Hiring Contractors in Bangladesh: Contracts, Tax, Payments and Misclassification in 2026

Hiring contractors in Bangladesh: how the 2026 framework works

Hiring contractors in Bangladesh is the fastest way for a foreign company to reach the country's software, design, data and back-office talent without first setting up a local entity. It is also where most cross-border hiring mistakes begin. The contract may say "independent contractor", but Bangladeshi law looks at the substance of the relationship, the Income Tax Act 2023 decides how the fees are taxed when they arrive, and Bangladesh Bank rules decide how the money may lawfully reach the contractor's account. A model that works well for a six-month project can become an employment, tax or intellectual property problem by the second year.

This guide is for founders, general counsel, HR and finance teams outside Bangladesh who engage Bangladeshi freelancers and independent contractors. It covers engagement models, contract terms, tax on both sides, the 2026 foreign exchange rules, the line between contractor and employee, and how TRW can engage and manage contractors on a client's behalf.

Summary: A foreign company can lawfully engage a Bangladeshi independent contractor under a written services agreement, pay through the banking channel and leave the contractor to account for tax locally. The risks lie in the details: a contractor who works like an employee may be a worker under section 2(65) of the Labour Act 2006; software copyright defaults and assignment formalities under the Copyright Act 2023 must be handled expressly; the receiving bank may deduct tax under section 124 of the Income Tax Act 2023 unless an exemption applies; and Bangladesh Bank's July 2026 circular governs how fees are evidenced, retained and repatriated.

Key point: The foreign client usually has no Bangladeshi payroll or withholding duty when it pays a genuine contractor from abroad, because the Income Tax Act places the deduction on the bank that credits the remittance. That protection disappears when the relationship is really employment, when the contractor operates as the client's local presence, or when payment is routed through a Bangladeshi entity, which then becomes the payer under Bangladeshi withholding rules.

At a glance

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Table of Contents

How foreign companies engage Bangladeshi contractors

There is no single statute on independent contractors in Bangladesh. A contractor relationship is a contract for services under the Contract Act 1872, while employment is regulated by the Bangladesh Labour Act 2006 and, for tax, by the employment provisions of the Income Tax Act 2023. Choosing an engagement model is really choosing which regime applies and who carries the compliance burden.

Direct contract with an individual

The simplest model is a written services agreement with the individual, paid by bank transfer or through a payment platform linked to a Bangladeshi bank. It suits project work and specialist skills. The foreign company does not register, run payroll or usually deduct tax, but carries the classification, intellectual property and enforcement risks itself.

Contract with a Bangladeshi firm

Many developers trade through a sole proprietorship or private limited company. Contracting with the business strengthens the independent contractor position, because the firm supplies its own people, equipment and invoices. The client must still secure intellectual property from the individuals who do the work.

Marketplaces and platforms

Marketplaces handle contracting and payment, but their standard terms rarely address Bangladeshi copyright formalities. Treat them as a sourcing and payment channel, supplemented by a direct agreement on ownership and confidentiality.

Contractor management, agent of record and employer of record

A local intermediary can engage and manage contractors for a company that does not want to run contracts and compliance itself. Where the role is really a job, the cleaner answer is an employer of record, under which a Bangladeshi employer hires the person on the client's behalf. Both routes are discussed below.

Contractor or employee: the section 2(65) test

The question that decides everything else in hiring contractors in Bangladesh is whether the person is in substance an employee. Section 2(65) of the Labour Act, as substituted by the Bangladesh Labour (Amendment) Act 2026 (Act No. 43 of 2026), defines a worker as any person, including an apprentice, employed in an establishment or industry, directly or through a contractor by whatever name called, for wages or payment in any skilled, unskilled, manual, technical, business development or clerical work, whatever the terms of employment, express or implied.[6] The only carve-out is for persons given managerial, chief executive, administrative or supervisory responsibility in writing under section 2(49)(b).[6]

Why the label in the contract does not decide status

The definition reaches implied terms, so a "consultancy agreement" will not survive if the working pattern looks like employment. It covers people engaged through a contractor "by whatever name called", so routing a developer through a friend's company changes little. And it includes technical and business development work, the roles foreign companies most often fill remotely.[6] Our detailed guide to the Labour Act amendment 2025 in Bangladesh explains how the definition changed between the 2025 Ordinance and the 2026 Act.

Indicators we look at

• Control: who decides how, when and where the work is done.
• Integration: a company email, a job title on the organisation chart, performance reviews.
• Exclusivity and duration: full-time work for one client over a long period.
• Pay pattern: a fixed monthly fee regardless of output, or paid leave.
• Business reality: a trade licence, TIN, own equipment and other clients.

