Funding a Bangladesh Subsidiary in 2026: Equity, Parent Loans, Interest Caps and Tax

Funding a Bangladesh subsidiary: what changed in 2026

Funding a Bangladesh subsidiary is a legal decision before it is a treasury one. The same dollars can arrive as share capital, as a loan from the parent, or be replaced by a Taka facility from a local bank, and each label fixes what the money may be used for, which regulator must be involved, how it is taxed and how, if ever, it can leave the country again. In 2026 the options widened. Bangladesh Bank gave fully foreign-owned industrial companies a general permission to borrow from their parents at up to 3 per cent a year, reissued its master circular on loans and external borrowing, and BIDA was folded into the new Invest Bangladesh Authority.

This guide is for group CFOs, treasury teams and in-house counsel. It compares equity, parent loans and local borrowing, sets out the caps, ratios and tax rules for each, and explains exits and loan-to-equity conversion. The approval process itself is covered in our guide to foreign loan approval in Bangladesh.

Summary: Equity remains the default capital for a Bangladesh subsidiary: it needs no Bangladesh Bank approval, carries no repayment schedule and supports local borrowing, but it can only come back as dividends, a share sale, a capital reduction or liquidation proceeds. Since July 2026 a fully foreign-owned industrial company can also borrow from its parent without prior approval if it stays within FEID Circular No. 03: capital expenditure only for loans over a year, a 3 per cent all-in cost cap, an 80:20 debt-equity limit for cost-bearing debt, and repayment through the nominated AD bank. Anything outside those terms goes to the Invest Bangladesh Authority or Bangladesh Bank.

Key point: The cheapest instrument on paper is not always the cheapest in practice. A 3 per cent parent loan is deductible and withheld at 10 per cent, while dividends are withheld at 20 per cent, but the loan must fit a narrow regulatory box and be repaid on a cash-flow-matched schedule. Choose the instrument for the use of funds and the exit, then price it.

At a glance

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Table of Contents

The legal map for funding a Bangladesh subsidiary

Every rule here traces back to the Foreign Exchange Regulation Act 1947: loans and guarantees involving non-residents are regulated under sections 3, 4, 5, 18 and 20, and Bangladesh Bank issues its instructions to authorised dealer (AD) banks under section 20(3).[2] Section 18(2) is the provision that matters most for a subsidiary: no resident may lend to a company controlled directly or indirectly by non-residents without Bangladesh Bank approval, which the central bank then grants generally for specified kinds of facility.[2]

Who regulates which instrument

Funding a Bangladesh subsidiary engages four sets of rules at once. Bangladesh Bank's Foreign Exchange Investment Department oversees inward equity, share transfers, dividends and the parent-loan permission. The Invest Bangladesh Authority, which began operating on 23 August 2026 as the merged successor to BIDA, the Bangladesh Economic Zones Authority and the PPP Authority, gives prior authorisation for most other external borrowing by private sector industrial enterprises.[8] [2] The Companies Act 1994 governs share capital, allotments, charges and capital reduction, and the Income Tax Act 2023, as amended by the Finance Act 2026, decides how each return is taxed. Our overview of the Invest Bangladesh Act 2026 explains the institutional change.

Classify the subsidiary first

Bangladesh Bank treats a locally incorporated company as foreign controlled if foreign nationals own 50 per cent or more of its shares, or make up 50 per cent or more of its board; where holdings or board seats are equal, the company is foreign controlled if its chairman is a foreign national.[2] "Fully foreign-owned" is a narrower category, and the parent-loan permission for terms over one year is confined to it.[1]

Three further questions complete the classification. Is the business industrial, meaning manufacturing or services, or trading? Is it inside a specialised zone such as an export processing zone, economic zone or hi-tech park, and if so is it a Type A (wholly foreign), Type B (joint venture) or Type C (local) enterprise? And is it registered with the Invest Bangladesh Authority? The answers decide which permissions apply and who approves anything outside them.[1] [3]

