ESOP in Bangladesh 2026: Employee Share Plans, Tax, Foreign Exchange and Company Law

ESOP in Bangladesh: the legal position in 2026

An ESOP in Bangladesh is possible, but it is not plug-and-play. There is no dedicated employee share option statute, the Companies Act 1994 was written for a world of founders and passive investors, the Bangladesh Securities and Exchange Commission's rules deal with employees mainly through IPO quotas, and foreign exchange law treats a resident employee's acquisition of foreign shares as a capital account transaction. What does exist, since 2023, is a clear tax rule: the Income Tax Act 2023 taxes income from employee share schemes as employment income in the year the shares are received.

This guide explains how employee equity can be structured lawfully in a Bangladeshi private or listed company, the company law limits on issuing and buying back shares, the BSEC position, how foreign parent plans work for employees in Bangladesh, the foreign exchange permissions and reporting involved, the tax treatment for employees and employers, phantom and cash-settled alternatives, vesting and leaver terms, and how employee equity interacts with labour law. It ends with a practical design sequence and the mistakes we see most often.

Summary: Bangladeshi law permits employee share plans through ordinary share issues under the articles, trust structures and cash-settled awards, but it imposes real constraints: companies cannot freely buy back their own shares, public companies cannot finance share purchases, issuing shares to non-resident or expatriate holders engages foreign exchange law, and resident employees need Bangladesh Bank permission to pay for foreign shares. Since the Income Tax Act 2023, share scheme income is taxed as employment income on receipt, at fair market value less cost.

Key point: The tax point is the receipt of shares, not the grant or vesting of an option. Under section 34 of the Income Tax Act 2023, the employee is taxed on the fair market value of the shares on the date of receipt minus the price paid for the shares and for the option, and a sale of the option itself is also taxed as employment income.

At a glance

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Table of Contents

ESOP in Bangladesh: the legal position in 2026

Employee stock option plans are contracts layered on top of share capital rules. A company promises an employee the right to acquire shares in future, usually at a fixed price, once conditions such as time served or performance targets are met. The legal questions are therefore always the same: can the company create and issue the shares when the time comes, can it or someone else take them back when the employee leaves, how is the benefit taxed, and does any regulator need to approve the movement of shares or money.

In Bangladesh each of those questions is answered by a different body of law. The Companies Act 1994 governs capital, allotment, pre-emption and buy-backs; the articles and the plan rules govern eligibility, vesting and leaver terms; the Income Tax Act 2023 governs tax; the Foreign Exchange Regulation Act 1947 and Bangladesh Bank's guidelines govern any cross-border element; and for listed companies the BSEC's securities rules add their own layer. A well-designed ESOP in Bangladesh treats all five together rather than importing a foreign template and hoping it fits.

Why the 2023 tax law matters

The Income Tax Act 2023 gives plan sponsors a statutory anchor. Section 32 lists "income earned from employee share schemes" as part of income from employment, and section 34 defines an employee share scheme and sets the computation.[3] The National Board of Revenue published the authentic English text of the Act in October 2025.[3] Plans can now be designed around a known tax point instead of an argument about how a share award should be characterised.

Company law: creating the shares

A private limited company issues shares to employees in the same way as to anyone else: within its authorised capital, by board allotment, and with a return of allotment filed with the RJSC within sixty days.[1] If the authorised capital is not large enough to accommodate the pool, it must first be increased by the company in general meeting, with notice of the increase filed with the Registrar within fifteen days of the resolution.[1] Many ESOP problems start here: the company grants options over shares that do not yet exist within its authorised capital, and the increase is never passed.

Pre-emption under section 155

Where directors increase subscribed capital by issuing further shares, section 155(1) requires the new shares to be offered first to existing members in proportion to their paid-up holdings, by notice giving at least fifteen days to accept, after which the directors may dispose of declined shares as they consider most beneficial.[1] Section 155(2) then allows the further shares to be offered to any person, whether or not existing members, in any manner; commentators note that, unlike the Indian model it resembles, the Bangladeshi provision does not expressly require a special resolution for this.[2]

In practice the articles and the shareholders' agreement matter more than the statute. Investor documents nearly always contain contractual pre-emption rights and a consent right over new issues, with an express carve-out for an approved ESOP pool. That carve-out should define the pool size, the instruments covered and who approves grants, so that each allotment to an employee does not need a fresh round of shareholder consents.