Platform and self-employed workers in the union chapter

For the trade union and industrial dispute chapter alone, the substituted section 175 extends the meaning of worker to self-employed workers, daily and temporary workers and persons engaged through any digital labour platform.[7] That does not make every freelancer an employee, but it brings platform work within collective labour rights.

What misclassification costs

If a contractor is found to be a worker, the Labour Act's protections apply from the start of the relationship: an appointment letter and identity card, leave and festival holidays, maternity benefit, and statutory process and compensation on termination. A permanent worker who resigns, for example, is now entitled to 7 days' wages per completed year for service of up to three years, 15 days for more than three but less than ten years, and 30 days or gratuity, whichever is higher, for ten years or more.[8]

On the tax side, payments that are really salary fall under section 86 of the Income Tax Act, which requires the person paying employment income to deduct tax at source.[1] Our guides to hiring and firing laws in Bangladesh and severance pay in Bangladesh set out the employment consequences in full.

A misclassification review should compare the written agreement with what actually happens and fix what cannot be defended, by restructuring the engagement or moving the person into employment.

Drafting the contractor agreement

A well-drafted agreement is the foreign company's main protection when hiring contractors in Bangladesh, because it will usually be the only document a Bangladeshi court, arbitral tribunal, bank or tax officer sees. The clauses below are the ones that most often fail when they are copied from a template written for another country.

Scope, deliverables and independence

Describe the services by deliverables and milestones rather than hours and reporting lines. Confirm that the contractor controls the method of work, supplies its own equipment and may work for other clients. These terms carry weight only if they reflect reality, so do not also impose working hours or leave approval.

Intellectual property under the Copyright Act 2023

The Copyright Act 2023 contains two default rules that matter for foreign clients. Where the author is employed under a contract of service or apprenticeship, the employer is the first owner of copyright in the work unless otherwise agreed. For information technology-based digital works, the person or organisation that engaged someone to complete the program is the first owner, again unless the parties agree otherwise.[10] That second rule helps clients commissioning software, but it does not cover every deliverable, such as marketing copy, research, artwork or data sets, so an express assignment remains essential.

The assignment formalities are strict. The assignment must be signed by the assignor or a duly authorised agent, and must identify the work, the rights assigned, the duration and the territory.[10]

If no duration is stated, the assignment is treated as running for five years; if no territory is stated, it is treated as covering Bangladesh only. The deed should state the royalty, advance or lump sum, an assignment lapses if the assignee does not exercise the rights within one year unless the deed provides otherwise, and an assignment deed is to be registered with the Copyright Office.[10] A clause drafted as "all rights, worldwide, for the full term of copyright", signed by the individual creator and stating the consideration, avoids each of these traps. Our guide to copyright law in Bangladesh covers registration in detail.

Confidentiality and data

Confidentiality obligations should survive termination. Define confidential information broadly, require return or deletion of materials on exit, and prohibit uploading client code or data to personal repositories or third-party AI tools. Where the contractor handles personal data, add security terms and check the position with our data protection and privacy team.

Restrictive covenants

Section 27 of the Contract Act provides that every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is void to that extent, with a statutory exception only for the sale of goodwill.[9] A post-termination non-compete against an independent contractor is therefore unlikely to be enforced. Protect the business instead through confidentiality, ownership of work product, non-solicitation of staff drafted narrowly, and restrictions that operate only during the term of the agreement.

Payment, currency and invoices

State the fee, currency, invoicing cycle and payment channel, and require the contractor to provide invoices and keep a Bangladeshi bank or permitted payment-platform account in their own name. Clear invoices and a written contract are exactly the electronic evidence Bangladeshi banks rely on to credit foreign receipts and to process exemptions and cash incentives, as explained below.[3] Make the contractor responsible for its own Bangladeshi taxes, and address whether fees are stated gross or net of any tax the receiving bank may deduct.

Termination

Give either party a right to terminate on notice and immediately for material breach, with payment for work delivered. Avoid severance-style payments that mirror the Labour Act, which read as evidence of employment, and require handover of code, credentials and documents on exit.

Governing law, disputes and enforceability

Foreign clients usually choose their home law, and that is common in cross-border services contracts, but the Labour Act, the Copyright Act and the foreign exchange rules apply in Bangladesh regardless of the chosen law. For disputes, arbitration is usually more practical than foreign court litigation: Bangladesh acceded to the New York Convention on 6 May 1992, so a foreign arbitral award can be enforced against a contractor's assets in Bangladesh.[11] Keep the clause proportionate to the value of the contract; for a modest engagement, a short arbitration clause with a sole arbitrator and online hearings is more useful than an elaborate institutional procedure. Our guide to arbitration clause drafting in Bangladesh includes sample wording.

