Business

Business Expansion in Bangladesh: Branch Office vs. Subsidiary

The dynamic, fastest-growing, and emerging business environment of Bangladesh is responsible for the rise in business expansion. Bangladesh currently holds the 4^th rank in terms of defining the Bangladesh Startup Ecosystem, which is responsible for adding value to the rate of business expansion in Bangladesh as observed every year. As per the reports of the Japan External Trade Organization (Jetro), approx. More than 71.6% of Japanese firms are targeting business expansion in Bangladesh through the establishment of branch offices and subsidiary business entities in Bangladesh. The widely observed business expansion in Bangladesh includes a dependent (total and partial) form of business entity, namely a branch office or liaison office, and a distinct (total and partial) business unit from that of the parent company, namely a subsidiary company.

Reasons responsible for business expansion in Bangladesh

Bangladesh, after its independence in 1971, has undergone an impressive transformation in terms of economic development and growth of the nation’s business prospects. The prospects of business expansion in Bangladesh are clearly evident due to the following reasons:

1. Saves time and cost in comparison to the business startup in Bangladesh;
2. Increases the brand visibility in the international global market;
3. Provide business awareness among the parent companies willing to expand their business in Bangladesh;
4. Provides global exposure to the parent brands aiming for business expansion in Bangladesh;
5. Availability of a powerful market space in Bangladesh is observed;
6. The benefit of the availability of heavy potential investors in the nation;
7. The rapid growth observed in the economy of Bangladesh;
8. The benefits of the increase in labour productivity are enjoyed by the parent companies;
9. Ensures infrastructural development in Bangladesh;
10. Supportive reforms dealing with the vast business policies of Bangladesh;
11. Competitive labour cost;
12. Abundance of raw materials and resources;
13. Suitable geographic location, etc.

A comparative analysis of the expansion of branch office vs. subsidiary

Business expansion in Bangladesh and other parts of the globe is crucial for addressing and recording the rapid growth rate observed due to the continuous expansion in the parent business structures. A branch office is a direct extension of the parent company whereas it doesn’t apply to a subsidiary company. Certain factors like compliance with the market standards, hiring foreign contractors, etc. must be considered before targeting the expansion of the business environment in other countries like Bangladesh.

The research of the companies targeting business expansion in Bangladesh ends with the important decision of establishing a branch office, representative/ liaison office, or a subsidiary company. The decision of what is best suited can be easily made based on the comparative analysis of the two, providing the parent business with opportunities for international growth and further prospects in Bangladesh. The comparison between the Branch Office and a subsidiary business is outlined below:

Comparison based on the advantages of business expansion in Bangladesh

On the expansion of a foreign company, a branch office, and a dependent business firm that has no local source of revenue, it was formed in Bangladesh. On the contrary, establishing a subsidiary in Bangladesh is the most crucial requirement during business expansion, as it is a distinct entity from the parent or holding company; hence, it is considered a totally new form of business setup or expansion in a foreign country. A parent company is responsible for holding the ownership status of both companies, whether it be a branch office or a subsidiary company. The branch officer and subsidiary both attract certain advantages and disadvantages of business expansion in Bangladesh, which are discussed below.

The branch office established in Bangladesh is mainly concerned with the following business activities, which is observed as an advantage for business expansion in Bangladesh:

1. Simplifies the export and import of goods and services;
2. Aids with professional or consultancy services within the nation;
3. Promotes a strong collaboration between the Bangladeshi and the parent or foreign companies carrying their business in Bangladesh;
4. Increases the customer base of the parent company expanding their business in Bangladesh;
5. Broadens the market size with the help of recognized brand names;
6. Enjoys various tax benefits as no need to file separate tax returns (as agreed upon in the avoidance of double tax treaty);
7. Authority to engage in other commercial activities with the prior approval of the Inter-Ministerial Committee of BIDA;
8. Less expensive than forming a subsidiary company;
9. A greater level of managerial control is with the parent company;
10. Easy to dissolve the status of a branch office;
11. Simplified procedure of setting up a branch office without any bureaucratic hurdle;
12. Satisfies the customer needs without forming a separate entity;
13. Branch offices are recognized globally.

