General Overview

The Bangladesh government is attempting to attract foreign investment in various fields, but the actual investment is primarily concentrated in the export clothing industry.
Not only are foreign investors hesitant to invest due to the limited domestic market, but most of the investment incentives, such as taxation and finance, are primarily targeted at the export industry.

Many critics argue that there is, in fact, no foreign investment incentive because these incentives are not only offered to foreign investors but also apply to domestic companies.

Summary of Foreign Investment Law

Foreign investment law in Bangladesh legally guarantees foreign investment and ensures the export and repatriation of profits, capital, and dividends.

100% foreign investment and joint ventures between foreigners and locals are permitted.

The Export Processing Zone (EPZ) was established to attract foreign-invested companies in the export industry, providing incentives such as tax benefits.

The EPZ will also create additional Economic Zones (EZ) that can cater to the domestic market.

Double taxation prevention agreements (with more than 20 countries) and Tax Holiday qualifications are granted (ranging from five to seven years depending on the region).

When non-resident foreigners issue stocks and remit dividends overseas, prior approval from the central bank is not required. Foreigners can invest in stocks through the stock exchange without prior approval from the central bank.

Technology transfer fees and royalties can be paid without prior approval from the central bank.

Commercial banks can extend loans and repayment periods to foreign companies operating in Bangladesh without prior approval from the central bank.

Commercial banks can transfer funds to foreign countries without prior approval from the central bank within the amount of salary specified in the employment contract approved by the relevant authorities if foreigners return to their home countries.

Capital income or dividends generated by foreigners' acquisition of securities through the Bangladesh Stock Exchange can be repatriated without prior approval from the central bank after paying taxes.

Foreign companies do not require central bank approval for borrowing through commercial banks, opening letters of credit, supplier credit, interest, and principal and interest payments if they meet interest rates of up to LIBOR +4% and a repayment period of 7 years or less.
Income tax exemption is granted for funds brought in through new investments and normal remittance channels.

(1) Tax Holiday

New investment companies will be provided with 5 to 10 years of corporate income tax exemption (Tax Holiday) depending on the industry and investment area.
Initially scheduled to end in June 2015, it has been extended to 2024.

Beneficiary Requirements

The head office must be located in Bangladesh, and the company must be newly established. Methods such as the spin-off of existing companies are not allowed. (Establishing new companies through equipment transfer is not permitted).

Companies with a capital of more than 2 million taka ($23,670 USD) must reinvest 30% of tax-free income and purchase 10% of shares in other companies.

An application for the issuance of an Exemption Certification must be submitted within six months of commencing commercial production, and the tax exemption period is calculated from the date of issuance of the tax exemption permit.

It cannot be combined with other tax benefits, such as accelerated depreciation.

Exemptions are not applicable to major metropolitan areas and the clothing manufacturing sector.

Application Procedures

Along with the application, the following documents must be submitted to the National Tax Service (NBR), and, in principle, the National Tax Service must decide whether to issue an exemption certification within 45 days.

Certificate of Incorporation, Memorandum and Articles of Association, Certificate of Commencement of Business, Certified Copy of Balance Sheet and Profit & Loss Account, Certified Copy of Blueprint of Building

(2) Accelerated Depreciation

If the Tax Holiday mentioned above is not applied, companies may benefit from accelerated depreciation.

Accelerated depreciation of 50% in the first year, 30% in the next year, and 20% in the third year is recognized for the actual cost of machinery and plants if factories are operated in areas such as Dhaka, Narayanganj, Chittagong, and Khulna.

(3) Exemption from Import Duties on Capital Goods (Mechanical Equipment, etc.)

In general, there is no tariff on mechanical equipment within the EPZ, and a 1% tariff is imposed on 100% exporters outside the EPZ when importing mechanical equipment.

(4) Exemption from Import Duty Taxes

Regardless of whether the production plant is within or outside the EPZ, 100% exporters are exempt from tariffs when importing raw materials and intermediate goods.

To receive tariff exemptions, a bonded warehouse license must be obtained.
This is not a problem for companies in EPZ, but companies outside the EPZ face difficulties in obtaining a new bonded warehouse license.

In the case of the clothing manufacturing industry, to obtain a bonded warehouse permit, one must be a member of the Bangladesh Clothing Producers Association.
However, joining the association is not allowed to protect domestic producers.

(5) Tariff Refunds

When importing raw materials for export, exporters without a bond license can receive a drawback.

Exporters can apply for a refund by submitting the necessary documents to an institution called DEDO (Duty Exemption & Drawback Office) under the National Tax Service.

