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Starting A Business In Bangladesh: Common Legal Entity Options

Posted: 15th December 2021 10:53

Bangladesh is becoming an increasingly attractive investment destination due to its cost competitive business environment and large labor market. The country allows foreigners to privately invest in all its industries, except the defense, nuclear energy, mining, and forest plantation industries. Key sectors that have benefited from foreign direct investment (FDI) include garment and textiles, agribusiness, energy, IT and outsourcing, and infrastructure.

The Bangladesh government has also aggressively invested in establishing export processing zones (EPZs), private economic zones, and special economic zones (SEZs) targeting sector-specific foreign investment and business participation from specific countries. For example, Bangladesh is on the list of attractive low-cost destinations for several hundred Japanese firms and an SEZ is being set up on 405 hectares of land in the Araihazar sub-district, which is about 32 km from Dhaka, for Japanese investors.

The Bangladesh government wants to expand the country’s capabilities in its export-oriented industries as well as build up its infrastructure and upgrade its technology and services industries. The urgency is being felt more as the country is set to lose its Least Developed Country (LDC) status between the next five to 10 years, and the Bangladesh government is keen to attract greater FDI to meet its developmental goals and offset future loss of preferential market access.

Meanwhile, several foreign companies are increasingly working to diversify their Asian investment footprint and supply chain sourcing in the aftermath of the pandemic and as costs in China have risen. In a previous article, Diversifying Your Asia Supply Chain: What Does Bangladesh Have to Offer? – we discussed some of the important benefits that foreign investors could tap into when choosing to set up here. Taking this a step further, in this article, we shall focus on explaining the corporate establishment process in Bangladesh and the entity options that are available for foreign investors who want to set up here.

Setting Up In Bangladesh: What Are My Options?

There are three most popular types of legal entities for doing business in Bangladesh:

  1. Private Limited Companies (PLC)
  2. Branch Office of a Foreign Company
  3. Liaison Office of a Foreign Company

A brief analysis of these entities is as follows.

Legal Entities In Bangladesh: A Comparative Analysis

Private Limited Company

A Private Limited Company (PLC) is a legal entity that is separate and distinct from its owners. It is recognized as a separate “legal person” and can buy assets, incur liabilities, profits, and losses, enter contracts, hire and fire employees, sue and be sued, pay taxes, etc. just as any individual would be under the law.

PLCs in Bangladesh are limited to between two and 50 shareholders whose financial liabilities in relation to the PLC are limited to the capital they have invested.

These investors can be either foreign or local, individuals or other corporations, depending on the requirements of a given investor. Unlike Public Limited Companies, Private Limited Company shares are not available for sale to the general public, and the transfer of shares is restricted by the terms of its Articles of Incorporation.

PLCs may be 100 percent foreign-owned. The setup time for a 100 percent foreign-owned entity ranges within four to eight weeks on average. There is no official minimum capital requirement in Bangladesh. However, to obtain certain advantages including appointing foreign employees, the minimum requirement is US$50,000.

Registration Of A Private Limited Company

The incorporation process starts with the name clearance of the proposed company by the Registrar of Joint Stock Companies (RJSC). This is followed by the opening of a temporary bank account, and the preparation of various forms and Memorandum and Articles of Association for the proposed company. At this stage, the paid-up capital of the company must be remitted to Bangladesh into the newly opened bank account through appropriate banking channels and an encashment certificate must be obtained. Documents such as the required forms for incorporation, Memorandum and Articles of Association, and encashment certificate as proof of investment must be submitted to the RJSC after being duly signed (as applicable) by the Directors and Shareholders of the Company. Once all documents are approved by the RJSC, a Certificate of Incorporation is issued. After receiving the Certificate of Incorporation, the Trade License, TIN certificate, and VAT registration must be obtained from the respective government offices.

Step-by-step Incorporation Process

Step 1: Executing The Joint Venture Agreement

If incorporating as a Joint Venture, execute a Joint Venture Agreement (JVA) between the Foreign and Local Promoters, who set the terms and conditions, which includes the shareholding ratio. Fix the name of the proposed company in the JVA, subject to obtaining clearance from the Office of the Registrar of Joint Stock Companies.

Step 2: Obtaining Name Clearance Certificate

Obtain the Name Clearance Certificate from the Office of the Registrar of Joint Stock Companies (RJSC).

