Corporate tax in Pakistan

Summary

 

Corporate Income Tax Rate (%)

Companies Other than Banking Companies 32
Banking Companies 35
Capital Gains Tax Rate (%) 7.5/10/12.5/32 (a)
Branch Tax Rate (%) 32
Withholding Tax (%) (b)
Dividends
7.5/10/12.5/17.5/25 (c)
Interest 10/17.5/20 (d)
Royalties from Patents,
Know-how, etc.
15/20 (e)
Fees for Technical Services 8/10/12/15 (f)
Branch Remittance Tax 10 (g)
Net Operating Losses (Years)
Carryback 0
Carryforward 6

a) Capital gains on listed securities are taxable at reduced rates (see Section B).

b) See Section B for a listing of additional withholding taxes.

c) The 12.5% rate is the general tax rate for dividends. The 7.5% rate applies to dividends paid by companies engaged in power generation, by purchasers of power projects privatized by the Water and Power Development Authority or by companies supplying coal exclusively to power generation projects. The 10% rate applies to dividends paid to unit holders other than companies by mutual funds; however, in the case of stock funds, the general rate of 12.5% applies if the dividend receipts of the fund are less than capital gains. The 25% rate applies to dividends received by companies from collective-investment schemes, real estate investment trusts (REITs) or mutual funds other than stock funds. The 17.5% rate applies to dividends paid by companies (other than power projects, stock funds, money market funds, income funds, REITs or other funds) if the recipient is a non-filer (that is, it does not file an income tax return). The withholding tax is imposed on the gross amount of the divi­dend. The withholding tax on dividends is considered a final discharge of the tax liability on such income (except for banks and the 17.5% rate for non-filers).

d) The withholding tax on interest is considered to be an advance payment of tax, which may be credited against the final tax liability for the year. Interest paid on loans and overdrafts to resident banks and Pakistani branches of nonresi­dent banks and financial institutions is not subject to withholding tax. The withholding tax rate is 10% of the gross amount of interest paid to resident persons and to nonresident persons without a permanent establishment (PE) in Pakistan. The 17.5% rate applies if the recipient is a non-filer. The rate is 20% for nonresidents with a PE in Pakistan.

e) The general withholding tax rate for royalties is 15%. This tax is considered to be a final tax for nonresident recipients of royalties. However, if royalties are derived with respect to properties or rights effectively connected with a PE of a nonresident, a 20% withholding tax rate is imposed, unless a non-deduction certificate is obtained by the PE. The 20% withholding tax is credited against the final tax liability.

f) Fees for technical services do not include consideration for construction, assembly or similar projects of the recipient (such consideration is subject to various withholding tax rates) or consideration that is taxable as salary. The general withholding tax rate is 15% of the gross amount of the payment. This withholding tax is considered to be a final tax for nonresident recipients. However, if technical services are rendered through a PE in Pakistan, various rates apply depending on whether the service provider is a filer or non-filer. The withholding tax is considered to be an advance payment of tax by the nonresident recipient of such technical service fees and may be credited against the eventual tax liability. For further information, see the table in With­holding taxes in Section B.

g) Remittances of after-tax profits by branches of nonresident petroleum explo­ration and production companies are not taxable.

Taxes on corporate income and gains

Corporate income tax. Companies that are resident in Pakistan are subject to corporation tax on their worldwide income. Tax is levied on the total amount of income earned from all sources in the company’s accounting period, including dividends and taxable capital gains. Branches of foreign companies and nonresident companies are taxed only on Pakistan-source income. A company is resident in Pakistan if it is incorporated in Pakistan or if its con­trol and management are exercised wholly or almost wholly in Pakistan during the tax year. Company is defined to include the following:

  • A company as defined in the Companies Ordinance, 1984
  • A body corporate formed by or under any law in force in Pakistan
  • An entity incorporated by or under the corporation law of a country other than Pakistan
  • The government of a province
  • A local authority
  • A foreign association that the Federal Board of Revenue de­clares to be a company
  • A modaraba, cooperative society, finance society or other society
  • A nonprofit organization
  • A trust, entity or a body of persons established or constituted by or under any law

Tax rates. For the 2016 tax year (income year ending on any day between 1 July 2015 and 30 June 2016), the tax rate is 32%. How­ever, for banking companies, the tax rate is 35%.

Small companies are subject to tax at a rate of 25%.

Small companies are companies incorporated after 1 July 2005 that meet the following conditions:

  • They have paid-up capital and undistributed reserves of not exceeding PKR50 million.
  • They have no more than 250 employees at any time during the year.
  • They have annual turnover not exceeding PKR250 million.
  • They were not formed as a result of a restructuring involving the splitting up or reorganization of an already existing business.

