26.5- United States Tax Treaty with Bangladesh

Information provided is for general understanding, tax code is complex and the information provided may not include all relevant information to the taxpayer's specific situation. We at Z-tax & Accounting specialize in International Taxation and Tax Treaties applicable to the taxpayer's specific situation. Contact us today, and we will gladly help with your Tax situation and applicable Tax treaty benefits.  

Following is a summary of the Convention between the United States of America and the People's Republic of Bangladesh for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (signed September 26, 2004) — key provisions and practical points. Note: This is only a summary and not a substitute for reading the full treaty or professional advice.

Key Facts

• The treaty between the U.S. and Bangladesh was signed on September 26, 2004.
  
  

• It entered into force on August 7, 2006 (after exchange of ratification instruments by both countries).
  
  

• Withholding-tax provisions became effective for amounts paid or credited on or after October 1, 2006; the rest of the treaty applies for taxable periods beginning on or after January 1, 2007.
  
  

• Purpose: To avoid double taxation of income earned by residents of one country from sources in the other country and to prevent tax evasion and discriminatory tax treatment.
  
  

Major Provisions of the Treaty

Here are some of the important features:

Resident vs. Source Country Taxing Rights

The treaty specifies which country has the primary right to tax different types of income (e.g., business profits, dividends, interest, royalties).

Withholding-tax Rates

The treaty sets upper limits on withholding taxes that a “source country” may impose on residents of the other country. For example:

• Dividends: A general maximum of 15 %, and for certain direct investment dividends a 10 % rate applies if a minimum ownership threshold is met.

• Interest: Generally a max of 10 %; for certain financial institutions or trade credits, a lower 5 % rate may apply.

Business Profits / Permanent Establishment

Profits of an enterprise of one country may only be taxed in the other country if the enterprise has a “permanent establishment” in that other country.

Relief from Double Taxation

Each country agrees to provide relief (such as foreign tax credits) to its residents so income taxed in the other country is not taxed twice.

Limitation on Benefits (“LOB”)

The treaty includes an article to prevent abuse by residents of third countries (i.e., treaty-shopping) seeking benefits they are not entitled to.

Exchange of Information & Administrative Cooperation

The treaty includes provisions under which the two tax authorities can exchange information and assist each other to prevent tax evasion.

Special Provisions for Students & Trainees

For example, income of a resident of Bangladesh for teaching or research in the U.S., or a full-time student from Bangladesh in the U.S., may under certain conditions be exempt from U.S. tax.

Practical Implications

• If you are a resident of Bangladesh earning U.S.-source income (or vice-versa), this treaty may reduce the rate of U.S. (or Bangladesh) withholding tax, or may exempt certain income entirely — provided you satisfy all conditions of the treaty.
  
  

• Because the treaty limits U.S. withholding rates and assigns taxing rights, it may be beneficial for cross-border trade/investment between U.S. persons and Bangladesh persons.
  
  

• The treaty helps provide tax certainty and a framework for avoiding double taxation, which can encourage investments between the two countries.
  
  

• However, not all income may be covered, and treaty benefits usually require you to meet specific criteria (residency, fixed base, permanent establishment, etc.).
  
  

• For U.S. persons, the IRS Publication 901 lists how the treaty applies to residents of Bangladesh.
  
  

Important Notes & Limitations

• Simply being from Bangladesh (or residing there) does not automatically entitle you to the benefits of the treaty — you still must meet the relevant articles and conditions (for example, ownership thresholds, residency requirements, etc.).
  
  

• The treaty does not eliminate all tax — it limits or reduces taxation in some cases, but other domestic tax laws still apply.
  
  

• Always check both countries’ domestic law as well as the treaty text to see how it applies to your specific situation.
  
  

• The treaty’s “saving clause” means the U.S. (and Bangladesh) retains the right to tax its residents as if the treaty had not come into effect, in certain circumstances