Step 3: Preparing The Memorandum And Articles Of Association

Shareholders must prepare and sign the Memorandum and Articles of Association of the proposed company.

Step 4: Opening A Bank Account And Remitting The Investment

A temporary bank account is opened based on the name clearance certificate because Foreign Shareholder(s) are required to remit money to Bangladesh through the proper banking channels to obtain a subscription against shares in the proposed company’s capital. Once the share capital is credited to the company’s bank account, the bank issues an Encashment Certificate in favor of the investors that must submit to the RJSC as proof of investment in Bangladesh.

Step 5: Submitting Documents With The Office Of The Registrar Of Joint Stock Companies To Incorporate The Company

File the following documents with the Office of the Registrar of Joint Stock Companies (RJSC):

  1. The proposed company’s “Minutes of the Meeting of the Promoters/Board of Directors”
  2. A declaration and Forms I, VI, IX, X, XII, XIV (only for public companies), Schedule V (only for public companies), duly signed and containing the name and address of the Company, the full name, address, date of birth, nationality, profession, and other details of the Directors, and full name, addresses, date of birth, nationalities, professions, and parents’ names of the Shareholders
  3. Power of Attorney in favor of an Advocate (Full name, designation and address of the authorizer executing the Power in favor of Advocate)
  4. Encashment Certificate
  5. Joint Venture Agreement (a notarized copy may be accepted by the RJSC), if applicable
  6. Three Copies of the Memorandum and Articles of Association containing all necessary information
  7. Permission of the relevant authority, if required

Step 6: Paying Registration Fees

Pay the Registration Fees, as required, to incorporate the Company. The registration fees are determined based on the authorized capital.

Step 7: Obtaining Certificate Of Incorporation

After examining the submitted documents, the RJSC registers and issues a Certificate of Incorporation for the Company.

Information required for the registration of a private limited company is summarized as follows:

Liaison Office

A Liaison Office (LO) acts as a channel of communication between the principal place of business (head office) and entities in Bangladesh and offers a low-cost method of entry for companies seeking to gain a better understanding of the Bangladeshi market.

As such, this option is among the most common for first-time entrants to the Bangladeshi market and often precedes a larger presence within the country. An LO cannot undertake any commercial activity directly or indirectly and cannot, therefore, earn any income in Bangladesh.

Currently, LOs are permitted to engage in the following activities:

  • Conducting market research
  • Providing information about the company and its products to prospective Bangladeshi customers
  • Promoting the head office’s activities through meetings and events that can lead to business at later stages
  • Facilitating technical/financial collaboration between the parent company and local companies

The Bangladesh Investment Development Authority (BIDA) and Central Bank of Bangladesh (BB) grant approval for establishing a liaison office in Bangladesh. While there is no official minimum capital requirement for establishing a LO in Bangladesh, the cost for opening up a LO is BDT 25,000 and an inward remittance of US$50,000 must be made to the local office’s account from the Parent Company into the designated Bangladeshi bank account of the LO within two months of receiving permission. Once the required documents are submitted, it takes about four to eight weeks to receive approval for setting up the LO.

Branch Office

A Branch Office (BO) may conduct business activities in Bangladesh within the parent company’s business scope. However, BOs are not permitted to engage in manufacturing activities – they must subcontract these activities to a Bangladeshi manufacturing company. Branch Offices established with the approval of BIDA or BB may remit the branch’s outside profit net of applicable taxes subject to BIDA/ BB permission. Foreign companies engaged in manufacturing and trading activities abroad can set up BOs in Bangladesh for the following purposes:

  • Exporting/importing goods
  • Rendering professional or consultancy services
  • Carrying out research work in which the parent company is engaged
  • Promoting technical or financial collaborations between Bangladeshi companies and the parent company or overseas group
  • Representing the parent company in Bangladesh and acting as a buying/selling agent
  • Rendering services in Information Technology and the development of software in Bangladesh
  • Rendering technical support to the products supplied by the parent/ group companies
  • Foreign airline/shipping company

There is no official minimum capital requirement. The BO must obtain an establishment license and have a seal with the name of the parent company. Additionally, the BO must appoint a branch manager who is a Bangladesh resident. Foreign companies may appoint a manager from their countries of origin. However, this employee must obtain a Bangladesh work permit to be hired as a BO manager. Once the required documents are submitted, it takes about four to eight weeks to receive approval for setting up the BO.

