Corporate Tax in Bangladesh in 2024
Under $2(20) of the Ordinance, a “company” means a company as defined in the Companies Act 1913 or the Companies Act 1994 and includes
(1) a body corporate established or constituted by or under any law for the time being in force;
(2) any nationalised banking or other financial institution, insurance body, and industrial or business enterprise;
(3) an association or combination of persons, called by whatever name, if any of such persons is a company as defined in the Companies Act 1913 or the Companies Act 1994;
(4) any association or body incorporated by or under the laws of a country outside Bangladesh; and
(5) any foreign association or body, not incorporated by or under any law, which the NBR may, by general or special order, declare to be a company for the purposes of the Ordinance. For the purposes of the Ordinance, the word “company” has a much wider meaning than that of the word in Bangladesh company law.’
A “project” established as an industrial enterprise by law can be a “company” under $2(20) of the Ordinance? A “factory” may also be a “company” under $2(20) of the Ordinance? Under the Ordinance, company includes “an association or combination of persons” if “any of such persons is a company” under the Bangladeshi company law.*
The term “association or combination” is not defined in the Ordinance and yet it has been mentioned in several places.” This term does not seem to suggest that it has to be only “incorporated” for the purposes of the Ordinance. The word “associate” means to join in a common purpose, or to join in an action. Thus, if there is an unincorporated and contractual joint venture with the intent and the object of co-mingling of interest and there is intent to move towards a common objective then the joint venture would be classified as an “association of persons”?
On this basis, it appears that if there is an unincorporated association of persons involving individuals and a company, such an “unincorporated” association, although not a legal entity, would be regarded as a company under §2(20) (bb). A company, for the purposes of the Ordinance, need not have a profit motive and may be incorporated for purposes other than business.” Thus, a Section 28 company® under the Companies Act 1994 is also assessed as a company under the Ordinance.’
A company in liquidation is also a “company” under Section 2(20).” A company which was declared abandoned property under the Bangladesh Abandoned Property (Control, Management and Disposal) Order 1972 is aiso a “company” liable to taxation under the Ordinance.? While determining whether or not a foreign company is a “company” as defined in §2(20)(666) of the Ordinance, the taxing authority must consider $378 of the Companies Act 1994, under which the Legislature has contemplated two kinds of foreign companies-one incorporated outside Bangladesh which, after the commencement of the Companies Act 1994, establishes a place of business within Bangladesh, and the other that was incorporated outside Bangladesh, and established a place of business within Bangladesh before the commencement of the Companies Act 1994, and continued to have an established place of business within Bangladesh at the commencement of the Companies Act 1994.13
Bangladeshi company:
Under $2(11), a “Bangladeshi company” means a company incorporated under the Companies Act 1913 or the Companies Act 1994 and includes a body corporate established or constituted under or by any law and having its registered office in Bangladesh. 52(11) lists two types of entities as Bangladeshi company: (a) companies incorporated under the Companies Act (1913 or 1994), and (b) body corporate established or constituted under or by any law. Thus, any “corporation”* established by or under any Act of Parliament should also be regarded as a “Bangladeshi company” 15 The other requirement of S2(11) is that the Bangladeshi company must have its registered office in Bangladesh.
Foreign company:
Under $2(33), a “foreign company” means a company which is not a Bangladeshi company as defined in S2(11).
Principal officer:
Under $2(48) of the Ordinance, a principal officer, when used in connection with a company or any association of persons, includes (a) managing director, chief executive officer, manager, secretary, treasurer, agent or accountant (by whatever designation known), or any officer responsible for the management of the affairs, or of the accounts, of the company or the association of persons’; and (b) any person connected with the management or administration of the company or association of persons upon whom the DCT has served a notice of his intention to treat him as a principal officer of such company or association.”
Residential status of a company
Two provisions are important to consider the residential status of a company under the Ordinance-S$ 2(42) and 2(55). For tax purposes, to ascertain the residence of a company, two factors will be looked at under $2(55)(c)—(a) whether it is a Bangladeshi company as defined in §2(11) or any other company as defined in $2(20) and (b) whether the control and management of its affairs are wholly situated in Bangladesh in a year. Here, “year” means the financial year from June to July!8 Several words are important for consideration in §2(55)(c).
Control and management:
The term “control and management” is not defined in the Ordinance. Several issues are important to determine the control and management of a company. These are: (a) does the company carry on business in Bangladesh? what do “affairs” and “wholly” in S2(55)(c) mean? (b) what does control and management mean? (c) the persons exercising control and management and the impact of outsiders in the decision making process; and (d) the location from where control and management is exercised.
Whether the company is carrying on business in Bangladesh: Generally, the place, where a company is incorporated or maintained to make profit or gain for its shareholders, is likely to be the place from where its business is carried on.’ This is so even if the company only holds passive investments, and its activities consist of receiving rents or returns on its investments and distributing them to shareholders.
