Legal Framework and Statutory Basis
Permanent Establishment (PE) Thresholds
Under most DTAAs signed by Bangladesh (e.g., with the UK, USA, Singapore), a foreign enterprise is only taxable on business profits in Bangladesh if it maintains a 'Permanent Establishment'. This includes a fixed place of business, a branch, or a dependent agent who habitually exercises authority to conclude contracts.
| Type of PE | Statutory/Treaty Basis | Tax Implication |
|---|---|---|
| Fixed Place PE | Article 5 (OECD/UN Model) | Taxable on profits attributable to the fixed site. |
| Service PE | Income Tax Act 2023, Sec 2(59) | Taxable if services exceed 90-183 days (treaty specific). |
| Agency PE | Income Tax Act 2023, Sec 103 | Taxable if agent maintains stock or secures orders. |
Royalty Relief and Withholding Tax
Royalties paid to non-residents are subject to withholding tax under Section 119 of the Income Tax Act 2023. While the domestic rate is typically 20%, DTAA provisions often reduce this to 10% or 15%. To avail this, the recipient must provide a Tax Residency Certificate (TRC) and a Form 119 certificate from the National Board of Revenue (NBR).
Procedural Requirements for Relief
- Verification of Treaty Eligibility: Confirm the non-resident is a tax resident of a country with which Bangladesh has an active DTAA.
- PE Determination: Conduct a factual audit to ensure the activities do not constitute a PE under the specific Treaty Article 5.
- Application for Reduced Rate: Submit an application to the Commissioner of Taxes (External Resources) under Section 120 of the Income Tax Act 2023 for a certificate allowing deduction at a reduced rate.
- Remittance Compliance: Ensure compliance with Section 18 of the Foreign Exchange Regulation Act 1947 for outward remittance of royalties.
Consult Barrister Liton Asaduzzaman Sarkar
For cross-border tax structuring and DTAA advisory, contact our chambers.
Schedule ScopingFrequently Asked Questions
What is the statutory definition of a Permanent Establishment in Bangladesh?
While DTAAs provide specific definitions, Section 2(59) of the Income Tax Act 2023 defines 'Permanent Establishment' broadly to include a place of management, branch, office, factory, or any site for construction/assembly exceeding a specified duration.
How can a foreign company claim the lower DTAA rate for royalties?
Under Section 120 of the Income Tax Act 2023, the payer or payee must apply to the NBR for a certificate. Without this certificate, the bank is legally bound to deduct tax at the full domestic rate prescribed in the First Schedule, regardless of treaty provisions.
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