Equity: the default capital for a new subsidiary

Equity is the instrument that asks the fewest regulatory questions on the way in. No prior Bangladesh Bank permission is needed to issue shares to a foreign investor against foreign investment. Shares may be issued against remittances received through the formal banking channel or against imported capital machinery paid for abroad by the investor, but the remittance must arrive, and the machinery must clear customs, before the shares are issued.[5]

How equity comes in

Before incorporation, a foreign investor can open a temporary Non-Resident Taka Account with an AD bank in the name of the proposed company to park equity and meet preliminary expenses, again without prior permission; if the venture is never formed, the balance can be remitted back.[5] After shares are issued and the filings with the Registrar of Joint Stock Companies are complete, the AD must inform the Foreign Exchange Investment Department within 14 days under Chapter 9, paragraph 2(A) of the Guidelines for Foreign Exchange Transactions.[5]

The encashment certificate and the AD's report are the evidence on which every later dividend, share sale and liquidation remittance will be tested. Bangladesh Bank's 2026 share transfer circular allows a foreign investor to transfer shares only up to the value of the foreign funds the company actually received, calculated in Taka at the exchange rate on the date of receipt.[6] An undocumented capital injection is capital that may not come back.

Further capital and existing shareholders

Increasing authorised capital is an alteration of share capital that must be notified to the Registrar, and a further issue of shares is subject to the Companies Act rules on further issues of capital and to any pre-emption rights in the articles.[13] In a joint venture, a parent that funds by equity while the local partner does not will dilute that partner, so the shareholders' agreement should settle the funding method before the first cash call.

What equity costs on the way out

Equity's weakness is the exit. A dividend needs distributable profits, a board resolution and an auditor-certified application to the company's nominated AD supported by audited accounts, proof that tax has been deducted and an auditor's certificate that the tax provision covers all past and current liabilities.[7] ADs must also check that earlier losses have been absorbed before the profit is treated as divisible.[7] Withholding on dividends paid to a non-resident company is 20 per cent unless a treaty reduces it.[11] Returning the original capital means a share sale at a regulated valuation, a court-confirmed reduction of share capital under sections 59 to 64 of the Companies Act, or liquidation.[6] [13]

Parent-company loans under FEID Circular No. 03

The single most important 2026 change for funding a Bangladesh subsidiary is FEID Circular No. 03 of 15 July 2026. It gives a general permission for external borrowing from parent companies, associates and shareholders by industrial enterprises inside and outside the specialised zones, so a loan that fits its terms needs no case-by-case approval.[1] It was reported as easing borrowing for wholly foreign-owned manufacturers and service companies.[14] The detailed mechanics are in our foreign loan approval guide; the funding-relevant terms are these.

Short-term loans of less than a year

Outside the specialised zones, fully foreign-owned manufacturing and service companies, but not trading businesses, may take two kinds of short-term parent loan for bona fide business purposes. The first is interest-free, for general working capital other than input procurement, with no prior approval needed to draw or repay it. The second is cost-bearing, may fund inputs, costs no more than 3 per cent a year all-in, is repaid in a bullet at maturity, can be rolled over to an aggregate of three years and can never be converted into medium- or long-term debt.[1] Both short-term facilities are also open to foreign-controlled, not only fully foreign-owned, industrial companies, and ADs report them to Bangladesh Bank within a week.[1]

Medium- and long-term loans for capital expenditure

Loans of one to five years, and of more than five years, must be used for capital expenditure: capital machinery and goods, legitimate services and civil construction. Medium-term cost-free loans may reach USD 50 million and cost-bearing ones USD 5 million, with bullet repayment allowed up to USD 5 million; a medium-term loan, with accrued cost, may later be turned into long-term borrowing. Long-term loans should preferably be cost-free, any cost is capped at 3 per cent, and bullet repayment is not allowed.[1]