The table below summarises the clauses to check. On a phone, scroll it sideways.

Tax on the contractor side

A Bangladeshi contractor is taxed on its own income under the Income Tax Act 2023. An individual is resident for an income year if present in Bangladesh for 183 days or more in that year, or for 90 days or more in that year having been present for 365 days or more during the preceding four years.[1] Most contractors working from Bangladesh are therefore resident, and the real question is which exemption, if any, applies to their fees.

The 2026 freelancing exemption

The Finance Act 2026 exempted income from freelancing and content creation, extending relief that previously applied only to IT freelancing.[2] For a foreign client, the practical effect is that a genuine freelancer will often owe little or no Bangladeshi income tax on its fees, which makes accurate classification more, not less, important: salary income from a foreign employer is employment income and is not freelance income. Our guide to freelancer tax in Bangladesh explains the exemption and its conditions.

The IT and IT-enabled services exemption for 2026-27

Paragraph 21 of Part 1 of the Sixth Schedule excludes from total income the income from a closed list of technology businesses carried on by a resident or a non-resident Bangladeshi individual from 1 July 2024 to 30 June 2027. The list includes AI and blockchain-based solution development, software as a service, cyber security, data analytics and data science, mobile application and software development, website development, IT assistance and software maintenance, digital animation and graphics design, data entry and processing, IT freelancing, call centre services and digital archiving. It is conditional on all income, expenditure and investment of the business being performed wholly through bank transfer.[1]

A contractor that pays sub-contractors in cash or takes fees into an informal account can lose the exemption for the year, which is a reason for clients to insist on bank payments. The exemption ends on 30 June 2027 unless extended.

Returns, records and rates

Exempt income must still be declared in a return. From 2026-27, taxpayers other than companies must keep agreements, bills, statements, invoices and other supporting evidence, in analogue or digital form, for six years.[2] Income outside the exemptions is taxed at the individual slabs; for the 2026-27 assessment year the general tax-free threshold is Tk 400,000 and the top rate is 30%.[2] Services supplied by freelancers and content creators were also brought into the VAT exemption framework by the Finance Act 2026.[2]

Does the foreign payer withhold tax?

This is the question foreign finance teams ask first when hiring contractors in Bangladesh. The answer turns on who pays, from where, and whether the payee is really a contractor.

Section 124: deduction by the receiving bank

Section 124 of the Income Tax Act requires any person responsible for paying or crediting to a person's account a sum remitted from abroad by way of fees, service charges or remuneration for services rendered in Bangladesh, or for services performed by a resident for a foreign person, to deduct tax when crediting the sum.[1] In practice that person is the Bangladeshi bank, not the foreign client. The Finance Act 2026 reduced the rate from 7.5% to 5%.[2]

No deduction is to be made under section 124 against amounts excluded from total income by paragraphs 12, 17, 21 and 33 of Part 1 of the Sixth Schedule, which include the IT and ITES exemption.[1] On 4 June 2026 the chairman of the National Board of Revenue stated publicly that there is no provision for tax deduction on remittances of freelancers and expatriates.[5] Bank practice varies, so contractors should tell their bank how receipts are classified and keep the certificate for any deduction.

When the payer has a Bangladeshi presence

Payments made inside Bangladesh are different. Section 90 requires a specified person paying a resident for any service to deduct tax at a rate not exceeding 20%, and section 89 applies to contract payments at a rate not exceeding 10%.[1]

The definition of specified person in section 140(3) includes any company, firm or association of persons and any foreign contractor, foreign enterprise or organisation established outside Bangladesh.[1] A foreign company that has a branch, liaison office or local subsidiary paying the contractor locally, or that routes fees through a Bangladeshi agent, should assume these withholding duties apply. Default in deducting or depositing withholding tax can now trigger additional tax of 150% of the default.[2] Our guide to withholding tax in Bangladesh sets out rates and deposit deadlines.

When the payee is really an employee

If the contractor is in substance an employee, the payments are employment income and section 86 requires the payer of that income to deduct tax at source at the average rate applicable to the payee's estimated income.[1] A foreign company with no Bangladeshi presence cannot practically run that withholding, a strong reason to employ long-term staff through an employer of record.

How contractors receive foreign currency under Bangladesh Bank rules

On 22 July 2026 Bangladesh Bank's Foreign Exchange Policy Department issued FEPD-1 Circular No. 22, consolidating the rules on foreign exchange transactions by freelancers and individual service exporters supplying services in non-physical form, such as ICT services, BPO and online professional services.[3] Banks apply it whenever a foreign client pays a Bangladeshi contractor.

