How Does the US Bangladesh Tax Treaty Work?

The United States and Bangladesh maintain a bilateral income tax treaty, effective since 2007, to prevent the same income from being taxed by both countries. The agreement also aims to stop tax evasion and foster economic cooperation between the two nations. It establishes rules determining which country has the right to tax income earned by residents of one country from sources in the other. The treaty covers federal income taxes in the United States and the income tax in Bangladesh, providing a more predictable tax environment for taxpayers.

Determining Treaty Eligibility

Eligibility for the U.S.-Bangladesh tax treaty depends on being a “resident” of one of the countries. Under Article 4, a person or entity is a resident if they are liable for tax in that country due to domicile, residence, or place of management. For an individual, this may involve meeting the substantial presence test in the U.S. or residing in Bangladesh for over 182 days a year. A company’s residency is based on its place of incorporation or management.

When an individual qualifies as a resident of both countries, a situation known as dual residency, the treaty provides tie-breaker tests to assign residency to a single country. The first test is whether the individual has a permanent home, which is any dwelling continuously available to them, in only one of the countries.

If a permanent home exists in both or neither country, the next test is the “center of vital interests,” which analyzes where personal and economic ties, such as family, social relations, and business, are closer. If the center of vital interests is unclear, the test becomes the “habitual abode,” or where the person more frequently stays. The final tie-breaker for individuals is citizenship.

If residency is still not determined, or in the case of a dual-resident company, the competent authorities of both countries will settle the matter by mutual agreement.

Taxation of Personal Income

The treaty outlines how different types of personal income are taxed, assigning the primary taxing right to either the country of residence or the source country.

Income from Employment

Under Article 16, income from employment is taxable in the country where the work is performed. However, an employee resident in one country may be exempt from tax in the other country where the work is done. The exemption applies if three conditions are met. The first is that the employee is present in the source country for a period not exceeding 183 days in any 12-month period.

The second condition is that the remuneration is paid by an employer who is not a resident of the source country. Finally, the remuneration must not be borne by a permanent establishment that the employer has in the source country.

Income from Independent Personal Services

Article 15 addresses income earned by self-employed individuals like consultants or lawyers. This income is taxable only in the person’s country of residence unless they have a “fixed base” regularly available in the other country for performing their activities. A fixed base is understood to be a place like an office or workshop.

If a fixed base exists, the other country may tax income attributable to it. The source country can also tax this income if the individual is present there for more than 183 days in a 12-month period, even without a fixed base.

Pensions and Annuities

Under Article 19, pensions, annuities, and Social Security payments made to a resident of one country are taxable only in that country of residence. This rule applies to payments made in consideration of past employment and simplifies tax obligations for retirees.

Students, Trainees, and Teachers

Article 21 provides special rules for educational and cultural exchange. A student or business trainee who is a resident of one country and is temporarily in the other for education or training is exempt from tax in the host country on payments received from abroad for their maintenance, education, or training. These individuals can also earn up to $8,000 per year from personal services in the host country without being taxed on that amount.

A teacher or researcher visiting one country to teach or conduct research at an institution is exempt from tax in the host country on that income for up to two years from their arrival date. This exemption is a one-time benefit and does not apply if the research is for private benefit instead of public interest.

Taxation of Business and Investment Income

The treaty establishes guidelines for taxing income from business activities and investments.

Business Profits

The taxation of business profits under Article 7 centers on the concept of a “Permanent Establishment” (PE). An enterprise from one country can only be taxed on its business profits in the other country if it carries on its business there through a PE. If a PE exists, the source country can tax the profits attributable to that establishment.

A PE is a fixed place of business, such as a place of management, branch, office, factory, or workshop. A construction project also constitutes a PE if it lasts for more than 183 days. Certain activities are excluded from creating a PE, provided they are of a preparatory or auxiliary character. These include:

• Using facilities solely for storage or display of goods
• Maintaining a stock of goods for processing by another enterprise
• Maintaining a fixed place of business for purchasing goods or collecting information
• Engaging in any other activity of a preparatory or auxiliary character

Dividends, Interest, and Royalties

The treaty sets maximum tax rates that the source country can impose on certain investment income paid to a resident of the other country. For dividends, Article 10 limits the withholding tax to 15%. A lower 10% rate applies if the beneficial owner is a company holding at least 10% of the voting stock of the paying company.

For interest, Article 11 limits the source country’s tax to 10%. Article 12 caps the withholding tax on royalties at 10%. Royalties include payments for the use of copyrights, patents, trademarks, and secret formulas. These reduced rates offer relief compared to the 30% statutory withholding rate that can otherwise apply.

Claiming Treaty Benefits on a US Tax Return

Individuals and businesses must follow specific procedures to claim benefits under the U.S.-Bangladesh tax treaty on a U.S. tax return.

Information and Forms Needed

Two forms are primarily used to claim treaty benefits: Form W-8BEN and Form 8833. Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, is given to the U.S. payer. By completing this form, the foreign person certifies their non-U.S. status and claims residency in a treaty country, allowing the payer to apply a reduced rate of withholding tax. The form requires the beneficial owner’s name, address, and foreign tax identifying number.

Form 8833, Treaty-Based Return Position Disclosure, is used by taxpayers filing a U.S. tax return to state that a treaty overrules or modifies a provision of the Internal Revenue Code. The filer must identify the treaty country, the relevant article(s), and provide a brief explanation of the position.

Submission Process

The submission process differs for each form. Form W-8BEN is not filed with the IRS but is given directly to the withholding agent, such as the bank or company making the payment. The withholding agent keeps the form on file, and it remains valid for three years.

Form 8833 must be attached to the filer’s annual U.S. income tax return, such as a Form 1040-NR or Form 1120-F. Failure to disclose a treaty-based position on Form 8833 when required can result in a penalty of $1,000 for individuals and $10,000 for C corporations.