Setting Up An LO/BO

In order to open a new Branch Office or Liaison Office in Bangladesh, investors must apply using a BIDA prescribed form found on the BIDA website. Additionally, investors must submit:

  1. The board resolution for opening the Liaison/Branch in Bangladesh
  2. Certified copies of the Memorandum, Articles of Association, and Certificate of Incorporation
  3. Particulars of Board of Directors
  4. Audit report

All of these documents must be attested by the Bangladesh Embassy/High Commission/Consulate Office in the country of the investor.

An investor may change the address of a Branch/Liaison Office in Bangladesh through an application with a BIDA certified copy of the rent deed and board resolution, duly supported by a treasury chalan of BDT 1,000. An investor may close a Branch/Liaison Office in Bangladesh by applying to the BIDA with audit report, updated tax payment certificate, No Objection Certificate (NOC) from Bangladesh Bank, etc. The company’s Branch Office or Liaison Office must apply to the BIDA to waive specific condition(s).

General Conditions Of Office Permission

  • The Liaison/Branch Office must obtain permission from the Bangladesh Bank (Central Bank) under section 18(B) of the Foreign Exchange Regulations Act, 1947.
  • The Liaison/Branch Office must strictly follow the foreign exchange regulations of the Government of Bangladesh.
  • If the Liaison/Branch Office intends to operate beyond the initial approval period, it must apply for renewal at least two months before the expiration of the initial approval.
  • If the Liaison/Branch Office intends to employ foreign national(s), prior government approval must be obtained from the Bangladesh Investment Development Authority (BIDA). In this scenario, it must appoint five local individuals, preferably in executive positions and under an appropriate pay structure, for each foreign national.
  • While operating its business program in the country, the Liaison/Branch Office must abide by the rules, regulations, orders, and instructions already in force or to be issued by the Government of Bangladesh.
  • All operational, functional, and establishment costs, including the salaries of the foreign and local employees in the Liaison/Branch Office, must be met using the remittance from the parent office.
  • No outward financial remittance from Bangladeshi sources is allowed.
  • The Liaison/Branch Office must open an account with a scheduled bank to receive the remittance and meet the aforementioned expenses.
  • The Quarterly Return of Income and Expenditure out of the remittance from abroad must be submitted to the Bangladesh Investment Development Authority (BIDA), Deputy Commissioner of Taxes (Companies Circle 17 or Circle 59 (as applicable), and Bangladesh Bank.
  • Any change to the present address should be communicated to the Board before the change is actualized.
  • The permission issued does not exempt the Liaison/Branch Office from obtaining clearance from any other government agency, if required under the existing laws/rules of the country.
  • The Liaison/Branch Office is not entitled to open any other business establishment beyond what has been sanctioned under the Liaison/Branch Office permission. If the office intends to conduct any other business, it must obtain permission separately.
  • Income tax must be deducted at the source when paying rent, salaries, bills for supply of goods and service of contract work, and subsequently deposited to the government accounts as per provisions of Income Tax Ordinance, 1984.
  • The Ministry of Home issues a security clearance in favor of the Liaison/Branch Office after verification.
  • The Liaison/Branch Office must bring inward remittance of at least US$50,000 within two months of the permission letter issuance date for initial establishment and operational expenses. Failure to do so will require the Liaison/Branch Office to pay an additional five percent on this amount for each delinquent month as a penalty.
  • The Liaison/Branch Office permission may be partially or completely revoked, suspended, or altered at any time, and new condition(s) may be added without assigning any reason.

Income Tax

Per the Circular of the National Board of Revenue (NBR) no. 10(2) kar-8 (Aa chu Ma)/96 dated 21.10.1998, LOs are not liable for any income tax because they have no income in Bangladesh. However, BOs have tax obligations for their commercial activities. In addition to income tax, if a Liaison/Branch office fails to comply with the withholding of tax and value-added tax (VAT) requirements of the Income Tax Ordinance 1984 and VAT Act 1991, the expenses from which the tax or VAT was not deducted will be treated as “deemed income” and tax will be payable on these expenses at applicable rates. The tax rate for Liaison/Branch offices (where applicable) is 32.5 percent and the deadline for filing the income tax return is the 15th day of the seventh month following the company’s year-end.

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