General conditions apply to both. The borrower needs a clean record on external obligations; cost-bearing loans must stay within an 80:20 debt-equity ratio, though cost-free loans have no ratio; documentation follows Annexure-A to Appendix-3 of the loans circular before disbursement; proceeds go to a foreign currency account and repayments come from it; instalments may not exceed USD 5 million and must match projected cash flows; and the AD reports disbursement within 14 days and any amendment within 7 days.[1]

Subsidiaries that fall outside the permission

A joint venture with a Bangladeshi shareholder, a trading company, a cost-bearing medium-term loan above USD 5 million, or any loan priced above 3 per cent falls outside the general permission, and the circular sends such applications to the appropriate authority.[1] For a private sector industrial borrower that is generally the Invest Bangladesh Authority, which must authorise borrowing from abroad in advance.[2] Since FEPD-1 Circular No. 35 of 14 September 2026, specialised-zone enterprises registered with the Authority, including former Economic Zone companies, also go to its Scrutiny Committee, and only zone enterprises not registered with it still need Bangladesh Bank approval.[3]

Two features of that route matter for a funding plan. The 1998 procedure the Authority still applies gives priority to medium- and long-term borrowing for new or expanded capacity, discourages shorter-term proposals unless they bridge to an approved longer loan, and expects pricing to be reasonable against international rates.[2] The investment authority has also recommended that a company's debt-to-equity ratio should not exceed 70:30 for foreign loans.[12]

Interest caps and the real cost of shareholder debt

No single interest cap governs every loan to a Bangladeshi company. The ceiling depends on the facility, and the most common error in funding a Bangladesh subsidiary is to apply one regime's figure to another's loan.

• Parent and shareholder loans under the general permission: a flat 3 per cent a year all-in for any cost-bearing facility, short, medium or long term.[1]
• Short-term import trade finance in foreign currency: an all-in ceiling of 3 percentage points over the benchmark for the currency, such as SOFR or Euribor, under FEPD-1 Circular No. 10 of 11 May 2026.[4]
• Term loans approved by the Invest Bangladesh Authority: a reasonableness test against international rates for the currency and tenor rather than a published number.[2]

Why a 3 per cent cap changes the calculation

A parent that would charge a third-party borrower SOFR plus a margin cannot do so under the general permission, because 3 per cent is an absolute figure, not a spread. When benchmark rates are near that level, a cost-bearing parent loan is effectively subsidised. The cap is measured all-in, so arrangement fees and any withholding tax gross-up count towards it; a loan at 2.8 per cent with a gross-up clause may already be over the line.[1]

Interest-free loans are not free

An interest-free parent loan carries no withholding, but it still needs a written agreement, a repayment schedule and AD reporting. It also gives the parent none of the tax deduction that makes debt attractive. For a loss-making start-up that cannot use deductions yet, a cost-free medium-term loan of up to USD 50 million with no debt-equity test is a flexible way to fund capital expenditure.[1]

Tax: deductibility, withholding and thin capitalisation

Tax is where the comparison between equity and debt is usually won or lost. The Finance Act 2026 changed several rules that matter for funding a Bangladesh subsidiary, mostly in favour of related-party debt.

No thin capitalisation rule, but regulatory ratios

Bangladesh has no specific thin capitalisation regime in its tax law.[12] The constraints are regulatory instead: the 80:20 ratio for cost-bearing parent loans under FEID Circular No. 03, the 70:30 ratio the investment authority has recommended for foreign loans, and the 60:40 total debt ceiling for Taka term loans to foreign-owned companies.[1] [12] [2] These ratios bind as conditions of the foreign exchange or banking permission rather than as tax disallowances, so breaching one is a regulatory problem first.