Evidence instead of export documents

Physical-goods export procedures, including the EXP form, do not apply to services delivered over the internet. Freelancers may receive payment from non-resident customers on delivery of services, supported by electronic evidence. Banks must satisfy themselves of the genuineness of a transaction from emails, contracts, invoices where available, platform statements or other digital communications, together with the inward remittance message, and must check that the freelancer has the capability and profile to provide the services.[3]

Thresholds, gateways and cards

Inward remittances up to USD 20,000 or its equivalent may be credited without a Form-C; larger transactions must be supported by an online Form-C (ICT) through designated digital applications, unless otherwise permitted. Banks may facilitate small-value service export proceeds through internationally recognised online payment gateway service providers, with a maximum of USD 10,000 per transaction, and may issue dual-currency Freelancer Cards. Mobile financial service providers and payment service providers working with foreign payment providers may also facilitate repatriation.[3]

Retention, repatriation and the ban on keeping money abroad

Service exporters may retain up to 50% of net export earnings in foreign currency in an exporters' retention quota account for software, data entry and processing and other ICT-related services, and up to 30% for other legitimate services, with the remainder converted into taka. Proceeds must be repatriated within the time limits applicable to exports of goods, no earnings may be kept in notional accounts abroad, and retaining export proceeds abroad in any form outside permitted arrangements, including foreign accounts or virtual assets, is a violation of the 1947 Act.[3]

For the foreign client, the lesson is to pay into an account in Bangladesh or through a recognised gateway, never to a relative abroad, a third-country account or a crypto wallet. Our guide to foreign exchange regulations in Bangladesh explains the wider framework.

Cash incentive on service exports

For the period from 1 July 2026 to 30 June 2027, Bangladesh Bank set the cash incentive at 6% for exports of software, hardware and IT-enabled services and 2.5% for individual freelancers exporting software and ITES, with claims subject to periodic audits by external audit firms.[4] The Finance Act 2026 cut the withholding rate on export cash subsidy from 10% to 5% and provided that this deduction is no longer a final tax.[2]

Permanent establishment and other exposure for the foreign client

Hiring contractors in Bangladesh does not by itself give a foreign company a taxable presence, but some patterns can. Under section 2(92) of the Income Tax Act, a permanent establishment includes a place of management, a branch, an agency or an office, and also the furnishing of services, including consultancy services, by any person or by manpower engaged for the purpose, if the activities continue in Bangladesh.[1]

The Finance Act 2026 widened the concept to cover a significant digital or online presence of a non-resident entity with 100,000 or more digital or online customers or subscribers in Bangladesh, and provided that residential status and permanent establishment of a foreign person are determined under any applicable double tax treaty, with domestic law applying where there is none.[2]

Patterns that raise the risk

• A contractor who concludes contracts with Bangladeshi customers in the client's name.
• A contractor "country manager" running the client's Bangladeshi operations.
• Contractors serving the client's Bangladeshi customers over a long period.

Where they exist, review whether a registered presence, an employer of record or a restructured contract is needed. Payments by Bangladeshi persons to a non-resident that are taxable to the non-resident are themselves subject to deduction of up to 30% under section 119.[1]

Contractor management and agent of record through TRW

TRW offers contractor engagement and management for foreign companies working with Bangladeshi talent: localising the services agreement, including Copyright Act formalities and dispute terms; onboarding and verifying contractors; reviewing classification; and advising on how fees are paid and evidenced. Where a client prefers a single local counterparty, TRW can engage and manage contractors on the client's behalf.

When a Bangladeshi entity sits in the payment chain, local withholding and VAT rules apply to its payments and must be built into the structure. Where a review shows that a contractor is really an employee, TRW's employer of record service is the alternative: TRW employs the person in Bangladesh on the client's behalf, runs payroll and statutory filings, and handles contracts, work permits and terminations under Bangladesh law.

Foreign nationals who will work in Bangladesh need a work permit from the competent authority, such as Invest Bangladesh; our guide to employment law for expatriates in Bangladesh covers that process. Our international remote work and employer of record governance and employment and labour practices advise on both routes, and our guide to employment contracts in Bangladesh covers the employment side.