The 2015 Finance Act introduced a super tax for rehabilitation of temporarily displaced persons for the 2015 tax year. This tax is imposed at a rate of 3% of the specified income of companies (other than banking companies) that have income of PKR500 mil­lion or more. All banking companies are required to pay the super tax at a rate of 4% of their income, regardless of the amount of their income.

The 2015 Finance Act also introduced a tax on undistributed re­serves, which applies for the 2015 tax year and future years. This tax is imposed on a public company (other than banking compa­ny) that derives profits for a tax year but does not distribute cash dividends or distribute cash dividends to such an extent that its reserves at the end of the tax year exceed its total paid-up capital. The amount by which the reserves exceed the total paid-up capi­tal is treated as income and is subject to tax at a rate of 10%.

The gross revenue of nonresidents’ air transportation and ship­ping businesses is taxed at 3% and 8%, respectively. This income is not subject to any other tax.

The shipping business of resident persons is taxed on the basis of registered tonnage per year.

Certain types of income are subject to final withholding taxes. For information regarding these taxes, see Section A and Withholding taxes.

Alternative corporate tax. The 2014 Finance Act introduced an alternate corporate tax, which is effective from the 2014 tax year. If the corporate tax is less than 17% of the accounting income (excluding certain types of income and related expenses), alter­native corporate tax is required to be paid as minimum tax. The difference between the corporate tax and alternative corporate tax can be carried forward to offset corporate tax for a maximum period of 10 years.

Tax incentives. Some of the significant tax incentives available in Pakistan are described in the following paragraphs.

Private sector projects engaged in the generation of electricity are exempt from tax. However, this exemption is not available to oil­fired electricity generation plants set up during the period of 22 October 2002 through 30 June 2006.

Income derived from instruments of redeemable capital, as defin­ed in the Companies Ordinance, 1984, by the National Investment (Unit) Trust of Pakistan established by the National Investment Trust Limited or by mutual funds, investment companies or collective-investment schemes approved by the Securities and Exchange Commission is exempt from tax if such enterprises distribute at least 90% of their profits to their unit holders.

Income derived by a collective-investment scheme or real estate investment trust scheme is exempt from tax if at least 90% of the scheme’s accounting income for the year, reduced by realized and unrealized capital gains, is distributed among the unit or certifi­cate holders or shareholders.

Income derived from the export of computer software developed in Pakistan and related services is exempt from tax until 30 June 2016.

A tax credit of 10% of the amount invested by a company that is an industrial undertaking for the purchase of plant and machinery for the purposes of extension, expansion, balancing, moderni­zation and replacement in an industrial undertaking set up in Pakistan and owned by the company may be claimed against the tax payable if the plant and machinery is purchased and installed between 1 July 2010 and 30 June 2016. Any unused tax credit may be carried forward to the following two tax years.

A tax credit equal to 100% of the tax payable on taxable income for a period of five years is granted to a company if the following conditions are satisfied:

  • The company is incorporated and an industrial undertaking is set up during the period of 1 July 2011 through 30 June 2016.
  • The investment is made entirely out of equity.

A tax credit is allowed to a company that is set up in Pakistan before 1 July 2011 if it invests any amount with 100% new eq­uity raised through issuance of new shares in the purchase and installation of plant and machinery for an industrial undertaking, for the expansion of plant or machinery already installed or for the undertaking of a new project. The credit is allowed against the tax payable for a period of five years. The credit is calculated by applying the pro portion of new equity to total equity including new equity against the tax payable.

A tax credit equal to 20% of the amount of investment is allowed to a company that is set up in Pakistan before 1 July 2011 and that makes an investment during the period of 1 July 2011 through 30 June 2016 with 100% new equity raised through the issuance of new shares, for the purpose of balancing, modernization and replacement of plant and machinery already installed in an indus­trial undertaking owned by a company. The tax credit may be carried forward up to five years.

A tax credit of 20% of the tax payable is allowed in the tax year in which a company becomes listed on a registered stock ex­change in Pakistan.

A tax credit of 2.5% of tax payable is allowed in a tax year to a taxpayer registered as a manufacturer under the Sales Tax Act if 90% or more of the taxpayer’s sales are made to persons also registered under the act.

A tax credit is available for 10 years to a company formed to establish and operate a new manufacturing unit set up between 1 July 2015 and 30 June 2018. The tax credit equals 1% of the tax payable for every 50 employees registered with the social security institutions of the federal and provincial governments. The total tax credit is restricted to 10% of the total tax payable.

The corporate tax rate is reduced to 20% for a period of five years for a company setting up an industrial undertaking between 1 July 2014 and 30 June 2017 through foreign direct investment of at least 50% of the cost of the project, including working capital.

