Foley Hoag LLP has helped Nepal defeat a US$422 million claim commenced by Axiata Investments UK Limited (“Axiata UK”), a wholly-owned subsidiary of Axiata, and Ncell Axiata Limited (“Ncell”) against the Federal Democratic Republic of Nepal (“Nepal”) brought under the UK-Nepal Bilateral Investment Treaty (“BIT”). The arbitration, Axiata Investments (UK) Limited and Ncell Private Limited v. Nepal (ICSID Case No. ARB/19/15), was Nepal’s very first investment arbitration case. 

In 2015, Axiata and the Swedish TeliaSonera entered into a deal by which Axiata UK acquired an indirect 80% shareholding in Nepal’s largest telecommunications company, Ncell. Soon thereafter, Nepal’s Large Taxpayers Office (“LTPO”) taxed the transaction on the basis of Nepal’s Income Tax Act. Following Ncell’s challenge and various public interest petitions submitted by civil party litigants, the Supreme Court of Nepal found, in successive judgments rendered in 2019, that the taxes were lawfully imposed under Sections 57 and 73 of the 2002 Income Tax Act. 

Axiata UK and Ncell commenced ICSID proceedings against Nepal, arguing that Nepal had gone back on assurances it allegedly made to Axiata’s senior executives not to tax Axiata’s capital gains arising from the transaction. The investors also claimed that the Supreme Court’s decisions subjected them to a denial of justice in breach of the fair and standard in Article 2(2) of the BIT due to the arbitrary and unfair imposition of tax liability. Axiata UK and Ncell also asserted that Nepal’s administrative authorities, including the Nepal Telecommunications Authority, the LTPO, the Inland Revenue Department and the Department of Investment, engaged in coordinated action designed to force them to pay the taxes.

In a unanimous award, the Tribunal, composed of Professor Joongi Kim, Paul Friedland and Professor Albert Jan van den Berg, dismissed all of the investors’ claims under the BIT. The tribunal found that Nepal had given no assurances that the transaction would not be taxed and therefore the companies could not reasonably have expected to evade tax liability. The tribunal also gave deference to Supreme Court’s interpretation of Nepal’s Income Tax Act, as being the apex court passing judgment on a question of first impression. The tribunal also found no evidence to support the claims that there was any collusion on part of the authorities to compel Axiata UK and Ncell to pay the taxes. On the other hand, the tribunal ordered Nepal to reimburse approximately US$1.4 million to Axiata, finding that Nepal had violated a provisional measures order during the early stage of the arbitration. 

“The Tribunal confirmed the lawfulness of Nepal’s conduct under the BIT, awarding Claimants 0.33% of their claimed damages on account of a procedural violation. This is indeed a milestone victory for Nepal and we are delighted to have been of assistance. The taxes collected can now rightfully be dedicated to protecting the health and welfare of the people of Nepal,” says Dr. Constantinos Salonidis, Global Co-Chair of Foley Hoag’s International Litigation and Arbitration Department, who co-led Nepal’s defense in these proceedings together with Senior Counsel Larry Martin and Partner Tafadzwa Pasipanodya. The Foley Hoag team also included attorneys Nour Nicolas, Sudhanshu Roy, Iulia Padeanu Melon and Karim M’ziani. Professor Surya Subedi, KC from the University of Leeds and Chhetry & Associates in New York and Kathmandu served as Foley Hoag’s co-counsel in these proceedings.