For the past three decades, Japanese brands like Toyota and Honda have dominated the Bangladeshi market, establishing the threshold of “Japanese quality” in the majority of households. Brands like Sony, Panasonic, Canon, Toshiba, Nikon, Fujifilm and Epson have been shaping the choices of more than three generations of Bangladeshi consumers.
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Bilateral relations between Japan and Bangladesh extend beyond just quality products. Japan was one of the earliest countries to officially recognise Bangladesh, and ever since diplomatic ties were established in February 1972 between the two nations, Japan has been the single largest donor nation. Japan and Bangladesh have signed a bilateral investment treaty (BIT) for the protection and promotion of investment, in 1998, and a double taxation avoidance agreement (DTAA) in 2010.
Political stability and sustainable economic vision have allowed Bangladesh to establish itself as the next emerging market among middle-income economies. Evidently, its gross domestic product (GDP) from 2015 to 2019 achieved compound annual growth, recording Asia’s highest growth of 8.2% in 2018-2019. When the economic growth of the rest of the world was slowing down, Bangladesh maintained a static average of 8% GDP growth as one of Asia’s top performing economies. The UN’s Committee for Development Policy (CDP) expects Bangladesh will exit the least developed country (LDC) category by 2024.
The covid-19 pandemic has hit the world with the largest economic shock for decades. Despite this, Bangladesh has not only shown signs of recovery, but also indications of continual development, reporting 5.24% GDP growth during the pandemic. An unhindered flow of inward remittances has kept the country’s economy afloat, with US$21.4 billion received from 1 January to 24 December in 2020, 17.75% more than that received in 2019. Forex reserves stood at an all-time high of US$42.8 billion on 27 December 2020. This reflects a constructive and affirmative scenario for foreign investors to rest their bids on Bangladesh in the coming years.
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Therefore, it is not a surprise that there has been a steady increase of investment by Japanese companies in the past few years. In 2019, more than 300 Japanese companies were in operation, which was up from 245 in 2016. The number has increased by 10 times in the past 10 years. Japan Tobacco International’s acquisition of Akij Group for US$1.47 billion in November 2018 was the biggest single foreign direct investment (FDI) in Bangladesh to date. Japan’s largest energy company, Jera, recently acquired a 22% stake in Bangladeshi Summit Power International for US$330 million to establish major energy infrastructure.
FDI inflows to Bangladesh by Japanese manufacturing companies increased from ¥400 million (US$3.7 million) in 2018 to ¥3 billion in 2019. Bangladesh Honda Private’s (Japanese Honda Motor Company’s joint venture) investment of BDT2.3 billion (US$27.6 million) for motorcycle manufacturing in the same month is a vivid indication of the confidence that Japanese businesses have embraced in recent years. On top of that, Japan has added Bangladesh to the list of the countries that will qualify for subsidies for Japanese companies that relocate their existing production bases.
The government of Bangladesh is all set with trade policies that aim to attract foreign investment in a friendly business environment. Section 4 of the Foreign Private Investment (Promotion and Protection) Act, 1980, ensures that the government shall accord fair and equitable treatment to foreign private investment, which shall enjoy full protection and security. Section 7 of the same act, and the Japan-Bangladesh BIT, safeguard investors from expropriation or nationalisation, or from being subject to any measures having the effect of expropriation or nationalisation.
Foreign investment is allowed in every sector except foreign plantation and mechanical extraction on reserve forests, arms/ammunition and defence equipment, nuclear energy, and security printing and money creation by way of minting. Bangladesh allows 100% ownership of foreign investors, except in some regulated sectors. Similarly, there is no general requirement as to the appointment of a specific number of local directors, no minimum or maximum limit for capital, and no regulatory requirement for obtaining permission for the issuance of shares by private companies.
Full repatriation of profit and investment to home countries is permitted. Recently, the central bank also eased the repatriation of sale proceeds for non-resident equity investment, and no permission is required to repatriate up to BDT100 million equivalent of foreign currency. No permission is also required for remitting any amount whatsoever, if a company takes the net asset value approach to evaluate the share price.
