SETTING UP BUSINESS IN PAKISTAN
General Aspects
Pakistan is a South Asian country, and the 33rd-largest country by area. Bounded by the Arabian Sea on the south, the Gulf of Oman on the southwest, it shares land borders with India to the east; Afghanistan to the west; Iran to the southwest; and China to the northeast covering 881,913 km2 (340,509 sq mi) of its landscape. It shares a maritime border with Oman in the Gulf of Oman and is separated from Tajikistan in the northwest by Afghanistan’s narrow Wakhan Corridor. Pakistan is the fifth populus country. Pakistan
Legal Forms of Business Entities
Legal
form Feature
Company Limited by Shares (Listed Company)
has a rapidly growing youth population, with 62% of its population being younger than the age of 30 as per the Pakistan Bureau of Statistics (PBS). Pakistan is ranked amongst the emerging and growth-leading economies.
Urdu is the national language of Pakistan, but English is widely spoken, written and understood by majority of the population.
The personal liability of shareholders is limited to the amount (if any) unpaid on their shares. Effectively, the shareholder’s liability does not exceed the amount committed, when taking up the shares in the company.
Remarks
Suitable for large companies who are looking for expanding their businesses and willing to capture international market as in a listed have its shares traded on the stock exchange and can raise huge capital from the general public.
Company Limited by Guarantee
The memorandum binds each member to contribute to the assets of the company in the event of its being wound up while he is a member, or within one year afterwards, for payment of the debts and liabilities of the company contracted before he ceases to be a member, and of the costs, charges and expenses of winding up, and for adjustment of the rights of the contributories among themselves, such amount as may be required, not exceeding a specified amount.
Private Company A private company can be easily formed by a minimum of two members (one for a single member company) and may commence its business immediately after its incorporation.
Single Member Company
Limited Liability Partnership (LLP)
An individual is entitled to obtain corporate status by forming a single member company and avail privileges of limiting the liability. All the shares are vested with single member; however, he / she is required to nominate an individual, who will become nominee director in case of death of the single member.
Limited liability partnership (LLP) is a partnership concern in which some or all partners have limited liabilities. In an LLP, each partner is not liable for another partner’s misconduct or negligence. This is an important difference from the traditional partnership under the Partnership Act 1932, in which each partner has joint (but not several) liability.
Suitable for individuals who are interested in establishing not for profit organization.
Suitable for a small and medium sized company looking for business whose operation can be commenced immediately.
Appropriate for an individual with a small setup and less compliances of regulations.
Suitable for businesses in partnership.
Governed Laws and Regulatory Bodies in Pakistan
Legal form Feature
Companies Act, 2017 Companies incorporated in Pakistan and branches or liaison / representative offices of foreign companies are regulated by the Companies Act, 2017
Securities and Exchange Commission of Pakistan (SECP)
Federal Board of Revenue (FBR)
Companies have to be complied with the rules framed thereunder, administered by Securities and Exchange Commission of Pakistan (SECP) regarding operational activities of a company.
Companies have to be registered under Federal Board of Revenue and obtain a National Tax Number (NTN) and have to be complied with the tax laws as given under Income Tax Ordinance, 2001 and rules made thereunder.
Organizational Questions
Topic Feature
Commercial Register Companies needs to be incorporated or registered on accordance of Companies Act, 2017 at Securities and Exchange Commission of Pakistan (SECP). Certain business activities require additional approvals from regulatory authorities.
Bank Account To open the company account, incorporation certificate, Article of Association, Memorandum of Association, NTN certificate is required to be submitted to the bank.
Transfer of Goods and Machinery
LC through Banks need to be opened when has to import or export the goods and machinery, import duties, custom charges and taxation rates apply according to government policies.
Transfer of Capital Foreign investors in any sector may repatriate their capital, profits, dividends, or any other funds in the currency of their investment or into any other freely usable currency, subject to Foreign Exchange Manual of the State Bank of Pakistan, provisions of the Companies Act 2017 and Anti-Money Laundering Act 2010.
Visa and Residence permit
All expatriates that are employed at a Liaison Office and a Branch Office in Pakistan are required to obtain a work visa before their employment begins.
Remarks
Compliance of Companies Act, 2017 along with its Regulation 2024 is mandatory for the companies.
Annual return filing and major decisions influencing companies’ operations and senior management structure should be updated at SECP timely.
Company shall obtain registration with FBR to claim tax benefits subject to certain conditions.
Remarks
A company need to be registered/incorporated in Pakistan with SECP before commencing its operation. (Public company needs to wait for the notification from the SECP for commencing its operations)
Every company must have its own bank account for the purpose of its business transactions. At certain situations like if a financing has been obtained, audited accounts are also submitted to the bank for evaluation.
Company must follow proper documentation to avoid any disrupt in its operation.
Foreign Exchange Manual of the State Bank of Pakistan, provisions of the Companies Act, 2017 and Anti-Money Laundering Act 2010 should be followed in this regard.
Tax benefits are available on foreign sourced income subject to conditions.
