Navigating Double Taxation in Bangladesh
A comprehensive guide to understanding and utilizing Double Taxation Avoidance Agreements (DTAAs) to optimize international business operations, attract foreign investment, and ensure tax compliance.
Understanding DTAAs in the Bangladesh Context
A Double Taxation Avoidance Agreement (DTAA) is a bilateral tax treaty signed between two countries to prevent the same income from being taxed twice. For Bangladesh, these agreements are a cornerstone of its international economic policy, designed to create a favorable and predictable tax environment for foreign investors and multinational corporations.
The primary objectives of Bangladesh's DTAAs, largely based on the UN and OECD Model Conventions, are:
- Attracting Foreign Direct Investment (FDI): By providing tax certainty and reducing the tax burden, DTAAs make Bangladesh a more attractive destination for foreign capital and technology.
- Preventing Fiscal Evasion: The agreements include provisions for the exchange of information between tax authorities, helping to curb tax evasion and avoidance.
- Allocating Taxing Rights: DTAAs clearly define which country has the right to tax various types of income, such as profits, dividends, interest, royalties, and capital gains, preventing jurisdictional disputes.
- Promoting Bilateral Trade: By removing tax impediments, these treaties facilitate the seamless flow of goods, services, and capital between Bangladesh and its partner countries.
Defining Permanent Establishment (PE)
The concept of a Permanent Establishment (PE) is critical in DTAA interpretation. It determines whether a foreign company's business profits are taxable in Bangladesh. If a foreign entity has a PE in Bangladesh, the profits attributable to that PE are subject to Bangladeshi corporate income tax. If no PE exists, the business profits are generally taxable only in the company's country of residence.
A PE can be constituted in several ways:
1. Fixed Place PE
This is the most common form, referring to a fixed place of business. Examples include a place of management, a branch, an office, a factory, a workshop, or a mine/oil well.
2. Agency PE
An Agency PE is created when a dependent agent acts on behalf of a foreign enterprise and habitually exercises authority to conclude contracts in Bangladesh in the name of that enterprise.
3. Service PE
This arises if a foreign enterprise provides services, including consultancy, in Bangladesh for a specified period (e.g., more than 183 days in a fiscal year) through its employees or other personnel.
PE Exclusions
Certain activities are specifically excluded from constituting a PE, such as using facilities for storage/display of goods, or maintaining a fixed place of business solely for preparatory or auxiliary activities.
Mechanisms for Tax Relief
DTAAs employ several methods to provide relief from double taxation:
1. Exemption Method
Under this method, the country of residence exempts the income earned in the source country from its tax base. For example, if a company resident in Country A (with a DTAA with Bangladesh) earns profits from a branch in Bangladesh, Country A will not tax those profits.
2. Credit Method
This is the most common method used in Bangladesh's treaties. The country of residence taxes the foreign income but allows a deduction (credit) for the taxes already paid in the source country.
Example:
A Bangladeshi company receives BDT 100,000 in interest from a UK source, on which 10% tax (BDT 10,000) was paid in the UK. If the tax on this income in Bangladesh is 25% (BDT 25,000), Bangladesh will grant a tax credit of BDT 10,000. The company will only pay the difference of BDT 15,000 in Bangladesh.
3. Tax Sparing Credit
This is a special provision often included in treaties between developed and developing countries. If Bangladesh offers a tax holiday or incentive to a foreign investor (e.g., zero tax for 5 years), the investor's home country will still grant a tax credit as if the full tax had been paid in Bangladesh. This preserves the benefit of the incentive for the investor.
Interactive Treaty Partner Explorer
Bangladesh has an extensive network of DTAAs. Use the search bar to find a specific country and click to view key treaty dates and a comparison of standard vs. treaty-based withholding tax rates.
The Legal Process: A Step-by-Step Guide to Claiming Benefits
Claiming DTAA benefits requires a meticulous and compliant approach. The following steps outline the typical procedure for a foreign entity to avail reduced withholding tax rates in Bangladesh.
Eligibility Assessment
Verify that a DTAA exists and confirm your status as a tax resident of the partner country.
Obtain TRC
Secure a valid Tax Residency Certificate (TRC) from your home country's tax authority.
Submit Documents
Provide the TRC and a no-PE declaration to the payer in Bangladesh before the payment is made.
Compliance & Filing
The payer withholds tax at the treaty rate and submits it to the NBR. Maintain records for audits.
How LegalSeba LLP Can Assist You
Navigating the complexities of international tax law requires expert guidance. At LegalSeba LLP, our team of seasoned tax professionals provides end-to-end support to help you leverage DTAA benefits effectively and ensure full compliance.