Any foreign-owned or controlled companies operating in Bangladesh may access a short-term working capital facility for the tenure of one year, extendable for one year, from their parent companies or shareholders abroad. Such companies may avail working capital with interest payable on the principal amount from their respective parent companies during the first six years of commercial operation. In addition, companies may avail a term loan facility from abroad, subject to prior permission from the Bangladesh Investment Development Authority (BIDA).
The government has created numerous economic zones (EZs) in order to stimulate economic activity, particularly through industrialisation and high-tech parks (HTPs). To cater especially to the needs of Japanese investors, the Bangladesh Economic Zone Authority (BEZA) and Japanese entity the TOA Corporation signed a deal to jointly develop 263 hectares of land in Narayanganj’s Araihazar for a dedicated industrial park. The BDT25.82 billion project is expected to be finished in 2023 and bring in US$21 billion worth of investment.
Companies operating in EZs benefit from income tax exemptions, ranging from 100% in their first three years of commercial operations to 20% in their 10th year. Capital gains arising from transfers of share capital, royalties, technical know-how and technical assistance fees paid by any such company, as well as from declared dividends, are exempted from income tax for a period of 10 years from the commencement date of commercial operations.
The BEZA has recently proposed a tax holiday of seven years for industries that invest a minimum of US$100 million, and of 10 years for a US$200 million investment. As a major financial expedition, the government and the Japan International Co-operation Agency have formulated the FDI Promotion Project, which comprises three components, one of which is the two-step loan component. The objective is to: Ensure the smooth flow of funds to Japanese enterprises that have an intention to enter or invest in EZs; improve the investment climate of EZs by providing funds through the participating financial institutions; and constructing on-site and off-site infrastructure of EZs.
Under the auspices of the Bangladesh Hi-tech Park Authority (BHTPA), HTPs have been established throughout the country to facilitate the sustainable development and proliferation of IT or high-tech Industry. Subject to conditions, high-tech industries operating and conducting their businesses in HTPs can enjoy income tax exemptions, varying from 100% in their first year of commercial operations to 70% in their 10th year. Any income of shareholders of these companies received as dividends, sale proceeds of transfers of shares, royalties, technical know-how fees, etc., are also tax exempt, at 50% for the first 10 years of operation. A developer appointed under the Bangladesh High-tech Park Authority Act enjoys income tax exemptions ranging from 100% in its first year of commercial operations to 30% in its 12th year.
For the ease of doing business, in 2018 the government enacted the One Stop Service (OSS) Act for the BEZA, BHTPA, BIDA and Bangladesh Export Processing Zone Authority (BEPZA). According to this act, investors can get most investment-related services from the OSS centre within one to 15 days. This will attract investment from Japanese manufacturers shifting from Japan, as well as investors from other nations.
In addition to the above-mentioned benefits, foreign promoters and investors are entitled to a private investor or business visa to establish business and explore business possibilities in Bangladesh. Potential investors may be provided with a multiple entry visa of up to five years. Foreign investors with a minimum investment of US$1 million, or a minimum transfer of US$2 million, to any recognised financial institution in Bangladesh will also be considered for citizenship. Additionally, foreign employees may repatriate up to 75% of net monthly income. As a significant safeguard, article 31 of the constitution of Bangladesh stretches its ambit of safeguard to the foreign national residing in Bangladesh, ensuring the fundamental right to protection of law and protection of life and personal liberty, respectively.
These discussed regulatory schemes and changes address and remove all of the existing barriers for investors, assuring an investor-friendly regulatory infrastructure in Bangladesh. A static economic growth, skilled workforce, openness to foreign investment, and the long-term economic plan backed by political stability have made the country a lucrative and liberal hotspot for foreign investment. As a promising destination for FDI, Bangladesh has the potential and means to be a top priority for all Japanese investors, including those who are highly likely to relocate their erstwhile investments.
ASA Bari
Managing Partner
Tel: +880 2956 1540
Email: a.bari@as-associates.net
Shahrima Tanjin Arni
Research Associate
Email: s.arni@as-associates.net
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