BIDA Approval for payment of Royalty and Technical Fees

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BIDA Approval Process for Outward Remittances due to Payment of Royalty, Fees for Technical Knowledge or Technical Assistance and Franchise Fees:



Do you know that you will need BIDA approval for payment of Royalty and Technical Fees to make outward remittance? 

Yes. Industrial enterprises in Bangladesh registered with Bangladesh Investment Development Authority (BIDA) need approval from BIDA for payment of royalty, fees for technical know-how and assistance and franchise fees. But, almost every business entity, especially industrial enterprises, needs to make payments abroad for those purposes. So, we will outline here the application and approval process from BIDA in detail.


However, please note that Section 18 of the BIDA Act, 2016 has imposed this requirement. This requirement is not from the central bank of Bangladesh neither from the Foreign Exchange Regulation Act 1947. Please refer to Chapter 10, Para 25 of Guidelines for Foreign Exchange Transaction (GFET), 2018, Vol-I in this regard.

 

Who Will Need Approval for Outward Remittances Like These?

According to Section 18 of the BIDA Act, 2016, every industrial enterprise registered with BIDA, according to Section 15(3) of the BIDA Act 2016) will need this approval. But there is a permissible limit. Registered entities will require BIDA approval for payment of royalties and technical fees abroad beyond this limit.


BIDA has issued circulars on February 3, 2021 and May 23, 2021 clarifying the issue.

 

Permissible Limit of Royalty, Technical Fees and Franchise Fees

Industrial enterprises registered with BIDA will not need approval to remit royalty, technical fees, franchise fees etc., in the following cases.

1. Projects that have not started commercial operation: Maximum 6% of the total C&F value of imported machinery.

2. Projects that have started commercial operation: Up to 6% of the previous years’ sales as per income tax returns excluding VAT (value-added tax).

3. Franchise fee: If the amount is more than USD 0.1 million, payment in installment is permissible. Prescribed installment sizes are as follows:

* In the first year, 50% of the approved claim

* In the second year, 30% of the approved claim

* In the third year, the rest 20%.

4. Contractors fee: A maximum of 6% of sales revenue as per last year’s income tax or VAT return. VAT return is acceptable for the first year only.


Remember that if the remittance amount exceeds the permissible limit, BIDA approval will be necessary. Moreover, all contracts with the foreign entity entitled to a royalty, technical fees or franchise fees etc. (or any change in them) must have endorsement or approval from BIDA.

 

Conditions for remittance of royalty, technical fees, franchise fees

Industrial enterprises should remit royalty, technical fees, franchise fees etc., through their AD (authorized dealer) banks. They will have to fulfill the following conditions.

  • Eligibility: BIDA will consider Applications from industrial enterprises registered with them
  • Value Addition: BIDA will approve the Application to remit royalty or technical fees for services that will have a minimum positive impact on the applicant’s business performance. BIDA will discourage services with no value addition, transactions without following arm’s length principle or primitive nature. 
  • Remittance to Collaborator: Local companies can remit fee(s) to their foreign collaborator, usually on a yearly basis. BIDA may relax this condition of remittance may for a genuine contractual obligation to pay.
  • Endorsement of Contract: Businesses should endorse or approve the contract from BIDA applying in a prescribed format after signing or before any transaction. Business entities should also take re-approval from BIDA for the amended agreement. 
  • Certificate of Completion: BIDA will consider the approval for post-service cases against a certificate of completion from the beneficiary.
  • Advance Payment: Industrial enterprises should take prior approval from BIDA for every case of advance payment of fees before completing service on the following conditions.

    1. BIDA will allow technical fees up to USD10,0000 per agreement per year. 
    2. The advance payments must be adjusted with the permissible limits.
    3. Application for advance payment must include a bank guarantee, affidavit or any other appropriate guarantee.
    4. A separate approval from BIDA will be necessary for any deviations like high advance payment or inability to adjust advance payment.