Price, consideration and the RJSC

Shares issued on exercise should be paid for in cash at or above nominal value. Shares issued for services rather than cash are recorded differently in the annual return, which distinguishes shares issued for cash from shares issued otherwise than in cash.[1] Our practical advice is to avoid "free" shares for services in an ESOP in Bangladesh: set an exercise price at least equal to nominal value, and if the economic intention is a free award, deliver it through a bonus paid in cash and applied to the subscription, so that the RJSC record, the tax computation and the bank trail all match.

The buy-back problem and leaver mechanics

Section 58(1) provides that no company limited by shares may buy its own shares, or those of a public company of which it is a subsidiary, unless the consequent reduction of capital is effected and sanctioned under sections 59 to 70.[1] A reduction requires a special resolution, authority in the articles and confirmation by the court after creditors have had the opportunity to object.[1] That process is far too heavy for routine leaver repurchases.

The consequence for an ESOP in Bangladesh is that the company itself is rarely the buyer when an employee leaves. Leaver provisions must instead oblige the departing employee to transfer shares to someone else: the founders, existing shareholders pro rata, an incoming employee or, most cleanly, an employee benefit trust that holds a warehouse of shares for future grants. Private company articles already restrict transfers by statute, which helps the company control where the shares go.[1]

Financial assistance

Section 58(2) prohibits a company limited by shares, other than a private company, from giving financial assistance, whether by loan, guarantee, security or otherwise, for the purchase of its own shares.[1] A private company can therefore lend to an employee trust or to employees to fund an exercise or a leaver purchase, while a public company cannot. The wording of the exception as it relates to subsidiaries of public companies should be checked before a group relies on it, and the funding should be documented on arm's length terms.

The trust route

The Income Tax Act 2023 expressly contemplates schemes under which a company issues shares to the trustee of a trust that then passes them to employees of the company or its associates in accordance with the trust deed.[3] A trust can subscribe for a pool up front, hold shares bought back from leavers, and deliver shares on exercise without a fresh allotment each time. The trust deed should deal with voting of unallocated shares, dividends, funding, the trustee's powers to buy and sell, and what happens on an exit or listing.

Designing the plan: vesting, exercise and leavers

The plan rules are a contract between the company, or the trust, and the employee. Nothing in Bangladeshi law prescribes vesting periods or leaver categories, so the drafting carries the weight. A typical structure for an ESOP in Bangladesh grants options over a fixed number of shares at an exercise price set by reference to a valuation, vesting over four years with a one-year cliff, exercisable within a set period after vesting and in any event on an exit.

Good and bad leavers

Leaver terms decide whether the plan is fair and whether it survives a dispute. Good leavers, typically those who leave through death, disability, redundancy or retirement, usually keep vested options and sometimes a pro rata portion of unvested ones. Bad leavers, typically those dismissed for misconduct or who breach restrictive covenants, usually lose all options and may be required to sell any shares already acquired at the lower of cost and market value.

Two cautions apply. First, compulsory transfer at an artificially low price looks like a penalty if it is not clearly linked to a legitimate interest, so tie it to defined misconduct and keep the definitions narrow. Second, the leaver trigger should reference the employment terms the employer can actually prove, because a contested dismissal under Bangladeshi labour law can turn a bad leaver into a good leaver after the event. Our guide to terminating employees in Bangladesh explains the procedural requirements.

Exit and liquidity

Private company options are worth little without a route to cash. Plans should contain drag-along and tag-along provisions aligned with the shareholders' agreement, automatic exercise or cash cancellation on a sale, and rules for a listing, including how the BSEC's lock-ins will apply to employee shares. Founders should also decide in advance whether the pool dilutes all shareholders or only the founders, because investors will ask.