Restrictions and Prohibitions (Industry)

In the case of the five industries below, they are operated as foreign investment prohibition industries, and only the government can invest in them

• Weapons, munitions, and other military equipment

• Nuclear production

• Afforestation and logging in protected areas

• Securities, paper money, currency casting

• Air transport and rail transport

Special Economic Zones and Free Trade Zones

As of April 25, 2023, Bangladesh boasts eight export processing zones (EPZs) managed by the state.

Bangladesh has channeled the majority of its industrial capabilities into the textile and sewing industries, which account for 80% of the country's exports.
These textile and sewing industries have transitioned into export public corporations and have received various tax benefits and infrastructure support.

Recognizing the success of the public sector and its contribution to the national industry, the Bangladesh government is pushing for the development of a total of 100 economic zones (EZs) by 2030.

Both EPZs and EZs enjoy various incentive benefits such as Tax Holidays and exemptions from raw material import taxes.

EPZs are exclusively for producing goods for export, while EZs have the flexibility to manufacture products for both export and domestic sales (subject to related taxes for domestic sales).

Since the enactment of the Special Economic Zone Act in 2010, the government has been pursuing policies for the development of special economic zones, led by the competent authority, BEZA (Bangladesh Economic Zone Authority).
However, progress has been somewhat sluggish.

The primary reason for the slow pace is the incomplete industrial infrastructure in the surrounding areas, including roads and energy supply. Moreover, the cost of acquiring land is often not covered, and issues related to friction with local residents and environmental concerns frequently arise.

In some special economic zones, foreign companies have established manufacturing facilities to access the local domestic market. For instance, in the case of the Abdul Monem Special Economic Zone, Honda, Japan, constructed a motorcycle production plant and commenced operations in 2019.

Major Regional Areas of Bangladesh

There are eight major regions in the exporting processing zones (Daka, Chittagong, Adamji, Kumila, Kanapuli, Ishwardi, Mongla, Utara).
Textile and sewing companies for overseas export purposes are centrally located, and various tax benefits and infrastructure support are available.

Among the eight EPZs, the capital Dhaka EPZ and the port city Chittagong EPZ have superior location and infrastructure compared to the other six EPZs.

Corporation

Local subsidiaries include stock companies (public and private) and guarantee limited companies under investment laws.

Branch

The branch office is not granted a legal personality and may conduct business activities within the scope of the head office's business.
The governor reports the details of the deposit and withdrawal of funds to the central bank and pays taxes by recording the total expenditure as sales.
Compared to local corporations, branches seem easier in the establishment process, and companies that conduct business activities but focus on trading with sales overseas often establish branches there.
However, according to the opinion of a local consultant, the governor is often recommended to establish a corporation because it is an exceptional case under the Bangladesh legal system and is subject to a central bank approval process.

In principle, all expenses of the branch must be remitted from the headquarters and cannot be executed with the amount received locally (ex: construction establishment price).
In addition, remittance to the home country in any form is not possible.
These two matters are stipulated in the establishment permit document issued by the Investment Agency (BIDA), so they must be observed unless waived through official procedures.
Regulations related to restrictions on overseas remittance have procedures, but it is known that it is impossible to actually be exempted.

Liaison Office

The contact office or representative office is also not given a legal personality, and the scope of activities is limited to contact with the headquarters, advertisements, and promotions.
It mainly supports the activities of the headquarters without direct business activities.
In the case of the liaison office, it is understood that taxes must be paid for the contribution to the sales of the headquarters.
The liaison office can open a localization account, but deposit is not possible and can be used only for expenditure purposes.

Public Limited Company

A Public Limited Company is suitable for large enterprises as it can offer stocks to the general public and be listed on the Dhaka Stock Exchange.
The minimum number of shareholders is seven, with no upper limit, and there must be at least three directors.
While public corporations have the advantage of raising substantial funds through stock offerings, they are not typically preferred by small and medium-sized foreign investment companies due to the numerous regulatory provisions they must adhere to.

Private Limited Company

A Private Limited Company is a type of company that is prohibited from offering shares and has restrictions on the transfer of shares.
It is a common form of company in Bangladesh.
The number of shareholders is limited, with a minimum of 2 and a maximum of 50, excluding employees.
Most foreign investment companies operating in Bangladesh take the form of private stock companies.

Limited Liability Company

Limited liability companies include stock companies and guarantee companies in the form of general companies.
Stock companies can be further categorized into open stock companies, where stocks are publicly traded, and closed stock companies, where public solicitation of stocks is prohibited.
Guarantee limited companies do not issue stocks and are liable within the investor's guaranteed limit.
They are often used by holding companies and others when establishing special-purpose corporations.

Unlimited Liability Company

An unlimited liability company, such as a general partnership or joint venture, holds the representative or employee personally responsible for corporate debt.
This type of company is generally referred to as a private company, an ownership company, or a proprietorship company.