Affairs:
The expression “affairs” is used in $2(55)(c) while dealing with the control and management of a company. It is not the “business” of a company which needs to be looked at while determining the control and management; but rather the “affairs” of the company. The term “affairs” has a wider import than the term “business”? The liaison office of a foreign company with no income generating activity in Bangladesh and receiving cost and expenditure from its head office abroad is outside the net of taxation in Bangladesh.
Wholly in Bangladesh: The control and management of a company must be “wholly” in Bangladesh. Substantial control and management in Bangladesh will not suffice for the purposes of the Ordinance.
Meaning of control and management:
The two leading English cases on the meaning of “control and management” are 100 years apart-De Beers Consolidated Mines Ltd v. Howe? and Wood v. Holden.26 In De Beers, the company was incorporated under South African law, whose general meetings took place in Kimberley in the Cape Colony. It was engaged in the business of mining diamonds in South Africa and selling the diamonds in London. The control of the company was vested in three life governors and sixteen ordinary directors. Two of the three life governors and nine of the sixteen ordinary directors [ i) JC Penney v. Deputy Commissioner of Taxes 28 BLD (HCD) (2008) 38; ITA No. 3265 of 1981-82 (1986) 14 BTD (Trib) 173; Also see ITA Nos. 708 to 713 of 1979-80 (1982) 10 BTD (Trib) 96 (when the Bangladesh liaison office obtains business for the head office abroad, it cannot be said that the Bangladesh liaison office performs postal functions only for the head office ii) Imperial Tobacco v. Commissioner of Income Tax 10 DLR (SC) 140 at pp. 142-143; James Finlay v. Commissioner of Income Tax 55 DLR 315; Also see Macneill & Barry v. Commissioner of Income Tax 21 DLR (SC) 200 (assessee-company based out of Pakistan had full control of the business operation of managed company in Pakistan. Commission earned by the assessee-company from such management in Pakistan was taxable in Pakistan).] resided in the United Kingdom.
The chairman and six ordinary directors resided in the Cape Colony. Meetings of the directors were held weekly in Kimberley and London with an interchange of minutes between the two places. The proceedings of the boards of directors sitting in Kimberley and London were regulated by by-laws which provided, amongst others, that the policy of the board regarding the disposal of diamonds and other assets, the working or development of the mines and the output of diamonds, application of profits, and appointment of directors were to be determined by the majority of all the directors.
The facts showed that there were instances where the South African directors referred matters to, and took instructions from, London. In applying the “central management and control” test the House of Lords held that the decisive factor was how the company in fact conducted its affairs rather than what was stipulated in its internal by-laws. On this basis, the House of Lords held that the company was resident in the UK because, under the facts, the real control of all the important decisions of the company was in the hands of the directors in London. Lord Loreburn said this: “In applying the conception of a company, we ought, I think, to proceed as nearly as we can upon the analogy of an individual. A company cannot eat or sleep, but it can keep house and do business.
We ought, therefore, to see where it really keeps house and does business. An individual may be of foreign nationality, and yet reside in the United Kingdom. So may a company. Otherwise it might have its chief seat of management and its centre of trading in England under the protection of English law, and yet escape the appropriate taxation by the simple expedient of being registered abroad and distributing its dividends abroad…. I regard that as the true rule, and the real business is carried on where the central management and control actually abides.” In Wood, the facts arise out of a capital gains tax avoidance scheme. The taxpayers were UK residents and were holding approximately 96% of the ordinary share capital of a UK company, Greetings. The taxpayers engaged Price Waterhouse to locate a buyer for the company. In 1995, the taxpayers gave all their shares in Greetings to Holdings, which was a newly formed UK holding company. 51% shares of Holdings were owned by the taxpayers or their UK trusts, and 49% shares were owned by CIL, which was a BVI company. The shares in CIL were owned by offshore trusts created by the taxpayers. CIL wished to sell its shares in Holdings. In 1996, changes were made to $13 of the Taxation of Capital Gains Tax Act 1992 (“TCGA 1992”) with the effect that any gain realised by CIL on the sale of its shares in Holdings would have been attributable to the taxpayers. To avoid such an outcome, the following structuring was devised:
(a) On 18.07.1996, CIL purchased from ABN AMRO group, all the shares in a dormant Dutch incorporated company Eulalia.
(b) ABN AMRO Trust Company, a subsidiary of ABN AMRO group was the sole managing director of Eulalia.
(c) On 23.07.1996, CIL disposed of its shareholding in Holdings to Eulalia for £23.7 million plus, in the event of a sale within 3 years in excess of that amount, 95% of such excess.
