprise value and the sale price the fund can command. It is a tax on the company, not the shareholder, and thus operates independently of the DTAA.
Beneficial Ownership Disclosure: Regulations under the Money Laundering Prevention Act and international standards (AEOI, FATCA) require financial institutions and companies to disclose ultimate beneficial owners. Significant changes in the underlying Limited Partners of the Mauritius fund could trigger scrutiny during the repatriation approval process at Nepal Rastra Bank, creating administrative delays and leverage for the authorities.

However for section 57 to be applicable there should be at least 50% change in the underlying ownership which is not commonly seen in PE/VC’s investment. But if that threshold could be lowered to significant 25% or PE/VC removed from the Section 57 exemption, this could be a viable path for Nepal to follow for the legal reforms.

Conclusion: A Question of Will, Not Law

Nepal’s legal arsenal is more sophisticated than it appears. The path forward is not a hopeless treaty override but a strategic, treaty-compliant assault on the substance of the arrangement. The core challenge is not legal, but political and institutional.

Pursuing the PoEM or Vienna Convention arguments would require the IRD to engage in a high-stakes, costly, and lengthy legal battle, likely culminating in international arbitration. It would mean facing a consortium of powerful DFIs supporting Dolma. The government must weigh the cost of this fight against the principle of tax sovereignty.

The Dolma case, therefore, presents a profound choice: whether Nepal has the political will and legal expertise to use its sophisticated arguments to defend its tax base, or whether it will accept the continued erosion of its fiscal sovereignty through structures that prioritize investor returns over national revenue. The battle is not just about winning a case; it’s about establishing a precedent of enforcement.

7. What next dolma?

The controversial tax waiver granted to Dolma is more than a single administrative decision; it is an event whose effect will reshape Nepal’s investment landscape for years to come. It creates immediate policy instability, a dangerous precedent, and forces a reckoning with what the “rules of the game” will be after the Nepal-Mauritius DTAA is finally terminated.

Policy Instability: The Governance Risk Premium

The decision by an interim Ministry of Finance to override the explicit warnings of the Inland Revenue Department (IRD) does catastrophic damage to Nepal’s reputation as a predictable investment destination.

Political Discretion Over Rule of Law: The waiver signals that tax liability can be determined by political discretion, not by stable statutory or treaty law. This executive override of professional technical judgment demonstrates a critical vulnerability where policy can change with a change in government.
Undermining the Ncell Precedent: The move actively contradicts the principle of source-based taxation established after a long and costly legal battle in the Ncell case, where Nepal’s Supreme Court and an international ICSID tribunal affirmed the state’s right to tax gains from domestic assets. By granting this exemption, the MoF undercut its own legal victory, creating profound confusion over which principles actually govern taxation.
The Investor Calculation: For serious, long-term investors, this instability creates a “governance risk premium.” The risk assessment shifts from analyzing codified law to gauging political winds and potential for discretionary treatment. This premium makes Nepal a more expensive and riskier proposition, deterring the very investment it seeks to attract.

The Precedent Problem: A Contingent Liability

The waiver does not exist in a vacuum. It sets a benchmark that other investors will inevitably use.

Inviting Demands: As IRD officials warned, the decision creates “another dangerous precedent.” Other legacy investments structured through Mauritius—not just Dolma—can now legitimately demand similar retroactive or post-annulment benefits, citing this case as the new standard.
Massive Fiscal Exposure: This opens the door to a significant contingent liability for the Nepalese state. The government’s unilateral act of generosity to one fund could effectively nullify its own policy of annulling the DTAA for a whole class of existing investments, representing a massive, unquantified fiscal exposure.

The Road Ahead: The Post-July 2027 Landscape

The DTAA termination process, set in motion by the government’s annulment decision, continues on its legally mandated path, creating a defined new reality.

Event	Deadline	Implication
Formal Notice to Mauritius	On or before June 30, 2026	Nepal formally communicates the termination.
Effective Termination of DTAA	Mid-July 2027	The treaty ceases to apply. All new investments and exits are subject solely to Nepal’s domestic tax law.

This timeline creates a clear 20-month window (from Nov 2025 to Jul 2027) for Dolma and other Mauritius-based investors to plan tax-free exits under the old treaty rules. The government’s waiver effectively confirms it will honor this window.

Post-2027: A New Era of Risk and (Potential) Reform

After July 2027, the legal environment for foreign investment will shift fundamentally.

Increased Investor Risk: The protective shield of the DTAA will vanish. Investors will be fully exposed to Nepal’s domestic tax laws, including:
- Capital Gains Tax (CGT): A potential 25% tax on the sale of shares.
- Change in Control Tax (CCT): The major structural hurdle of Section 57 of the Income Tax Act, which can impose a 25% tax on the portfolio company itself upon a significant ownership change, degrading its sale value.
The Legislative Imperative: Recognizing this new reality, the government has signaled a need for reform. The Ministry of Finance plans to amend the Income Tax Act to introduce clear provisions for Development Finance Institutions (DFIs), aiming for a system where “income earned in Nepal is taxed locally.” Furthermore, stakeholders advocate for:
- A streamlined “venture capital fund” approval path to eliminate the current bottleneck of requiring separate approvals for each investment.
- Clarity on the application of the CCT for private equity transactions to remove a major exit friction point. The present exception for PEVC in Section 57, is still not very clear in terms of exit transaction.