Capital gains. Capital gains on shares of public companies, vouch­ers of the Pakistan Telecommunication Corporation, modaraba certificates, instruments of redeemable capital, debt securities and derivative products are taxable. The tax rates for the 2016 tax year vary according to the holding period of the securities. If the hold­ing period for such securities is two years or more, the tax rate is 0%. The following are the tax rates if the holding period is less than four years:

  • Holding period is less than 12 months: 15%
  • Holding period is 12 months or more but less than 24 months: 12.5%
  • Holding period is 24 months or more but less than 4 years: 7.5%

Capital gains on other assets (including non-public securities) are taxable at the corporate rate. However, only 75% of capital gains derived from transfers of capital assets, excluding immovable properties and assets on which tax depreciation or amorti zation is claimed, is taxed if the assets were held for more than 12 months.

Capital gains on the disposal of listed securities and the tax pay­able on the gains are computed, determined, collected and depos­ited on behalf of a taxpayer by the National Clearing Company of Pakistan Limited (NCCPL), which is licensed as a clearing house by the Securities and Exchange Commission of Pakistan. How­ever, the NCCPL does not collect tax from the following catego­ries of the taxpayers:

  • Mutual funds
  • Banking companies, nonbanking finance companies and insur­ance companies
  • Modarabas
  • Companies, with respect to debt securities only
  • Other persons or classes of persons notified by the Federal Board of Revenue

The investors listed above are required to self-pay their capital gain tax obligation on a quarterly basis at a rate of 1.5% or 2% of the amount of gain, depending on the amount of gain. They must file a statement of advance tax and pay the tax within 21 days after the end of each quarter.

Capital gains arising on immovable property held for a period of up to two years by a person are subject to tax at the following rates:

  • Immovable property held for a period of up to one year: 10%
  • Immovable property held for a period of more than one year but up to two years: 5%

Capital losses can be offset only against capital gains. Capital losses can be carried forward for six years. However, capital losses on disposals of securities (shares of public companies, vouchers of the Pakistan Telecommunication Corporation, Modaraba Cer­tificates, instruments of redeemable capital and derivative prod­ucts) can be set off only against capital gains on disposal of secu­rities in the current year.

Administration

Filing requirements. The tax year commences on 1 July and ends on 30 June. Companies are required to end their fiscal years on 30 June. Special permission is required from the Commissioner of Income Tax to use a different year-end. The Federal Board of Rev­enue has specified 30 September as the year-end for certain indus­tries, such as sugar and textiles, and 31 December as the year-end for insurance companies.

An income tax return must be filed by 30 September of the follow­ing year if the company’s year-end is from 1 July through 31 Dec­ember and by the following 31 December if the year-end is from 1 January through 30 June. Any balance due after deduct ing ad­vance payments and withholding taxes must be paid when the tax return is filed.

Advance tax payments. In general, advance tax is payable quar­terly based on the tax to turnover ratio of the latest tax year. How­ever, banking companies must pay advance tax on a monthly basis. If the tax liability is estimated to be more or less than the tax charged for the prior tax year, an estimate of tax liability can be filed and advance tax liability can be paid in accordance with such estimate, subject to certain conditions. For taxpayers other than banking companies, the due dates for the advance tax pay­ments are 25 September, 25 December, 25 March and 15 June. Banking companies must pay advance tax by the 15th day of each month.

Adjustable quarterly advance tax on capital gains from sale of securities is payable on the capital gains derived during the quarter by companies at a rate of 2% if the holding period is less than 6 months and 1.5% if the holding period is between 6 and 12 months.

Minimum tax. Resident companies and nonresident banking com­panies are subject to a minimum income tax equal to 1% of gross receipts from sales of goods, services rendered and the execution of contracts, if the corporate tax liability is less than the amount of the minimum tax. The excess of the minimum tax over the corporate tax liability may be carried forward and used to offset the corporate tax liability of the following five tax years.

Withholding taxes. Withholding tax is an interim tax payment that may or may not be the final tax liability. Amounts withheld that are not final taxes are credited to the final tax liability of the tax­payer for the relevant year.

In addition to the withholding taxes listed in Section A, payments by corporations are subject to the following taxes that are deduct­ed or collected at source.