How Bangladesh compares

Bangladesh is not alone in looking past contract labels. In Singapore, the Ministry of Manpower states that whether a person is an employee or self-employed depends on the actual relationship with the company, and only employees receive statutory benefits such as CPF contributions.[12] India brought its four labour codes into force on 21 November 2025; the Code on Social Security provides for welfare schemes for gig and platform workers, with aggregators contributing 1 to 2% of annual turnover, subject to 5% of amounts paid to those workers.[13] In the UAE, the 2022 Executive Regulations to the Labour Law introduced a self-employed work permit allowing individuals to work onshore without a sponsoring employer.[14]

Step-by-step: hiring contractors in Bangladesh

The sequence below reflects how we set up and review contractor engagements for foreign clients.

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Repeat the classification review at least once a year, and whenever the scope, hours or reporting lines of a contractor change materially.

Common mistakes to avoid

• Copying a home-country template: it will usually miss the Copyright Act assignment formalities, so ownership may be limited to five years and to Bangladesh.[10]
• Relying on a non-compete: post-termination restraints are void under section 27 of the Contract Act.[9]
• Treating full-time staff as contractors: the worker definition reaches implied terms and technical and business development work.[6]
• Paying outside the banking channel: payments to third-party or offshore accounts breach the foreign exchange rules and can cost the contractor its exemption.[1] [3]
• Routing fees through a local entity without a tax plan: a Bangladeshi payer must withhold under sections 89 or 90.[1]
• Letting a contractor act as the local office: this can create a permanent establishment.[1]

Checklist for hiring contractors in Bangladesh

• Localised services agreement with IP assignment, confidentiality, termination and arbitration.
• Signed copyright assignment stating rights, worldwide territory, full term and consideration.
• Contractor's TIN or trade licence and an account in its own name.
• Invoices matching the contract and the bank's remittance record.
• A classification file and a permanent establishment and withholding review.
• An exit plan for handover, data and credentials.

Done properly, hiring contractors in Bangladesh gives foreign companies access to a deep talent pool on terms that are lawful, tax-efficient for the contractor and defensible for the client. If you want a contractor agreement localised, a classification review or a move to employer of record, contact TRW in Dhaka or book a consultation.

Frequently asked questions

Can a foreign company hire contractors in Bangladesh without a local entity?

Yes. A foreign company can engage a Bangladeshi individual or firm under a written services agreement and pay from abroad through the banking channel. The arrangement must reflect a genuine contract for services, or the person may be a worker under section 2(65) of the Labour Act.[6]

Does the foreign client have to withhold Bangladeshi tax?

Not usually for a genuine contractor paid from abroad. Section 124 places the deduction, now 5%, on the Bangladeshi bank crediting the remittance. A local branch, subsidiary or agent paying locally must withhold under sections 89 or 90.[1] [2]

Is contractor income taxable in Bangladesh?

A resident contractor is taxable in Bangladesh, but the Finance Act 2026 exempted income from freelancing and content creation, and listed IT and IT-enabled services income is exempt until 30 June 2027 if handled wholly through bank transfer. Exempt income must still be declared in a return.[1] [2]

How can a Bangladeshi contractor receive payment in foreign currency?

Through a bank, a recognised payment gateway up to USD 10,000 per transaction, a Freelancer Card or a permitted payment service provider. Receipts up to USD 20,000 need no Form-C, and proceeds must be repatriated.[3]

Who owns software written by a Bangladeshi contractor?

Under the Copyright Act 2023, the person who engaged someone to complete an IT-based digital work is first owner unless otherwise agreed. Other deliverables need an express, signed assignment stating the rights, duration and territory, or it defaults to five years and Bangladesh only.[10]

Can I include a non-compete in a Bangladeshi contractor agreement?

A post-termination non-compete is unlikely to be enforced, because section 27 of the Contract Act makes agreements in restraint of a lawful profession, trade or business void, except on a sale of goodwill.[9] Rely on confidentiality, IP ownership and narrow non-solicitation instead.

When does a contractor become an employee in Bangladesh?

When the substance is employment: control, integration, exclusivity and a fixed monthly payment. The Labour Act definition covers implied terms and technical and business development work.[6]

Can contractors create a permanent establishment for my company?

They can. A permanent establishment includes an agency and the furnishing of services by any person or manpower engaged for the purpose if the activities continue in Bangladesh, and applicable tax treaties now govern the test for treaty residents.[1] [2]

Do Bangladeshi freelancers get a cash incentive on export earnings?

Yes, if the receipt qualifies. For 1 July 2026 to 30 June 2027 the incentive is 2.5% for individual freelancers exporting software and ITES and 6% for software, hardware and ITES exports, subject to external audit.[4]

What is the alternative to hiring contractors in Bangladesh?

For long-term, full-time roles, an employer of record. TRW employs staff in Bangladesh on the client's behalf, runs payroll and statutory filings, and handles contracts, work permits and terminations under Bangladesh law.