Tax on ESOP in Bangladesh: employees and employers

Under section 34 of the Income Tax Act 2023, when shares are received under an employee share scheme, the employee adds to employment income, in the year of receipt, the fair market value of the shares on the date of receipt minus the cost of acquisition. Cost includes both the price paid for the shares and any price paid for the right or opportunity to acquire them. Where the employee sells or transfers the option itself, the sale price minus the price paid for the option is employment income.[3]

Three practical consequences follow. Grant and vesting are not taxable events under section 34, so the tax falls on exercise, when shares are received. The employee may owe tax on a gain in unlisted shares that cannot yet be sold, so plans should allow cashless or sell-to-cover exercise on an exit, or be timed to exits. And because fair market value drives the tax, private companies need a defensible valuation at each exercise date; the Act does not prescribe a valuation method for unlisted shares.

Withholding and employer deductions

An employer paying income from employment must deduct tax at source at the average rate applicable to the employee's estimated income from employment.[3] Where the benefit is non-cash, the employer will usually need to recover the tax from cash salary or require the employee to fund it before shares are delivered, and the plan rules should say so. The Act also disallows, as a business deduction, perquisites paid to an employee in excess of Tk 10 lakh, and defines perquisites to include incentive bonuses.[3] That limit is a live issue for cash-settled and phantom plans, discussed below.

Later sale of the shares

Once shares are acquired, any later gain on sale is a capital gain, computed from the acquisition cost. For listed shares, PwC's July 2026 summary records an exemption for gains on listed shares up to Tk 50 lakh that does not apply to sponsor, director and placement shares, and different treatment depending on holding period.[4] Employees who are also directors of a listed issuer should take specific advice before selling. Our guide to income tax rates in Bangladesh sets out the wider rate structure.

Foreign parent plans for employees in Bangladesh

Many employees in Bangladesh are offered awards under the global plan of a foreign parent. Tax applies in the same way, because section 34 covers shares issued to employees of a company's associate companies.[3] The harder issue is foreign exchange. The Foreign Exchange Regulation Act 1947, as reproduced in Bangladesh Bank's guidelines, defines a capital account transaction to include the creation or transfer of securities, allows residents to buy foreign exchange freely only for current account transactions, and leaves it to Bangladesh Bank to specify permissible capital account transactions.[5]

Paying the exercise price

Remitting money from Bangladesh to pay an exercise price for foreign shares is therefore a capital account transaction that needs Bangladesh Bank's permission. Global plans are often designed around this by offering cashless exercise, under which the broker sells enough shares to cover the price and taxes, or by settling awards that vest as free shares or restricted stock units with no payment from Bangladesh. Those structures avoid the outward remittance but not the remaining rules on holding foreign securities.

Holding and reporting foreign shares

Bangladesh Bank's guidelines permit residents to hold foreign securities only if they were acquired in a manner not involving a breach of the foreign exchange regulations, and require prior permission where necessary to sell or transfer them. Residents who become owners of securities paying principal, interest or dividends in foreign currency must submit a return to Bangladesh Bank within one month of acquisition; foreign nationals temporarily resident in Bangladesh, dual nationals and persons usually residing abroad are not required to submit it.[5] Sale proceeds and dividends belong to a resident and should be brought back through the banking channel.

The practical result is that a foreign parent plan should have a Bangladesh country supplement covering the exercise method, the reporting obligation, repatriation of proceeds and tax withholding. Bangladeshi nationals are the participants most exposed, because expatriates on assignment are generally outside the reporting requirement. TRW's foreign exchange regulation practice and our guide to foreign exchange regulations in Bangladesh cover permissions in more depth.