Tax Rate
Foreign-exchange proceeds from
exports of goods
1% (a)
Rent for immovable property Various (b)
Payments for goods
Specified goods 1.50%
Other goods
Payments to companies
Filers (see footnote [c] to Section A) 4% (c)
Non-filers (see footnote [c] to Section A) 6% (c)
Payments to PEs of nonresidents
Filers 4.00%
Non-filers 6.00%
Payments to others
Filers 4.50%
Non-filers 6.50%
Imports of goods
By industrial undertakings and companies
Filers 5.5% (d)
Non-filers 8% (d)
By other taxpayers
Filers 6.00%
Non-filers 9.00%
Payments under executed contracts for
construction, assembly and similar projects
By companies and nonresident contractors
Filers 7% (e)
Non-filers 10% (e)
By other taxpayers
Filers 7.50%
Non-filers 10.00%
Sportspersons 10.00%
Payments for services
Rendered by residents
Transportation services 2.00%
Electronic and print media advertising
services
Filers 1.00%
Non-filers
Companies 12.50%
Other taxpayers 15.00%
Other services
By companies
Filers 8% (f)
Non-filers 12% (f)
By other taxpayers
Filers 10% (f)
Non-filers 15% (f)
Rendered by nonresidents through PE.s
Transportation services 2.00%
Other services (f)
By companies
Filers 8.00%
Non-filers 12.00%
By other taxpayers
Filers 10.00%
Non-filers 15.00%
Brokerage and commission
Indenting commission 5% (a) (g)
Advertising agents
Filers 10% (a) (g)
Non-filers 15% (a) (g)
Other commission and brokerage
Filers 12% (a) (g)
Non-filers 15% (a) (g)
Advertisement services by a nonresident
person relaying from outside Pakistan
(broadcasting an advertisement into
Pakistan from outside the country)
6% / 10% (a)
Payments to employees — (g) (h)
Commission earned by members of
stock exchange
0.01% (.i)
Cash withdrawals exceeding PKR50,000 0.3% / 0.6% (j)
Purchases of domestic air tickets 5.00%
Purchases of international air tickets
other than economy class
First or executive class PKR16,000
per person
Others excluding economy class PKR12,000
per person
Payments to distributors, dealers and
wholesalers for specified goods
0.1%/0.2%/
0.7%/1.4% (k)
Transfers of immovable property 0.5%/1%/2% (l)
Sales to retailers 0.5% (m)
Cable operators Various (n)
Internet protocol television (IPTV),
FM radios, mobile television, satellite
television channels and landing rights
(tax collected from licensee)
20.00%
Dealers, commission agents and arhatis
(middlemen) and similar persons
Various (p)
Payments for holding functions and
gatherings
5.00%
Foreign-produced films and television
Plays
PKR100,000 per
film or episode
Purchase of motor vehicles Various (q)
Registration of motor vehicles Various (q)
Electricity consumption 5%/7.5%/10% (r)
Telephone use including internet and
mobile
Various
Issuance of bonus shares 5% (s)
Auction of property or goods 10% (t)
Non-cash banking transactions
exceeding PKR50,000 in a day
0.6% (u)
Transactions in futures commodity contracts 0.5% (v)
Right to use machinery and equipment 10% (a)

a) This tax is a final tax.

b) Property income is subject to bottom-line profit taxation. The tax deducted at source may be credited against the eventual tax liability. A 15% rate applies if the payment is being made to a company. For payments made to individuals or association of persons, the rate ranges from 0% to 15%, depending on the amount of rent.

c) Tax deducted on the sale of goods is a final tax for resident companies, other than listed companies, engaged in trading.

d) This tax is a final tax for entities engaged in the trading of imported goods. Lower rates may apply to importers or manufacturers of specific goods.

e) Nonresident contractors may irrevocably elect to treat the withholding tax as a final tax. The withholding tax is a final tax for all resident contractors other than listed companies.

f) The tax withheld is treated as a minimum tax if the tax liability computed on a bottom-line profit basis is less than the amount of the tax withheld.

g) This tax is imposed on residents and nonresidents.

h) The applicable rate depends on the income earned by the employee for the year.

i) The 0.01% rate applies to the traded value (sales price) of shares traded on the stock exchange that relate to the commission earned by the members on the purchase, sale and trading of shares for its clients and investors. The 0.01% tax is considered to be an advance payment of tax, which is credited against the final tax liability of the member of the stock exchange for the year.

j) The tax withheld is treated as a minimum tax if the tax liability computed on a bottom-line profit basis is less than the amount of the tax withheld.

  • The federal government or provincial governments
  • Foreign diplomats
  • Diplomatic missions in Pakistan
  • Persons who produce a certificate from the Commissioner of Income Tax that the person’s income is exempt from tax

The withholding tax is imposed on the entire sum if the aggregate of sums withdrawn during a day exceeds PKR50,000.

k) The tax is collected by manufacturers and commercial importers at the time of the sale of goods in specified sectors. The tax collected is an advance tax for distributors, dealers and wholesalers. The rates of 0.1% and 0.2% apply to sales of goods other than fertilizers to filers and non-filers respectively, and the rates of 0.7% and 1.4% apply for fertilizer sales to filers and non-filers respectively.

l) A person responsible for registering or attesting the transfer of immovable property must collect the tax from the person selling or transferring the prop­erty. The tax collected is an advance tax. The 0.5% and 1% rates apply to the sale of property by filers and non-filers respectively, and the rates of 1% and 2% apply to the purchase of property with a value exceeding PKR3 million by filers and non-filers respectively (the 2% rate is applicable from the date specified by the authorities).