In conclusion, the “what next” for Dolma is inextricably linked to the “what next” for Nepal. The waiver created a short-term crisis of confidence. The termination of the DTAA in 2027 presents a critical opportunity. The path forward requires moving beyond ad hoc political decisions and embarking on the hard work of legislative modernization to create a system that is transparent, stable, and fair – attracting capital based on the rule of law, not the discretion of the powerful. The Dolma waiver was a step backward; the post-DTAA era demands a giant leap forward.

8. No next dolma?

The Dolma case culminates in a policy dilemma for Nepal: should the state engage in a costly, high-stakes legal war over this specific tax waiver? A cold-eyed cost-benefit analysis suggests that such a battle would be a misallocation of resources. The true victory lies not in defeating Dolma in a courtroom, but in winning the larger war for a rational and sovereign investment policy.

Quantifying the Stakes: A Lopsided Equation

The potential financial recovery from challenging Dolma is disproportionately small compared to the certain costs of a fight.

Factor	Analysis	Implication
Scale of Mauritius FDI	Mauritius-sourced FDI constitutes a minor portion of Nepal’s total, around ~2%. The direct tax revenue from a single Dolma exit is modest in the context of the national budget.	The specific financial gain from a lawsuit is limited.
Contrast with Ncell	The Ncell case involved a multibillion-dollar transaction and was fought to establish the fundamental principle of source-based taxation. The astronomical stakes justified the immense legal costs.	The Dolma waiver undermines that principle, but the specific tax amount at stake does not warrant a similar all-out war.
Repatriation Patterns	While overall FDI sector dividend repatriation is significant (NPR 15-20 billion annually), the repatriation of invested capital (principal) has been minimal. The major fiscal risk is the future exemption of capital gains, an infrequent event.	A legal battle would be reactive and focused on a past decision, not proactive policy.

The Asymmetrical Battle: David vs. a Consortium of Goliaths

Escalating this dispute would pit Nepal against a formidable international consortium.

Prohibitive Cost: Challenging the waiver would mean navigating the Mutual Agreement Procedure (MAP) and then likely international arbitration under rules like those of the International Chamber of Commerce (ICC). This would require hiring world-class legal and financial experts, a multi-million dollar endeavour with an uncertain outcome.
Devastating Reputational Risk: The Dolma Impact Fund is backed by a who’s who of international development finance: the World Bank’s IFC, the UK’s BII, the US’s DFC, and European institutions like FMO and Swedfund. A headline reading “Nepal Sues World Bank-Backed Impact Fund” would be catastrophic. Regardless of the legal merits, it would paint Nepal as hostile to investment, scaring away the very capital it needs for its development goals, such as the $48 billion energy roadmap.

The Real Victory is Systemic, Not Specific

The ultimate conclusion is that a legal battle over the waiver misses the point. The Dolma case is a symptom of a deeper disease: Nepal’s outdated and unpredictable investment policy framework.

The real failure exposed is not Dolma’s legal ingenuity, but the system that made its structure necessary and the governance deficit that allowed a discretionary waiver to override established law. The “battle” is not against a single fund, but within the halls of Singha Durbar to build a better system.

The government’s energy and political capital should be focused on long-term institutional reform:

Finalize the Clean Break: Ensure the Nepal-Mauritius DTAA termination is completed in July 2027, conclusively ending the treaty-shopping era. If necessary engage in new treaty negotiation with Mauritius under the UN model.
Enact Legislative Reforms: Follow through on plans to amend the Income Tax Act, creating clear, equitable rules for all investors and eliminating the need for discretionary waivers.
Build a Modern FDI Framework: Establish a streamlined, transparent approval process for international private equity and venture capital funds, so the next “Dolma” can be structured within Nepal’s jurisdiction, contributing fully to the national treasury.

Final Verdict

Therefore, a costly legal war against Dolma is likely not worth it for Nepal. The potential financial recovery is dwarfed by the certainty of immense legal costs and devastating reputational damage. The wiser, though less dramatic, path is to treat the waiver as a costly lesson in the price of policy incoherence.

The measure of Nepal’s commitment to economic sovereignty will not be found in a verdict from an international arbitration panel. It will be seen in the government’s ability to modernize its laws, empower its technical institutions like the IRD, and consistently apply a transparent, rules-based system to all. The goal must be to create a climate that attracts investment which builds the nation, not structures that enrich investors while stripping the state of its rightful revenues. The Dolma dilemma ends not with a lawsuit, but with a choice: to build a system where such dilemmas cannot arise again.

Considering all the variables, I believe the decision by Hon. Minister Rameshore Khanal reflects a pragmatic equilibrium – an act of statecraft rather than surrender. Granting Dolma Impact Fund a one-time pass on capital gains tax, while simultaneously committing to reform the legal and fiscal framework that enabled such arbitrage, strikes a delicate but necessary balance.

That said, if any public-spirited litigant wishes to test this decision in court, seeking recovery of the waived capital gains in the name of public interest, it would make for a fascinating legal and moral spectacle, which as a law student I would enjoy thoroughly. Whether the case succeeds or not, such a challenge could rekindle the deeper debate this episode deserves.