The taxation of life insurance companies in Bangladesh is governed primarily by the Income Tax Act, 2023, with regulatory oversight by the National Board of Revenue (NBR) and the Insurance Development and Regulatory Authority (IDRA).
Unlike other industries, life insurance companies operate under a specialised taxation framework because of their dual role as risk-bearing entities and custodians of policyholders' funds.
Life insurance companies are treated as financial institutions for tax purposes. The corporate tax rate ranges from approximately 37.5 percent for listed companies to 40 percent for non-listed companies.
Basis of taxation
The income of life insurance companies mainly comprises premium income, investment income (interest, dividends and rent), and other income. However, not all such income is fully taxable, as a significant portion belongs to policyholders.
Income that belongs to policyholders is not treated as income of the insurance company. For example, interest credited to policyholders under universal life policies is treated as a liability rather than as company income.
Determination of taxable income
The Income Tax Act contains a dedicated schedule for computing the taxable income of life insurance companies, as the process is more technical than that for other industries. Taxable income is often computed using the gross external earnings approach, which includes interest, dividend and rental income, less allowable expenses.
However, disputes arise when policyholder distributions are not fully allowed as deductions. The industry generally favours an actuarial surplus-based approach, as it better reflects the true profitability of life insurance companies.
A unique feature of life insurance companies is that both the financial statements and the actuarial valuation report must be considered together to assess profitability accurately.
There remains an opportunity to strengthen stakeholders' understanding of actuarial valuation reports and their linkage with financial statements, which are essential for a comprehensive assessment of an insurer's performance.
Moreover, the financial statements of a life insurance company generally comprise only a revenue account and a balance sheet, which do not present a complete picture of the company's profitability.
In practice, variations are sometimes observed in the application of tax computation methodologies, which may differ from established regulatory frameworks. These differences in interpretation occasionally lead to prolonged disagreements between industry participants and the authorities, sometimes resulting in formal dispute resolution.
Under Section 82 of the Insurance Act, 2010, 90 percent of the surplus from participating policies is allocated to policyholders and 10 percent to shareholders. Ideally, only the shareholders' portion should be subject to tax.
While the Insurance Act provides clear guidance on surplus allocation, consistent application across all cases remains an area for further alignment among stakeholders.
Withholding tax also has implications for the sector. Life insurance companies typically invest a substantial portion of their funds in government bonds, and the interest earned on these bonds is subject to a 15 percent withholding tax.
As a result, a significant amount of tax is deducted from investment income. In many cases, obtaining tax credits or refunds takes longer than expected, indicating scope for further streamlining and efficiency improvements.
In Bangladesh, all insurance companies are required to comply with IFRS 17, a complex accounting standard under which financial statements must be prepared.
The transition to IFRS 17 presents implementation challenges, and continued collaboration between regulators and industry stakeholders could help ensure its smooth and effective adoption.
The tax framework may also need to be updated over time to reflect evolving financial reporting standards.
Key challenges
Greater alignment in the treatment of investment income and the taxation of policyholder benefits between tax laws and insurance regulations would enhance clarity, consistency and the long-term development of the sector.
The taxation of life insurance companies in Bangladesh is complex and continues to evolve. The key issue lies in distinguishing company income from policyholder funds. Greater alignment between tax laws and insurance regulations is essential to ensure fair taxation and support the sustainable growth of the sector.
The implementation of IFRS 17 may present additional challenges in ensuring that financial reporting is appropriately reflected in tax laws.
This year has also seen further updates to the calculation of gross external earnings, a key component of tax computation. These changes reflect the authorities' ongoing efforts to refine and modernise the regulatory framework in response to evolving requirements.
The government, particularly through the NBR and IDRA, has demonstrated a strong commitment to developing a robust and transparent insurance ecosystem in Bangladesh. As the sector continues to evolve, sustained collaboration and gradual policy refinements will help unlock its full potential.
A well-aligned regulatory environment can further strengthen confidence in the industry and contribute meaningfully to national economic growth.
The writer is the deputy managing director and chief financial officer of MetLife Bangladesh.