m) The tax is collected by manufacturers, distributors, dealers, wholesalers or commercial importers at the time of the sale of goods in specified sectors to retailers. The tax collected may be credited against the eventual tax liability.

n) The tax is collected by Pakistan Electronic Media Regulatory Authority at the time of issuance or renewal of a license. The amount of tax depends on the category of license. The tax collected may be credited against the eventual tax liability.

o) The tax is collected on the permission or renewal fee.

p) The market committee collects the tax from dealers, commission agents, arhatis, and similar persons on the issuance or renewal of the license. The tax collected may be credited against the eventual tax liability.

q) This advance tax is collected by the motor vehicle registration authorities at the time of registration of the vehicle. The rates vary according to the engine capacity of the relevant motor vehicles. The tax rate also depends on whether the taxpayer is a filer or non-filer.

r) This advance tax is collected by electric companies at the time of issuance of invoices to consumers. The 5% rate applies to industrial consumers with a bill exceeding PKR20,000. The 10% rate applies to commercial consumers with a bill exceeding PKR20,000. The 7.5% rate applies to domestic consumers with a bill exceeding PKR75,000.

s) The issuance of bonus shares is subject to tax in Pakistan. The rate is applied to the value of the bonus shares and is deducted by the issuer company at the time of issuance.

t) Specified persons making sales through public auction or auction by tender are required to collect advance tax.

u) Banking companies must collect advance tax from non-filers at the time of the sale of banking instruments and at the time of transfer of funds through banking instruments. The government reduced the tax rate to 0.3% until 29 February 2016 and then to 0.4% until 15 March 2016. This advance tax is available for adjustment against the eventual tax liability.

v) The Pakistan Mercantile Exchange Limited collects this tax from its mem­bers on the sale and purchase of futures commodity contracts. This tax is adjustable.

In general, for payments not listed in the above tables or in Sec­tion A, withholding tax is imposed at a rate of 20% on payments to nonresidents subject to tax in Pakistan.

Interest and penalties. For a failure to file an income tax return by the due date, a penalty equal to 0.1% of the gross tax payable for each day of default is imposed, subject to a maximum penalty of 50% of the gross tax payable. However, if the calculated penalty is less than PKR20,000 or if no tax is payable for that tax year, the penalty is PKR20,000.

In addition, interest and penalties are imposed in the following circumstances:

  • Interest at a rate equal to 12% per year is charged if tax pay­ments, including advance tax payments, are not made or are partially paid.
  • For non-payment or underpayment of tax, a penalty equal to 5% of the amount of tax in default is imposed. For a second default, a penalty equaling an additional 25% of the amount of tax in default is imposed. For any subsequent defaults, an additional penalty equal to 50% of the amount of tax in default is imposed. For any subsequent defaults, an additional penalty equal to 50% of the amount of tax in default is imposed.
  • If income is concealed, a penalty equal to the amount of tax sought to be evaded or PKR25,000, whichever is higher, is levied in addition to the normal tax payable.

The income tax department is required to pay compensation at the Karachi Interbank Offered Rate (KIBOR) plus 0.5% per year on refunds due that have not been paid within three months after the due date, from the expiration of the three months until the date on which the refund is paid.

Dividends. Dividends, including remittances of profits by a Paki­stan branch to its head office (other than remittances of profits by a Pakistan branch engaged in exploration and production of petro­leum), are subject to withholding tax at a general rate of 12.5%. The withholding tax is considered to be a final discharge of the tax liability. A 7.5%, 10%, 12.5%, 17.5% or 20% rate is imposed on certain dividends (see footnote [c] to Section A). Intercorporate dividends paid within a wholly owned group are exempt from tax.

Foreign tax relief. A foreign tax credit is granted to resident com­panies with respect to foreign-source income at the average rate of Pakistani income tax or the actual foreign tax paid, whichever is less. If foreign income is derived under different heads (catego­ries) of income, the amount of the allowable credit is applied separately to each head of income. However, income derived under a particular head of income from different locations is pooled to gether. A credit is allowed only if the foreign income tax is paid within two years after the end of the tax year in which the foreign-source income is derived.

Determination of trading income

General. The determination of taxable income is generally based on the audited financial statements, subject to certain adjust­ments. Any income accruing or arising, whether directly or indi­rectly, through or from a PE or any other business connection in Pakistan, through or from any asset, property or source of income in Pakistan, or through the transfer of a capital asset located in Pakistan, is subject to tax.

Expenses incurred to derive income from business that is subject to tax are allowed as deductions to arrive at taxable income. For branches of foreign companies, allocated head-office expenses may be deducted, up to an amount calcu lated by applying the ratio of Pakistani turnover to worldwide turnover.