Interest deductibility after the Finance Act 2026

The Finance Act 2026 removed the earnings stripping rule and the cap on interest on certain related-party financing, and withdrew the requirement for National Board of Revenue approval of interest paid on loans from associated entities above BDT 1.5 million.[9] [10] Interest paid by an ordinary company on a loan from an associated enterprise is now a deductible business expense.[10] One new trap offsets that: interest claimed as an expense but not paid within three years after the income year is added back as income, and becomes deductible only when it is actually paid.[9] [10] A parent loan on which interest is accrued and rolled up indefinitely will lose its deduction.

Withholding: interest against dividends

For income year 2026-27, the domestic withholding rate on payments to a non-resident is 10 per cent on interest and 20 per cent on dividends paid to a company.[10] The Finance Act 2026 brought interest down to 10 per cent from the previous flat 20 per cent rate for non-residents, so older guides and term sheets that assume 20 per cent are out of date.[10] It also made the tax withheld from a non-resident without a permanent establishment in Bangladesh a final tax.[9] [10] Treaties can lower dividend rates to 10 per cent or less where the parent holds the required stake, and interest rates are typically 10 per cent.[11]

Treaty rates are not applied automatically. The non-resident applies to the National Board of Revenue for a certificate permitting no deduction or a reduced rate, which the Board may issue within 30 days of the application.[11] Our guide to withholding tax in Bangladesh covers the deposit and return obligations that come with each payment.

Transfer pricing and the 12 per cent floor

A parent loan is an international transaction between associated enterprises, so its terms must be arm's length, and taxpayers whose international transactions exceed BDT 30 million in aggregate must keep transfer pricing documentation and obtain an accountant's report.[12] The Finance Act 2026 also introduced a floor running in the other direction: where a Bangladeshi company, other than a bank, finance or leasing company, lends to an associated enterprise at less than 12 per cent a year, the shortfall is taxed as its business income.[9] [10] That catches upstream loans and sister-company advances. Our transfer pricing guide deals with benchmarking.

Putting numbers on the comparison

The general corporate tax rate for a non-listed company is 27.5 per cent, reduced by 2.5 percentage points where all transactions are made through bank transfers.[10] On those figures, a dollar of profit paid out as a dividend bears corporate tax and then 20 per cent withholding, while a dollar paid as deductible interest bears only the 10 per cent withholding in Bangladesh. The gap is real but available only within the 3 per cent cap and the purpose test, so it shapes the mix rather than replacing equity.

Local borrowing alongside parent funding

Funding a Bangladesh subsidiary rarely relies on offshore money alone. Taka borrowing matches Taka revenue, avoids exchange-rate risk on repayment and keeps the parent's capital free, and Bangladesh Bank has given general authorisations under section 18(2) for the most common facilities.

Taka working capital

Banks may lend Taka working capital to foreign-owned or foreign-controlled industrial and trading companies for their operations in the ordinary course, according to prevailing credit norms and the normal banker-customer relationship.[2] Resident group companies also have general approval to make interest-free Taka working capital loans to them.[2] No bank is obliged to lend.

Taka term loans

A foreign-owned or controlled company engaged in manufacturing or services for three years or longer may take Taka term loans for capacity expansion or balancing, modernisation, rehabilitation and expansion, whatever the local share of its equity. The lender must apply its credit norms and prudential limits, the company's total debt must not exceed a 60:40 debt-equity ratio, and the facility is reported after the event to Bangladesh Bank in Form-L. Proposals outside those terms go to Bangladesh Bank for a specific decision.[2] A new subsidiary is therefore dependent on equity and parent funding for its first three years of capital expenditure.

Security for local and offshore lenders

Local lenders will usually want a charge over machinery, receivables or land, and often a parent guarantee. A company charge over immovable property, book debts, most movables or a floating charge must be filed with the Registrar within 21 days of creation, or it is void against a liquidator and creditors.[13] Type B joint venture enterprises in the zones may not mortgage or hypothecate fixed assets or raw materials to non-residents.[2] Our guide to loan security documentation covers the instruments.