(d) On 21.10.1996, Eulalia sold its shares in Holdings toBirthdays Group Limited for £30.7 million. The other shareholders (both in Holdings and the minority shareholders in Greetings) also sold their shares simultaneously.
The above steps, as it was intended, would avoid capital gains tax under the TCGA 1992 because Eulalia was not a UK resident and was effectively managed by the ABN AMRO group’s office in Holland, and as such Eulalia was a resident in the Netherlands under the UK- Netherlands double tax avoidance treaty. But the revenue authority did not accept that Eulalia was not resident in the UK. The case, therefore, revolved around whether or not Eulalia was a UK resident. The Special Commissioners agreed with the revenue authority and held that Eulalia was resident in the UK. The Special Commissioners observed that there was no evidence that any consideration was given by ABN AMRO Trust Company (Eulalia’s managing director) of the basis on which the price of £23.7 million was fixed to purchase the shares in Holdings from CIL. The Special Commissioners also observed that there was no record of any explanation having been provided by Price Waterhouse (Eulalia’s adviser) who had produced the draft agreement containing that figure or of any advice being requested or given. On appeal to the High Court by the taxpayer, Park J allowed the appeal. Park J was satisfied that, on the facts, ABN AMRO Trust Company (Eulalia’s managing director) genuinely resolved on 23.07.1996 to buy the shares in Holdings from CIL. The fact that the decision may have been taken upon the advice of Price Waterhouse in the UK did not alter the fact that the decision was indeed taken.
The revenue authority appealed to the Court of Appeal. While dismissing the appeal and upholding the High Court’s judgment,Chadwick LJ, for the Court of Appeal observed? as follows: “In my view the judge was correct in his analysis of the law. In seeking to determine where “central management and control” of a company incorporated outside the United Kingdom lies, it is essential to recognise the distinction between cases where management and control of the company is exercised through its own constitutional organs (the board of directors or the general meeting) and cases where the functions of those constitutional organs are “usurped” – in the sense that management and control is exercised independently of, or without regard to, those constitutional organs. And, in cases which fall within the former class, it is essential to recognise the distinction (in concept, at least) between the role of an “outsider” in proposing, advising and influencing the decisions which the constitutional organs take in fulfilling their functions and the role of an outsider who dictates the decisions which are to be taken. In that context an “outsider” is a person who is not, himself, a participant in the formal process (a board meeting or a general meeting) through which the relevant constitutional organ fulfils its function.”
On the issue of whether ABN AMRO Trust Company, the managing director of Eulalia, made no decision and let others dictate its actions, Chadwick LJ, observed? that the facts did not establish that ABN AMRO Trust Company, as managing director of Eulalia, made no decision and there was no evidence that Price Waterhouse (or anyone else) dictated the decision which ABN AMRO Trust Company was to make. On the observations of the Special Commissioners regarding the manner in which Eulalia made the decision to purchase the shares in Holdings from CIL, Chadwick LJ observeds that the Special Commissioners were wrong to treat the decisions (i.e. the decision to purchase the Holdings shares in July 1996 from CIL and the decision to sell those shares in October 1996) made by ABN AMRO Trust Company (the managing director of Eulalia), as an ineffective decision of a constitutional organ exercising management and control because they were reached without proper information or consideration.
Chadwick LJ held’ that a management decision does not cease to be a management decision because it might have been taken on fuller information or because it was taken in circumstances which might put the director at risk of an allegation of breach of duty and decisions taken in the management of a company, although ill- informed or ill-advised, still remain management decisions.
As a rule, the direction, management and control-that is the head, seat, and directing power of the company’s affairs-is situated at the place where the directors’ meetings are held and a company would be resident in Bangladesh if the directors’ meetings that manage and control the business are held here. A company may be resident in Bangladesh even though its entire trading operations are carried on abroad. If the management and control is situated in Bangladesh, it is immaterial where the actual business takes place.
The key element is the making of high-level decisions that set the company’s general policies, and determine the direction of its operations and the type of transactions it will enter.* But control and direction of a company is different from the day-to-day conduct and management of its activities and operations. The conduct of the company’s day-to-day activities and operations is not an act of management and control.36 Also, managing the company’s day-to-day activities and operations under the authority and supervision of higher level managers or controllers is not an act of management and control.
Majority shareholder having the power to appoint:
A majority shareholder having the power to appoint those who control and direct a company’s operations, does not, by itself mean that the majority shareholder controls and directs the company’s operations and activities. The meaning of “decision making” and the role of an “outsider” in the decision making process: The observation of Chadwick LJ in Wood v. Holden’® regarding an outsider’s involvement in the decision making process makes the test of management and control a fact intensive inquiry.’ A person or a group will be regarded as making a decision if he or they actively consider and decide to do something based on considerations that are in the best interests of the company.” An outsider who merely influences those with legal power to control and direct a company, even if he can and does exert strong influence, is not the relevant decision maker and does not exercise management and control of the company.