Inventories. Inventory for a tax year is valued at the lower of cost or net realizable value of the inventory on hand at the end of the year. If a particular item of inventory is not readily identifiable, the first-in, first-out (FIFO) or weighted-average methods may be used. The valuation method should be applied consistently from year to year, but the method may be changed with the prior ap proval of the tax authorities.

Provisions. General provisions for bad debts are not allowed as de ductions from income. However, a charge for specific bad debts may be allowed if the debt is accepted by the income tax officer as irrecoverable.

Nonbanking finance companies and the House Building Finance Corporation may claim a deduction equal to 3% of the income from consumer loans for the maintenance of a reserve for bad debts resulting from such loans. In this context, a consumer loan is a loan obtained for personal, family or household purposes and includes debts resulting from the use of a credit card or insurance premium financing.

For advances and off-balance sheet items, banking companies are allowed a provision not exceeding 1% of their total advances. This percentage is increased to 5% with respect to consumers and small and medium-sized enterprises. The provision is allowed if a certificate from the external auditor is furnished by the banking company to the effect that such provisions are based on and are in line with the Prudential Regulations issued by the State Bank of Pakistan. The amount in a provision in excess of the allowable percentage may be carried over to succeeding years.

Tax depreciation. Depreciation recorded in the financial statements is not allowed for tax purposes. Tax depreciation allowances are given on assets, such as buildings, plant and machinery, comput­ers and furniture owned by the company and used for business purposes. A depreciation allowance for a full year is allowed in the year the asset is placed in service, but no depreciation allow ance is allowed in the year of disposal of the asset.

Depre ciation is calculated using the declining-balance method. The following depreciation rates are generally used.

Assets Annual allowance (%)
Buildings 10
Furniture and fixtures 15
Machinery and plant, including
computer hardware, technical or
professional books, ships, aircraft
and motor vehicles
15 to 30
Below-ground installations
(including offshore) of mineral
oil enterprises
100
Offshore platform and production
installations of mineral oil
enterprises
20

To promote industrial development in Pakistan, certain other allow­ances relating to capital expenditure have been introduced. These allowances are summarized below.

Initial allowance. An initial depreciation allowance is available at a rate of 15% for buildings and at a rate of 25% for all other cat­egories of eligible depreciable assets placed in service in Pakistan. The allowance is granted in the tax year in which the assets are first placed in service in Pakistan and used in the taxpayer’s busi­ness for the first time, or in the tax year in which commercial production begins, whichever is later.

First-year allowances. A first-year depreciation allowance at a rate of 90% is granted for plant machinery and equipment in­stalled by an industrial undertaking established in specified rural and underdeveloped areas. This allowance is granted instead of the initial allowance.

A first-year depreciation allowance at a rate of 90% is granted for plant machinery and equipment installed for generation of alter­nate energy. This allowance is available to an industrial under­taking set up anywhere in Pakistan and owned and managed by a com pany. The allowance is granted instead of the initial allow­ance.

Amortization of intangibles. Amortization of intangibles is allowed over the normal useful life of intangibles. If an intangible does not have an ascertainable useful life or if the normal useful life is more than 10 years, for purposes of calculating annual amorti­zation, the normal useful life is considered to be 10 years for the purposes of calculating amortization.

Amortization of expenses incurred before the commencement of business. The amortization of expenses incurred before the commencement of business is allowed on a straight-line basis at an annual rate of 20%.

Relief for losses. Business losses, other than capital losses and losses arising out of speculative transactions, may be carried for­ward to offset profit in subsequent years for a period not exceed­ing six years. Unab sorbed depreciation may be carried forward indefinitely.

Foreign losses can only offset foreign-source income and may be carried forward for a period not exceeding six years.

Groups of companies. A group of com panies comprising holding companies and subsidiaries in a 100%-owned group can file its tax returns as one fiscal unit, subject to the satisfaction of certain conditions.

In addition, on the satisfaction of certain conditions, group com­panies can surrender their assessed losses (excluding capital losses and losses brought forward) for the tax year to other group companies.

The option of group taxation is available to group companies that comply with the corporate governance requirement and group designation rules or regulations, as specified by the Securities and Ex change Commission of Pakistan.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)
Sales tax, on the supply of goods, on the
cost of imported goods and on certain
services; certain items and classes of
persons are exempt
0 / 17
Excise duties, on specified goods imported
or manufactured in Pakistan and on specified
services provided or rendered in Pakistan
(the government may declare any goods or
class of goods exempt)
Various
State and local taxes; an annual trade tax on
companies, including branches of foreign
companies
Various
Capital value tax; imposed on purchases of
immovable property
2.5
Net assets tax (zakat, a religious levy), on
certain assets of companies having a majority
of Muslim shareholders who are citizens
of Pakistan
2.5
Social security contributions, on salaries of
employees (maximum of PKR600 per month)
6
Employees’ old-age benefits; based on
minimum wages of employees under law
of PKR11,000 per month; payable by
Employer 5
Employee 1

Miscellaneous matters

Foreign-exchange controls. In general, remittances in foreign cur­rency are regulated, and all remittances are subject to clearance by the State Bank of Pakistan. However, foreign currency may be remitted through the secondary market.