Repatriation: how each instrument comes back out

When funding a Bangladesh subsidiary, the exit route should drive the choice as much as cost does. A full treatment of exit flows is in our guide to capital repatriation in Bangladesh.

Loan repayment

Under the general permission, repayments are made from the borrower's foreign currency account through the nominated AD, and the account may accumulate funds for that purpose.[1] For loans approved by the Invest Bangladesh Authority, ADs may remit interest and principal without returning to Bangladesh Bank, but only through the AD that originally received the money, after tax is deducted and paid, and with proof of the original inflow.[2] Repayment of a compliant loan is the most predictable way for a parent to recover cash from Bangladesh.

Dividends and share sales

Dividends move through the nominated AD on the documents described above, may be credited to the parent's foreign currency account in Bangladesh and may be reinvested as fresh equity.[7] A share sale by the parent to a resident buyer can be repatriated without Bangladesh Bank approval, whatever the amount, where the price does not exceed net asset value on the latest audited accounts, or up to BDT 1 billion against an independent fair valuation; the AD must then remit within five working days if it finds no discrepancy.[6] Larger or off-formula transfers need Bangladesh Bank approval.[6]

Capital reduction and liquidation

A reduction of share capital needs a special resolution and confirmation by the court, with creditors entitled to be heard.[13] On liquidation, the amount due to a non-resident shareholder after all liabilities and expenses are met is repatriable with the prior permission of the Foreign Exchange Investment Department.[5] Both are slow, so a parent that expects to recover start-up cash within a few years should hold part of it as debt from the outset.

Converting a parent loan into equity

Conversion is the release valve when a subsidiary is over-leveraged or needs a stronger balance sheet. FEID Circular No. 03 allows outstanding medium- and long-term parent borrowings, including accrued cost, to be converted into equity at any time, subject to compliance with applicable procedures.[1] Short-term cost-bearing loans cannot be converted into medium- or long-term debt, so a working capital loan that has become permanent must be dealt with on its own terms.[1]

The corporate and foreign exchange steps

The conversion is a share issue, so the company-law steps come first: enough authorised capital, board and shareholder approvals, any pre-emption rights of existing members, the allotment and the filings with the Registrar.[13] The foreign exchange record must then show that the shares were issued against foreign funds already received, because the loan proceeds were the inward remittance. The AD reports the issue in the same way as any share issue to a non-resident, and an amendment to the loan agreement is reported within seven days.[5] [1]

Price, tax and later exits

The conversion price matters long after the conversion. Bangladesh Bank expects the transfer value of shares to be consistent with any issue value in the previous year, so a conversion at an inflated price can constrain a sale twelve months later.[6] Accrued interest that is capitalised rather than paid raises its own withholding and deduction questions, including the three-year add-back for unpaid interest.[9] Settle the tax treatment before the board meeting, not after the allotment.

A funding mix that works

For most groups, funding a Bangladesh subsidiary means a combination sequenced to the life of the company. Equity covers incorporation, licences, early payroll, losses and the equity cushion lenders will expect. Cost-free or capped parent loans fund defined capital expenditure, with a repayment schedule matched to projected cash flows. Taka working capital from a local bank funds receivables and stock once there are audited accounts to lend against. After three years, Taka term loans can fund expansion within the 60:40 ceiling.[1] [2]

A joint venture needs a different design, because longer-term shareholder loans to it need case-by-case approval. Its shareholders' agreement should fix equity contributions, funding obligations and the dilution consequences of a missed cash call. Our guide to investment structuring in Bangladesh covers the holding chain that sits above these choices.