Issuing local shares to expatriate employees

The mirror-image problem arises when a Bangladeshi company wants to grant shares to its own expatriate staff. Section 13 of the 1947 Act prohibits issuing securities registered in Bangladesh to persons resident outside Bangladesh, and transfers to them, without Bangladesh Bank's general or special permission, and for this purpose a foreign national resident in Bangladesh counts as a non-resident.[5] Bangladesh Bank has given general permission for issuing and transferring shares to non-residents against foreign investment in freely convertible foreign exchange or capital machinery.[5]

Shares issued to an expatriate employee for an exercise price paid from local salary, or for no payment at all, do not obviously fall within that general permission. Before an ESOP in Bangladesh extends to foreign nationals, the company should either have the exercise price remitted from abroad through the banking channel, so that the issue sits within the general permission, or obtain specific permission. Later repatriation of sale proceeds and dividends will depend on the original issue having been made properly. Foreign nationals resident in Bangladesh may also remit up to 80 per cent of their net income abroad under Bangladesh Bank guidelines, which affects how cash-settled awards are paid out.[13]

Startups with foreign holding companies

Venture-backed startups increasingly hold their Bangladeshi operating company through a holding company in Singapore, Delaware or elsewhere, with the option pool at the holding company level. Bangladesh Bank's March 2025 circular allowed startups to remit up to USD 10,000 to set up one company abroad, with individual citizens able to do the same, and permitted resident companies to invest abroad through share swaps at ratios consistent with global practice.[6] [10] Bangladesh Bank's July 2025 startup directives continued that approach, including a general permission for small foreign entity set-ups and share-for-share swaps that let founders consolidate the cap table offshore.[7]

Those reforms make an offshore structure easier to establish but do not by themselves authorise employees in Bangladesh to pay for holding company shares. Every Bangladeshi resident employee exercising an option in the offshore holding company is acquiring a foreign security, so the exercise method, reporting and repatriation analysis above applies. A startup ESOP in Bangladesh with an offshore pool should therefore favour cashless exercise or exercise only on exit, and the Bangladesh supplement to the plan should address Bangladesh Bank reporting from the outset. See our guide to venture capital law in Bangladesh.

Listed companies and the BSEC

For listed companies, the BSEC (Public Offer of Equity Securities) Rules 2025, notified in December 2025 and replacing the Public Issue Rules 2015, reserve part of each IPO for the issuer's permanent employees: 5 per cent under the fixed price method and 3 per cent under book building. Employees qualify after at least six months of service following confirmation, may not subscribe more than Tk 10 lakh, and their shares are locked in for one year. No subscription may be collected or shares allotted to employees by private offer before the Commission consents to the public offer.[8]

The 2025 Rules do not create an option framework. Their only reference to options is a prospectus disclosure item for options granted to directors, officers and employees.[8] Earlier, under the 2015 regime, the Commission had allowed some issuers to offer up to 15 per cent of their primary shares to employees, with a two-year lock-in from listing, and Grameenphone and Robi Axiata let employees buy shares before their IPOs.[9] A pre-IPO company with an ESOP in Bangladesh should therefore plan how outstanding options will be disclosed, whether they will be exercised before listing and how the Commission's lock-ins will apply, well before it appoints an issue manager. Our guide to the IPO process in Bangladesh explains the wider sequence.

Phantom shares and cash-settled alternatives

Where the cap table, foreign exchange or valuation issues make real equity impractical, companies often use phantom shares or share appreciation rights. These are contractual promises to pay a cash amount linked to the value of a notional number of shares, or to its growth above a base price, on vesting or on an exit. No shares are issued, no RJSC filing or pre-emption waiver is required and no foreign exchange permission is needed for local employees.

The trade-offs are cost and tax. Cash payments are taxed as employment income when paid, the employer must withhold, and if the payment counts as a perquisite, the portion above Tk 10 lakh per employee is not deductible for the employer.[3] Phantom plans also give employees no shareholder rights, which can matter for senior hires who expect genuine ownership. For many Bangladeshi private companies a hybrid works best: real options for a small senior group, and phantom units for the wider workforce.