However, if an outsider is more than merely influential, and actually dictates or controls the decisions made by the directors, the outsider will be regarded as exercising management and control of the company! In this analysis, the directors’ knowledge of the business is relevant. If following the advice or instructions from outsiders would be seen as improper or inadvisable, then the directors’ lack of knowledge of the business and inability to determine that adhering to such advice or instructions is improper or inadvisable would suggest that they are not the real decision makers and are more likely rubberstamping or implementing decisions already made by others.* A person without any legal power or authority to control or direct a company may exercise management and control of that company.
Instances of management and control:
The following activities are examples of management and control-
(a) Setting investment and operational policiest including (i) deciding the policy regarding disposal of inventory or trading stock or the use and development of capital assets*; or (ii) deciding to buy and sell significant or substantial assets of the company,18
(b) Appointing company personnel and agents and granting them power or authority to carry on the company’s business (and possessing or exercising the power of revocation of such appointments and authorities).49
(c) Overseeing and controlling those appointed to carry out the day-to-day business of the company.
(d) Deciding on finance matters’ including determining the use of profits and the declaration of dividends.52
Instances which are not acts of management and control: Activities like (a) keeping the company’s share register, including registering transfers of shares, (b) keeping the company’s accounts, (c) paying the company’s dividend from a certain places; and (d) undertaking the minimum activities that are necessary to maintain the company’s incorporation or registrations are not regarded as acts of management and control.
Treaty treatment of “management and control” test:
It is worthwhile to explore the treaty stipulation regarding the “management and control” test. The OECD Commentaries on Articles of Model Tax Convention, deal with the issue of “control and management” test in the following words” :
“The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made.”
The above explanation should be contrasted with the treatment accorded by the US Treasury Department in explaining the “management and control” test. It runs as followss?.
“A company… may claim treaty benefits if its primary place of management and control is in its country of residence. This test should be distinguished from the “place of effective management” test which is used in the OECD Model and by many other countries to establish residence. In some cases, the place of effective management test has been interpreted to mean the place where the board of directors meets. By contract, the primary place of management and control test looks to where day-to-day responsibility for the management of the company (and its subsidiaries) is exercised.
The company’s primary place of management and control will be located in the State in which the company is a resident only if the executive officers and senior management employees exercise day-to-day responsibility for more of the strategic, financial and operational policy decision making for the company (including direct and indirect subsidiaries) in that State than in the other State or any third state, and the staff that support the management in making those decisions are also based in that State.
Thus, the test looks to the overall activities of the relevant persons to see where those activities are conducted. In most cases, it will be a necessary, but not a sufficient, condition that the headquarters of the company (that is, the place at which the CEO and other top executives normally are based) be located in the Contracting State of which the company is a resident.
To apply the test, it will be necessary to determine which persons are to be considered “executive officers and senior management employees.” In most cases, it will not be necessary to look beyond the executives who are members of the Board of Directors (the “inside directors”) in the case of a U.S. company or the members of the ] in the case of the other Contracting State, That will not always be the case, however; in fact, the relevant persons may be employees of subsidiaries if those persons make the strategic, financial and operational policy decisions. Moreover, it would be necessary to take into account any special voting arrangements
that result in certain board members making certain decisions without the participation of other board members.”
The US Treasury Department’s explanation of the “management and control” test goes to the opposite direction of the test as espoused in the OECD explanation. It looks more towards the day-to-day responsibility of the executive officers and senior management employees in conducting strategic, financial and operational policy decision making for the company rather than where the board of directors of the company meets.
In a sense, the US Treasury Department’s explanation indicates a tacit distinction between whether the company is being operated by its constitutional organs (i.e. the board of directors or shareholders meeting) or whether the company’s management and control is exercised independently of, or without regard to, those constitutional organs (for example, the decisions of the employee-CEO without having regard to the board of directors or shareholders meeting). This distinction is akin to what Chadwick L] observed in Wood v. Holden® while distinguishing between management and control exercised by an “outsider” (i.e. one not a part of the company’s constitutional organs) and an “insider” (e.g. members of the board of directors).
Expansion of residency element to other vehicles and entities
The Finance Act 2019 introduced additional categories of entities to the concept of residence under $2(55)(d) which capture a trust, a fund or an entity, the control and management of whose affairs is situated wholly in Bangladesh in an income year. The word “fund” is not defined in the Ordinance. It could be a fund as described in the Bangladesh Securities and Exchange Commission (Alternative Investment) Rules, 20156° or a mutual fund. The principles applicable to a company under S2(55) with respect to the control and management test equally apply to other entities and persons, including a trust, or other entities like a special purpose vehicle (SPV) or subsidiary.
