Forms of Entity and Taxation

Forms of Entity and Taxation

Following are the forms entity and taxation in Pakistan.

Liaison Office

The activities of a LO of a foreign entity are restricted to undertaking promotional activities, provision of technical assistance, exploring the possibility of collaboration and export promotion on behalf of its parent company in Pakistan. Such an office is strictly restricted from entering revenue generating activities and is required to meet its operational expenses through remittances from its parent company through normal banking channel and converted to local currency account

• Requirements for approvals for liaison offices of foreign companies shall be permitted by BOI.
• A foreign company LO is required to file prescribed returns/ documents with Registrar of Companies as per Provisions of Companies Act, 2017 after obtaining permission from BOI.
• The requirements relating to accounts, audit, and submission of accounts to Registrar of Companies are also applicable.
• LO is required to be registered with the tax authorities.

Branch Office

A foreign entity can operate in Pakistan by establishing a BO. A BO is set up specifically to execute the contracts awarded to the foreign entity, therefore, activity is restricted to the extent stated in the signed agreement / contract. A BO cannot indulge in commercial / trading activities.

• Revenue generated / profit earned from BO activities can be repatriated to the Head Office, subject to payment of applicable taxes. Such repatriation should be in compliance with the procedure mentioned in the Foreign Exchange Regulations of the SBP through an authorized dealer (banker) under normal banking channels and Tax regulations.
• All expenses incurred from BO activities will be met out of funds transferred from abroad through normal banking channel and converted to local currency account, or from the amounts received through execution of the agreement / contract.
• A foreign company desirous of setting up a BO in Pakistan is required to apply for permission to the BOI on a specified application format along with the prescribed documents / information.
• Permission for opening of branches of foreign banks is granted by the State Bank of Pakistan.
• A foreign company BO is required to file prescribed returns/ documents with Registrar of Companies as per Provisions of Companies Act, 2017 after obtaining permission from BOI.
• The requirements relating to accounts, audit, and submission of accounts to Registrar of Companies are also applicable.

Pakistan Subsidiary/ Joint Ventures

A foreign company, Forms of Entity and Taxation, can set up its own wholly owned subsidiary in Pakistan or establish / a joint venture company with a Pakistani or foreign partner, subject to fulfilling the policies for FDI and requirements of the Companies Ordinance, 2017. A subsidiary or a joint venture company can be formed as a private company or a public company.

Permanent Establishment

A PE is a place of business through which the business of a non-resident is wholly or partly carried out, including:

• A place of management, branch, office, factory or workshop, premises for soliciting orders, warehouse, permanent sales exhibition, or sales outlet, except a liaison office.
• An agriculture, pastoral, or forestry property.
• A mine, oil or gas well, quarry, or any other place of extraction of natural resources.
• A building site, a construction, assembly, or installation project; or supervisory activities connected with such site or project if such activity continued for more than 90 days within any 12-month period.
• The furnishing of services, including consultancy services, by any person through employees or other personnel engaged by the person for that purpose.
• A person acting in Pakistan on behalf of the person, other than an agent of independent status (excluding a person acting exclusively/almost exclusively on behalf of such person) in the ordinary course of business.
• Any substantial equipment installed, or other asset or property capable of activity giving rise to income.
• A person who habitually exercises authority to conclude contracts on behalf of another person or plays a principal role in execution of contacts that are concluded without any material variations and these contracts are in the name of the person

o for the transfer of the ownership of or for the granting of the right to use property owned by that enterprise or that the enterprise has the right to use, or

Forms of Entity and Taxation

o for the provision of services by that person.

• A fixed place of business that is used or maintained by a person if the person or an associate of a person carries on business at that place or at another place in Pakistan and:

o that place or other place constitutes a PE of the person or an associate of the person under this sub-clause, or

o business carried on by the person or an associate of the person at the same place or at more than one place constitutes complementary functions that are part of a cohesive business operation.

The definition of a PE provided in a DTT will prevail in cases where a DTT is executed by Pakistan with the related country of origin of the PE.

Controlled Foreign Company

There is said to be a general tendency that Pakistani Residents make investment in offshore companies in foreign countries having tax exemption or lower tax rates and then the profits of such offshore companies are not repatriated in Pakistan.

Section 109A, appears to be a part of the overall scheme to bring into tax ambit the income earned through offshore entities owned by Pakistani residents.

This scheme is termed as CFC regime summarized as under:

(a) A company shall be considered CFC if

Capital or voting rights of the non-resident company is held directly or indirectly by the persons resident in Pakistan:

– More than 40% in case of single person;

– More than 50% in case of two or more persons.

Tax paid, after rebate, on the income of the non-resident company outside

Pakistan is less than 60% of tax otherwise payable on the said income in Pakistan assuming that the company is a resident company taxable in Pakistan under the Income Tax Ordinance, 2001.

iii. The non-resident company is not listed in any stock exchange outside Pakistan.

1. The non-resident company does not derive active business income defined in section 109A.

(b) The income of CFC taxable in the hands of Pakistani residents shall be as per the  following

A*(B/100)

Where

A= income of CFC

B=% of capital or voting rights whichever is higher held by the resident person in CFC

(c) Income of CFC shall be calculated in foreign currency but for the purpose of inclusion in the income of the resident person it shall be converted into Rupees at the State Bank of Pakistan rate applicable on the last day of the tax year.

(d) The income taxable under this section shall not be taxable again when received in  any subsequent tax year. A tax credit shall be allowed in case of tax paid on dividend income in the foreign country in any subsequent tax year as lower of following:

– Foreign tax paid

– Pakistan tax payable on such dividend income in the tax year in which the dividend is received

(e) This section shall not apply in the following cases:

– Income of CFC is less than Rs. 10 million

– Capital or voting rights of the resident person in CFC is less than 10%.