Labour law interaction

The Bangladesh Labour Act 2006 defines wages broadly as all remuneration expressed in money or capable of being so expressed that is payable to a worker in respect of employment, with limited exclusions, and defines a worker to exclude persons employed mainly in managerial, administrative or supervisory capacities.[11] Most option holders are senior staff outside the definition of worker, but where awards extend to workers, the plan should state clearly that awards are discretionary, separate from wages and outside the contract of employment, to reduce the risk of them being counted in wage-based entitlements.

Labour law is also changing. The Bangladesh Labour (Amendment) Ordinance 2025, gazetted on 17 November 2025, revised union formation thresholds and expanded the definition of worker to include domestic workers and those in fisheries, livestock and horticulture.[12] Employers should review plan documentation alongside employment contracts whenever these rules change. TRW's guide to employee benefits in Bangladesh covers related entitlements.

Setting up an ESOP in Bangladesh step by step

The sequence below reflects how a lawful, workable plan is built.

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Plans built in this order rarely need rescuing later. Plans built in reverse, with grant letters first and capital, tax and permissions afterwards, usually do.

Comparing the main structures

The table compares the routes most commonly used. On a phone, scroll it sideways.

Common mistakes to avoid

• Granting options over shares that cannot be issued. Increase authorised capital and secure pre-emption waivers first.
• Promising a company buy-back. Section 58 makes that impractical; use founders, a trust or other shareholders as buyers.
• Ignoring the tax on exercise. Employees can face tax on illiquid shares unless exercise is timed or cashless.
• Exporting a foreign plan unchanged. Bangladesh residents need an exercise method and reporting process that fit foreign exchange rules.
• Issuing shares to expatriates without checking section 13. The issue should sit within a general or specific Bangladesh Bank permission.
• Vague leaver definitions. Tie bad leaver status to provable events and align it with employment terms.

An ESOP in Bangladesh can be a genuine retention and alignment tool if it is built around the local rules rather than in spite of them. TRW's compensation, benefits and incentive plans practice designs and documents plans, and works with our tax and foreign exchange teams on permissions and withholding. To discuss a plan, contact TRW.

Frequently asked questions

Is an ESOP legal in Bangladesh?

Yes. There is no dedicated ESOP statute, but companies can issue shares to employees under the Companies Act and their articles, use an employee trust or offer cash-settled awards, and the Income Tax Act 2023 expressly recognises employee share schemes.[3]

When is an employee taxed on ESOP shares?

In the year the shares are received, on their fair market value at receipt minus the price paid for the shares and for the option.[3]

Is the grant of an option taxable?

Section 34 taxes the receipt of shares and the sale of the option, not the grant itself.[3]

Can a Bangladeshi company buy back an employee's shares?

Only through a capital reduction approved by special resolution and confirmed by the court, so leaver shares are normally bought by founders, other shareholders or an employee trust.[1]

Can a company lend employees money to buy its shares?

A private company can; a public company is prohibited from giving financial assistance for the purchase of its own shares, subject to an exception for lending in the ordinary course of a lending business.[1]

Do employees need Bangladesh Bank approval to join a foreign parent's plan?

Paying an exercise price abroad is a capital account transaction requiring permission. Holdings of foreign securities must have been acquired lawfully and reported to Bangladesh Bank within one month.[5]

Can expatriate employees receive shares in a Bangladeshi company?

Yes, but issuing shares to a foreign national resident in Bangladesh is treated as an issue to a non-resident and needs to fall within Bangladesh Bank's general permission or a specific permission.[5]

Do BSEC rules provide for employee stock options?

Not as such. The 2025 Public Offer Rules give permanent employees an IPO quota with a Tk 10 lakh cap and one-year lock-in, and require disclosure of options granted to directors, officers and employees.[8]

Are phantom shares a good alternative?

Often, especially where foreign exchange or cap table issues make real shares impractical. Payments are taxed as employment income, and perquisites above Tk 10 lakh per employee are not deductible for the employer.[3]

Do ESOP awards count as wages under labour law?

The Labour Act defines wages broadly, but most option holders are managerial staff outside the definition of worker. Plans for workers should state that awards are discretionary and separate from wages.[11]