On the contrary, the benefits of business expansion in Bangladesh observed through the establishment of a subsidiary company are:

1. Operates independently from the parent company;
2. No requirement of minimum capital is required for establishing a subsidiary company;
3. The market share of the subsidiary companies increases after business expansion;
4. Enjoys substantial tax benefits as it reduces the overall tax obligations for the parent company;
5. No restriction on business activities;
6. Allows 100% foreign ownership of its shares;
7. Easy to transfer and sell the ownership of the shares of the holding company;
8. Ensure easy entrance to new market spaces;
9. Easy to sponsor visas for its employees;
10. Protection under the local laws of the nation;
11. The parent company is protected from all the liabilities of the subsidiary company;
12. Creates trust and credibility among the local entities;
13. Easy to attract banks and investors (because of holding the status of a local company).

Comparison based on the disadvantages of business expansion in Bangladesh

The branch offices are also restricted in many aspects of directly carrying out manufacturing activities in Bangladesh, which is considered one of the disadvantages of business expansion in Bangladesh. The disadvantages of business expansion in Bangladesh through the establishment of a branch office are provided below:

1. Increases the liability of the parent company;
2. No separate legal entity;
3. Difficulty in sponsoring visas and immigration formalities of its employees (because it is not a local company);
4. Difficulty in establishing commercial trust among the local vendors;
5. Absence of a local legal entity for bearing the debts of the company;
6. Limited business opportunities (due to lack of ownership);
7. Attracts risk in exploring new market spaces;
8. Complicated procedure for transfer within the organization.

On the contrary, a subsidiary company attracts the following disadvantages of business expansion in Bangladesh.

1. Mandatory compliance with all the local tax laws and regulations;
2. The parent company loses administrative control over the subsidiary company;
3. The employees of the subsidiary of Bangladesh are not considered part of the parent company;
4. 50% of the voting securities directly or indirectly lie with the parent or holding company;
5. Faces regulatory and foreign challenges due to business expansion in Bangladesh;
6. High cost of establishment;
7. A higher amount of complex legal and financial formalities is required for exiting a subsidiary business in Bangladesh;
8. Requires compliance with multiple government registrations;
9. Mandatory to file annual reports of the subsidiary business expanded in Bangladesh;
10. Exposure to political risks;
11. Difficulty in liquidating and deregistering upon the insolvency of the subsidiary company;
12. Lack of parental control.

Comparison based on authority for expanding business in Bangladesh

When it comes to the authority of the companies or firms authorized for business expansion in Bangladesh, all the foreign companies indulged in operations of carrying short-term trading and manufacturing activities abroad (or other projects) hold the authority to expand their business and establish a branch office in Bangladesh, whereas all the parent or holding companies holds the authority to legally extend and form a separate, limited liability, legal entity known as a subsidiary of the parent company in Bangladesh.

Comparison based on the documents required for business expansion in Bangladesh

The list of documents required for business expansion in Bangladesh depends upon the type of business expansion opted for, whether it be a branch office or a subsidiary company. The list of documents required for getting the prior approval of the Bangladesh Investment Development Authority (BIDA) and approval of the Registrar of the Joint Stock Companies and Firms for carrying out the commercial business operations of a branch office in Bangladesh include:

1. MOA and AOA of the parent company;
2. Certificate of Registration of the parent company;
3. Facsimile of the last year’s audited accounts of the parent company;
4. The resolution of the board authorizing business expansion in Bangladesh by opening a branch office;
5. A bank solvency certificate;
6. The facsimile of the letter of approval from BIDA;
7. The facsimile of the letter of approval from the Central Bank of Bangladesh;
8. Complete details of the business operations to be carried forward in Bangladesh;
9. Complete details of the shareholders, directors, managers, promoters, and other members of the parent company;
10. Filled and signed application for business expansion in Bangladesh;
11. The complete management structure of the parent and the proposed branch office;
12. Account opening form;
13. Any other documents as requested by BIDA;

The documents containing 4 copies of each must be submitted at the office of BIDA for further inspection by the Inter-Ministerial Committee of BIDA within a period of 1 month.

On the contrary, the list of documents required for business expansion through a subsidiary company in Bangladesh includes:

1. Facsimile of the name clearance certificate issued at the office of the Registrar of the Joint Stock Companies and Firms;
2. Facsimile of the passport, photographs, and other Identification documents of all the shareholders and directors;
3. Facsimile of the Memorandum and Articles of Association of the parent company;
4. Copy of the board resolution authorizing business expansion in Bangladesh through registration of a subsidiary company;
5. Copy of board resolution guiding for bank selection;
6. A draft copy of the new Memorandum and Articles of Association for the subsidiary company;
7. A signed copy of the subscriber’s form, directors’ consent letter, and a declaration of registered address;
8. Facsimile of the encashment certificates;
9. The freshly issued Tax Identification Number (TIN) of the subsidiary company.

