The new Constitution of Nepal established a federal system of governance in 2015. Implementation began in 2018 following the 2017 subnational elections. The new system is comprised of seven provinces and 753 local governments. The Constitution assigns important functional responsibilities to provincial and local governments and mandates that they have significant autonomy in deciding how services will be delivered. Subnational governments accounted for over one-third of total government expenditures planned for FY2021, financed primarily by intergovernmental transfers. This paper describes the new federal system, discusses the early implementation successes and challenges, and draws some lessons from Nepal's experience.