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Funding a Bangladesh subsidiary: mistakes to avoid

• Calling the money one thing and using it as another: a medium-term parent loan spent on payroll fails the capital-expenditure purpose test the AD must verify.[1]
• Assuming the subsidiary qualifies: a joint venture, a trading company or a foreign-controlled but not fully foreign-owned company cannot use the medium- and long-term permission.[1]
• Pricing over the cap: a margin over SOFR, fees or a gross-up that takes the all-in cost above 3 per cent.[1]
• Rolling up interest: interest unpaid three years after the income year is added back to taxable income.[9]
• Losing the capital trail: missing encashment certificates or AD reports, which limit later share transfers to proven foreign funds.[6]
• Filing with the wrong authority: sending a former Economic Zone company's loan to Bangladesh Bank rather than the Invest Bangladesh Authority after Circular No. 35.[3]
• Upstreaming cash at no interest: a loan from the subsidiary to a group company below 12 per cent creates deemed income.[9]

What to watch in late 2026 and 2027

Three points deserve attention over the next year. FEPD-1 Circular No. 32 is valid for one year from 2 September 2026, so a fresh consolidated circular should follow by September 2027.[2] The Invest Bangladesh Authority's Scrutiny Committee practice on joint venture loans is worth tracking.[3] And the first assessments under the Finance Act 2026 will show how the National Board of Revenue applies the 12 per cent floor and the three-year interest add-back.[9]

Funding decisions made in a subsidiary's first year are hard to unwind. See our banking and finance practice or contact our Dhaka team.

Frequently asked questions

Does a foreign parent need approval to fund a Bangladesh subsidiary with equity?

No prior Bangladesh Bank approval is needed to issue shares against inward remittance or imported capital machinery. The money must arrive, or the machinery clear customs, before issue, and the AD reports the issue within 14 days. Sector licences may still apply.[5]

Can a Bangladeshi subsidiary borrow directly from its foreign parent?

Yes. Under FEID Circular No. 03 of 15 July 2026, a fully foreign-owned industrial company may borrow from its parent, associates or shareholders without prior approval within the circular's limits. Other loans go to the Invest Bangladesh Authority or Bangladesh Bank.[1] [3]

What is the maximum interest rate on a parent loan?

Under the general permission, the all-in cost of any cost-bearing parent or shareholder loan may not exceed 3 per cent a year. This is a flat ceiling, not a margin over SOFR, and fees count towards it.[1]

Can a parent loan be used for working capital?

Only short term. Loans under a year may fund working capital, interest-free loans excluding input purchases. Loans of one year or more must be used for capital machinery, legitimate services and civil construction.[1]

Does Bangladesh have thin capitalisation rules?

Not in its tax law. Leverage is limited by regulatory ratios instead: 80:20 for cost-bearing parent loans, a recommended 70:30 for approved foreign loans and 60:40 total debt for Taka term loans.[12] [1] [2]

Is interest on a parent loan tax deductible in Bangladesh?

Generally yes. The Finance Act 2026 removed the earnings stripping rule and the NBR approval requirement for related-party interest. Interest left unpaid for three years after the income year is, however, added back until paid.[9] [10]

What withholding tax applies to interest and dividends paid to a foreign parent?

Under the Finance Act 2026 the domestic rates are 10 per cent on interest, down from 20 per cent, and 20 per cent on dividends paid to a non-resident company.[10] A treaty may reduce them, but only with a certificate from the National Board of Revenue.[11]

Can a foreign-owned subsidiary borrow from a Bangladeshi bank?

Yes. Banks may lend Taka working capital on normal credit terms. Taka term loans for expansion or BMRE need three years of manufacturing or service operations and total debt within a 60:40 ratio.[2]

Can a parent loan be converted into share capital?

Yes. Outstanding medium- and long-term parent borrowings, including accrued cost, may be converted into equity at any time, following the Companies Act share issue steps and AD reporting. Short-term cost-bearing loans cannot be converted into longer-term debt.[1]

How does a parent get its equity back from Bangladesh?

Through dividends, a share sale at a regulated valuation, a court-confirmed capital reduction or liquidation. Each has its own documents, and transfers are limited to the foreign funds the company is proven to have received.[6] [7]