Comparison based on costs for business expansion in Bangladesh

Business expansion in Bangladesh attracts several costs, from business setup to hiring employees to ensure smooth business operations of the branch office and Subsidiary business targeting branch setup in Bangladesh.

The cost of registering a branch office in Bangladesh requires a minimum paid-up capital of USD 50,000 as inward remittance, which covers the business establishment fees and operating expenses for at least 6 months within 2 months of receiving the date of issuance as mentioned in the BIDA permission letter and a fee of 25,000 Bangladeshi taka must be charged as a government fees for business expansion in Bangladesh, whereas the cost of registering a Subsidiary business in Bangladesh requires a minimum paid-up share capital of only USD 1 and at least 50% of share-holding with the parent company, which differs according to the rules and regulations established for different industries.

Comparison based on the timeline for completing the process of registration

The approval for registering a branch office in Bangladesh for at least 3 years is granted within 3 to 4 weeks after the submission of the required application to the authorities like BIDA, whereas the registration of a subsidiary company in the form of a limited liability company is considered the most preferred form of business expansion in Bangladesh which usually requires 6 to 8 weeks.

Comparison based on the procedure for business expansion in Bangladesh

Simply, foreign investors find that the procedure for business expansion into a subsidiary company is more complex than that of a branch office as establishing a branch office requires fewer formalities as it is an extension and hence does not create a separate legal entity distinct from the parent company, on the contrary, the registration of a subsidiary in Bangladesh requires the following of a more complex procedure as it gets established as a limited liability company which is a separate legal entity from its parent company.

Setting up a Branch Office in Bangladesh

As concerned with the provisions of the Companies Act of 1994, section 378 provides the procedure for setting up a branch office in Bangladesh, which requires prior approval of the Bangladesh Investment Development Authority (BIDA). The process of registering a branch office in Bangladesh includes the following steps:

1. Step 1 requires the submission of relevant documents of the parent business to the Inter-Ministerial Committee of BIDA;
2. Step 2 requires the appointment of a local registered or authorized agent who is a citizen or permanent resident of Bangladesh;
3. Step 3 requires opening a bank account in a registered bank in Bangladesh;
4. Step 4 requires reporting to the Central Bank of Bangladesh within 30 days of obtaining permission from the authorities of BIDA;
5. Step 5 requires applying for Local trade licenses with the Local city corporation of Bangladesh;
6. The most crucial step is Step 4, which requires the registration of the branch office with the Registrar of the Joint Stock Companies and Firms (RJSC) for at least 3 years;
7. Step 6 requires appointing foreign employees to carry out business activities in Bangladesh;
8. Step 7 requires to apply for VAT and other income tax registrations;
9. Step 8 requires applying for relevant work permits and visas for foreign employees;
10. Step 9 requires the filing of annual returns for the branch office.

Setting up a Subsidiary Business in Bangladesh

The provision of the Companies Act of 1994 provides the procedure for the incorporation of a subsidiary company, which may either require 100% or 50% foreign ownership and be in compliance with the local laws of Bangladesh. The procedure for business expansion in Bangladesh by setting up a Subsidiary in Bangladesh requires defining the nature of the structure chosen along with the formalities as provided below:

1. Step 1 requires selecting a name and obtaining a name clearance certificate after the registration of the name of the subsidiary company in Bangladesh;
2. Step 2 requires drafting the constitutional document of the subsidiary company, namely the Articles of Organisation;
3.  Step 3 requires opening a corporate bank account for the issuance of the encashment certificate;
4. Step 4 requires online registration of the subsidiary company with the Registrar of the Joint Stock Companies and Firms for facilitating the business expansion in Bangladesh;
5. Step 5 requires applying for relevant business licenses and other trade licenses like import and export registration certificates;
6. Step 6 allows for the registration of the VAT or other income tax qualifications;
7. Step 7 allows the conduct of the Annual General Meeting and the Board Meeting of the subsidiary company within 18 months of its incorporation;
8. Step 8 allows for the appointment of international and national employees and other staff;
9. Step 9 requires filing the Annual Report to regulate the business expansion in Bangladesh.

Conclusion

Choosing the correct strategy for business expansion in Bangladesh is a complex procedure that requires compliance with proper regulations dealing with taxation, liability considerations, capital requirements, market requirements, documentation, merits, demerits, etc., to either set up a branch office or a subsidiary company in Bangladesh. The entrepreneurs must also discover the thrill of proper market research and industry connection before deciding on the form of business expansion in Bangladesh.

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