  • Remittance to Foreign Associated Enterprise: If the entity in Bangladesh needs to send royalty and technical fees to a foreign associated enterprise/related party, they should comply with the arm’s length pricing principle. They should ensure a third-party assessment of the transaction complying with Income Tax Ordinance 1984.
  • Yearly Basis Remittance: BIDA will approve remittances on a yearly basis, but they may relax it based on specific cases.
  • Post Facto Investigation: BIDA reserves the right for post facto investigation. They may charge monetary penalties to the industrial enterprise for any deviation/discrepancy in the transaction. They will also inform such incidents to Bangladesh Bank. 

 

Payment of fees to a Project Contractor

Businesses in Bangladesh will need prior approval from BIDA to pay allowable fees to foreign parties acting as a contractor for a project in Bangladesh.

BIDA will allow to remit up to 6% of sales revenue (excluding Value Added Tax) shown in the previous year’s income tax return or VAT return for recurring payments to contractors. The frequency of such payments may vary depending on the associated agreement.

BIDA will examine while approving all Applications for approval to receive services from Foreign Service providers whether they import or locally produce their services.


Endorsement or Approval of Contract / Agreement for Remittance of Royalty and Technical Fees

We have already mentioned that endorsement of the contract or agreement for royalty, technical fees, and franchise fees is necessary for approval from BIDA for remittance of fees. Related formalities are as follows.

1. Application for Approval of the Contract: 

The industrial enterprise has to apply to BIDA for endorsement of the related contract in their prescribed format. They should apply immediately after signing the contract and before any remittance takes place.

2. Documents for Approval/Endorsement: 

Enterprises must apply in the prescribed form from BIDA along with all the documents mentioned in the enclosure of the application or latest circular from BIDA.

3. Approval/Endorsement: 

Designated officials of BIDA will ensure approval from their appropriate higher authorities. Then he/she will endorse the contract with his/her signature and seal on each page. 

The endorsement letter issued from BIDA clearly states the titles or names, limits, timeframes, conditions and payment schedules of fees. 

BIDA may request the applicant to revise the contract to comply with their Guidelines for the endorsement. 

4. Re-endorsement: 

Once a contract is endorsed from BIDA will remain valid for the transaction within the limits, timeframes, conditions, payment schedules and other conditions. Whenever there is any change in the contract, it will require a re-endorsement from BIDA. 

 

Procedure for Remittance of Royalty and Technical Fees

Procedure for outward remittance of royalty, technical fees and franchise fees has following few steps.

1. Application to the AD bank: 

Industrial enterprises will have to submit the Application in the prescribed form and all the documents as per the list of documents from BIDA to the concerned AD bank. The contract or agreement endorsed from BIDA must accompany the Application. 

2. Checking Application: 

The concerned AD bank will check the Application and all the documents submitted to ensure full compliance with BIDA guidelines.

3. Transaction: 

The AD bank will send the remittance. Then the AD bank will forward all related documents to BIDA for information and post facto checking. 

4. Post Facto Checking by BIDA: 

BIDA may perform the post facto verification of all or some of the transactions. They may impose the appropriate financial penalty to the concerned industrial enterprise in case of any deviation and discrepancies. They will also inform Bangladesh Bank about any such incident(s).

5. Compliance: 

The related AD bank will follow all the relevant banking and reporting rules and regulations for these remittances the Guidelines of BIDA. Bangladesh Bank will have the authority to take necessary measures against the concerned for any deviation and discrepancies of existing rules and regulations.


To Wrapping it Up:

The process of Outward Remittance Repatriation for Payment of Royalty, Technical Fees, and Franchise Fees seems to be complicated. This process of approval from BIDA indicates the process of approval or endorsement of the related service Contract / Agreement and its amendments. 

However, the “Guideline for Outward Remittance Repatriation for Payment of Royalty, Technical Knowledge/Technical Know-how Fee(s), Technical Assistance Fee(s) and Franchise Fee(s)-2020” dated March 3, 2021, does not accompany the prescribed format for the Application. It is available with their circular May 23, 2021.


We hope you have found this helpful article. If you have any other queries about this topic, do not hesitate to write to us.

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