Debt-to-equity rules. Under the thin-capitalization rules, if the foreign debt-to-equity ratio of a foreign-controlled company (other than a financial institution or a banking company) exceeds 3:1, interest paid on foreign debt in excess of the 3:1 ratio is not deductible.

The State Bank of Pakistan prescribes that borrowers from finan­cial institutions have a debt-to-equity ratio of 60:40. This may be increased for small projects costing up to PKR50 million or by special government permission.

Loans and overdrafts to companies (other than banking compa­nies), controlled directly or indirectly by persons resident outside Pakistan, and to branches of foreign companies are generally restricted to certain specified percentages of the entities’ paid-up capital, reserves or head-office investment in Pakistan. The per­centage varies, depending on whether the entities are manufactur­ing companies, semi-manufacturing companies, trading com panies or branches of foreign companies operating in Pakistan. No lim­its apply, however, to companies exporting at least 50% of their products.

To meet their working capital requirements, foreign controlled companies and branches of foreign companies may contract work­ing capital loans in foreign currency that can be repatriated. The State Bank of Pakistan also permits foreign controlled companies to take out additional matching loans and overdrafts in rupees equal to the amount of the loans that may be repatriated. Other loans in rupees are permitted in special circumstances. Certain guarantees issued on behalf of foreign controlled com panies are treated as debt for purposes of the company’s borrowing entitlement.

Treaty withholding tax rates

The maximum withholding rates provided in the treaties are shown in the following table.

Dividends

%

Interest

%

Royalties

%

Austria 10/20 (d) – (b)(g) 20
Azerbaijan 10 10 10
Bahrain 10 10 (b) 10
Bangladesh 15 15 (b) 15
Belarus 10/15 (d) 10 (b) 15
Belgium 10/15 (d) 15 (b) 20 (m)
Bosnia and
Herzegovina 10 20 15
Canada 15/20 (d) 25 20 (c)
China 10 10 12.5
Denmark 15 15 (b)(f) 12
Egypt 15/30 (q) 15 (t) 15
Finland 12/15/20 (s) 15 (i) 10
France 10/15 (o) 10 (t) 10
Germany 10/15 (v) 20 (b)(i) 10
Hungary 15/20 (p) 15 (b) 15
Indonesia 10/15 (p) 15 15
Iran 5 10 10
Ireland 10 (h) – (b)(g) – (e)

 

Italy 15/25 (r) 30 (t) 30
Japan 5/7.5/10 (a) 10 (b) 10
Jordan 10 10 (b) 10
Kazakhstan 12.5/15 (o) 12.5 (t) 15
Korea (South) 10/12.5 (d) 12.5 (b) 10
Kuwait 10 10 (t) 10
Kyrgyzstan 10 10 10
Lebanon 10 10 (b) 7.5
Libya 15 _ (g) _ (g)
Malaysia 15/20 (d) 15 (b)(f) 15
Malta 15 (a) 10 (b) 10
Mauritius 10 10 (b) 12.5
Morocco 10 10 (b) 10
Nepal 10/15 (a) 10/15 (f)(i) 15
Netherlands 10/20 (p) 20 (b)(l) 5/15 (j)
Nigeria 12.5/15 (o) 15 15
Norway 15 10 (b) 12
Oman 10/12.5 (o) 10 (t) 12.5
Philippines 15/25 (p) 15 (b) 25 (k)
Poland 15 (d) _ (b)(g) 20 (c)
Portugal 10/15 (a) 10 (f) 10
Qatar 5/10 (o) 10 (t) 10
Romania 10 10 (f) 12.5
Saudi Arabia 5/10 (a) 10 (f) 10
Serbia 10 10 (b) 10
Singapore 10/12.5/15 (u) 12.5 10
South Africa 10/15 (o) 10 (t) 10
Spain 5/7.5/10 (a) 10 7.5
Sri Lanka 15 10 (b) 20
Sweden 15 15 (b) 10
Switzerland 10/20 (a) 10 (f) 10
Syria 10 10 10/15/18 (w)
Tajikistan 5/10 (p) 10 (x)(y) 10 (x)
Thailand 15/25 (d) 25 (i) 10/20 (j)
Tunisia 10 13 10
Turkey 10/15 (d) 10 10
Turkmenistan 10 10 10
Ukraine 10/15 (a) 10 10
United Arab
Emirates 10/15 (v) 10 (b) 12
United
Kingdom 10/15/20 (n) 15 (b) 12.5
United States 3.75 (h) _ (g) _ (e)
Uzbekistan 10 10 (b) 15
Vietnam 15 15 (y) 15
Yemen 10 10 (y) 10
Non-treaty countries 7.5/10/12.5/17.5/25 (z) 10/17.5/20 (aa) 15/20 (bb)

a) Treaty-determined percentage holding required.

