Well I agree that you can`t take away his NS nation.
And about his RP nation why not stick with the "Government in exile" idea. If he wants his RP nation back why not let him RP the return of his government. Happens often enough in real live. Once the land is free the Dissidents return.
(However I don`t know if he simply "Gave it all away" or he didn't want to play his nation anymore and staged a coup against his government?)
In the latter case RP-ing his return would be interessting.
Would that be be okay with you Empire?
I mean it`s a role play and as long as he makes up a good story about it.