b) Interest paid to the government or, in certain circumstances, to a financial institution owned or controlled by the government is exempt.

c) Fifteen percent for industrial, commercial or scientific know-how.

d) Treaty-determined percentage holding required, and payer must be engaged in an industrial undertaking; otherwise, higher rate or normal rate applies.

e) Royalties are exempt from withholding tax to the extent they represent a fair and reasonable consideration.

f) Certain approved loans are exempt.

g) Normal rates apply.

h) Treaty-determined percentage holding by a public company required and the profits out of which the dividends are paid must be derived from an industrial undertaking; otherwise, normal rates apply.

i) Ten percent if the recipient is a financial institution.

j) Lower amount for literary, artistic or scientific royalties.

k) Fifteen percent if payer is an enterprise engaged in preferred activities.

l) Rate reduced to 10% if recipient is a bank or financial institution or if certain types of contracts apply. Rate reduced to 15% if recipient holds 25% of the capital of the paying company.

m) Copyright royalties and other similar payments for literary, dramatic, musical or artistic work are exempt.

n) Fifteen percent if the recipient is a company. Further reduced to 10% if the treaty-determined percentage is held by the recipient and the industrial undertaking is set up in Pakistan after 8 December 1987. Twenty percent in other cases.

o) Lower rate applies if the recipient is a company that controls, directly or indirectly, 10% of the voting power in the company paying the dividend.

p) Lower rate applies if recipient is a company that owns directly at least 25% of the capital of the paying company.

q) The 15% rate applies to dividends paid to companies. The 30% rate applies to other dividends.

r) The 15% rate applies if the recipient is a company that owns directly at least 25% of the capital of the payer and is engaged in an industrial undertaking.

s) The 12% rate applies if the recipient is a company that owns directly at least 25% of the capital of the payer; the 15% rate applies to dividends paid to other companies; and the 20% rate applies to other dividends.

t) Interest paid to the government or to an agency of or an instrumentality owned by the government is exempt from tax.

u) The 10% rate applies if the payer is engaged in an industrial undertaking and if the recipient is a company; the 12.5% rate applies if the recipient is a company; the 15% rate applies in all other cases.

v) The lower rate applies if the beneficial owner of the dividends is a company that owns at least 20% of the shares of the payer.

w) The 10% rate applies to royalties for cinematographic films and to tapes for television or radio broadcasting. The 15% rate applies to royalties for literary, artistic or scientific works.

x) The treaty rate applies to the extent the amount represents a fair and reason­able consideration.

y) Interest paid to the government or to the central bank is exempt.

z) The 12.5% rate is the general tax rate for dividends. The 7.5% rate applies to dividends paid by companies engaged in power generation, by purchasers of power projects privatized by the Water and Power Development Authority or by companies supplying coal exclusively to power generation projects. The 10% rate applies to dividends paid to unit holders other than companies by mutual funds; however, in the case of stock funds, the general rate of 12.5% applies if the dividend receipts of the fund are less than capital gains. The 25% rate applies to dividends received by companies from collective-investment schemes, real estate investment trusts (REITs) or mutual funds other than stock funds. The 17.5% rate applies to dividends paid by companies (other than power projects, stock funds, money market funds, income funds, REITs or other funds) if the recipient is a non-filer (that is, it does not file an income tax return). The withholding tax is imposed on the gross amount of the dividend. The withholding tax on dividends is considered a final discharge of the tax liability on such income (except for banks and the 17.5% rate for non-filers).

(aa) The withholding tax on interest is considered to be an advance payment of tax, which may be credited against the final tax liability for the year. Interest paid on loans and overdrafts to resident banks and Pakistani branches of nonresident banks and financial institutions is not subject to withholding tax. The withholding tax rate is 10% of the gross amount of interest paid to resi­dent persons and to nonresident persons without a PE in Pakistan. The 17.5% rate applies if the recipient is a non-filer. The rate is 20% for nonresidents with a PE in Pakistan.

(bb) The general withholding tax rate for royalties is 15%. This tax is considered to be a final tax for nonresident recipients of royalties. However, if royalties are derived with respect to properties or rights effectively connected with a PE of a nonresident, a 20% withholding tax rate is imposed, unless a non-deduction certificate is obtained by the PE. The 20% withholding tax is credited against the final tax liability.

Pakistan has also entered into treaties that cover only shipping and air transport. These treaties are not included in the above table.