Employment
Topic Feature
Work permit Nationals from all other countries need a work permit to work legally in Pakistan.
Remarks
Certain countries require security clearance from ministry of Interior before they are granted the work permit.
Labour law Constitution of Pakistan provides the right to form unions, equal pay, and secure working conditions. Although written contract are recommended and must specify terms of employment, wages, working hours, and job duties. Normal working hours are 8 hours/day and 48 hours per week. Any overtime should be paid the double than normal rate and minimum wage set by provincial governments should be paid at least. Minimum of 14 paid leaves annually should be given. The notice period on termination is 30 days.
Applicable laws including but limited to are :
1. Minimum Wages Ordinance, 1961
2. Companies Profits Worker Participation Fund Act (Each province has its own WPPF Act)
3. Employment of Children Act, 1991
Social system EOBI (Employees Old-Age Benefits Institution) is established to provide social insurance for the employees which includes; Old Age Pension, Invalidity Pension, Survivor’s Pension, Old – Age Grant and others. Employers are required to contribute 5% of the minimum wage (currently as of notified by the government) and should deduct 1% of the minimum wage from the employee’s salary and paid in the EOBI funds.
Employers who have five or more employees must register with EOBI and register its employees also aged between 18 to 60.
Taxation
Income Tax (Corporate Tax) It is charged on net taxable income of the companies. Rates varies on basis of the size of the companies.
Companies are liable to file their annual income tax return within due dates , otherwise charged with penalty and default surcharges.
If a company reports losses or low income, a minimum tax (1.25% of turnover) may apply.
Sales Tax General sales tax rate @ 18% tax rates applies on the value of sales of the company in accordance with the Sales Tax Act, 1990. The tax paid at the purchase stage by the companies are deductible as input tax against the tax charged on sales subject to various conditions.
Companies are liable to file sales tax returns within fifteen days of the expiry of the tax period. In case of non filing within due dates, they are subject to penalties and other default surcharges.
Companies in Pakistan are charged for Direct and Indirect Tax by Federal authorities (Federal Tax dealt by FBR) and Provincial authorities (Provincial tax, like SRB for Sindh).
Tax Feature
Remarks
Provincial Sales Tax on Services Punjab Revenue Authority (PRA), Sindh Revenue Board (SRB), Khyber Pakhtunkhwa Revenue Authority (KPRA), Balochistan Revenue Authority (BRA).Tax rates depend on services provided and province company is operating its business.
Capital Gains Tax
Dividend Tax
The tax applies on sale of the capital assets, like shares, real estate etc. Rate varies on the type of the asset and the its holding period.
Dividend income received by companies are taxed at 15% (subject to adjustments), if paid to individuals than rates applies are different.
These taxes are dealt separately from the above-mentioned taxes. These are governed by the provincial government laws.
Withholding Tax (WHT)
Companies are required to deduct tax at source on payments, such as, salaries, contractor payments, Rent, Dividends, Commissions.
In case for companies and individuals the tax treatments differ for both classes of persons.
The rates are to be applied at the gross receipt amount of the dividend and will be treated as final tax for the individuals but in case of companies the 15% tax is treated as the minimum tax to be paid.
In Pakistan, FBR has implemented a system of withholding tax which is withheld by the withholding agents which is treated as advance tax and is adjustable from the corporate tax liability of the companies
Super Tax An additional tax on high income companies (introduced under section 42C of the Income Tax Ordinance 2001). Sector specific rates for banks and other high profit sectors.
Federal Tax Duties (FED)
Import Duties and Regulatory Duties
Imposed on certain good and services, for example, telecom, beverages. The tax rates varies on the different kind of products.
Payable on imported goods by trading and manufacturing companies, rates vary per item under the Pakistan Customs Tariff, Customs Act 1969, and Federal Excise Duty Act, 2005.
Other Levies Stamp duty: on contracts and legal documents.
Professional tax: small annual fee levied by provincial authorities.
Property tax: if company owns real estate.
Workers’ Welfare Fund (WWF) and Workers’ Profit Participation Fund (WPPF)
This guide has been prepared by A. D. Akhawala & Co, an independent member of Antea
A. D. Akhawala & Co
Office No. 313 & 321, 3rd Floor, Uni Center, I.I.
Chundrigar Road
Tel.: +92 21 32411268
Mail: msohail@adaco.com.pk
Web: https://www.adaco.com.pk/
Mallorca, 260 àtic
08008 – Barcelona
Tel.: + 34 93 215 59 89
Fax: + 34 93 487 28 76
Email: info@antea-int.com www.antea-int.com
SETTING UP BUSINESS IN PAKISTAN
This publication is intended as general guide only. Accordingly, we recommend that readers seek appropriate professional advice regarding any particular problems that they encounter. This information should not be relied on as a substitute for such an advice. While all reasonable attempts have been made to ensure that the information contained herein is accurate, not Antea Alliance of Independent Firms neither its members accepts no responsibility for any errors or omission it may contain whether caused by negligence or otherwise, or forany losses, however caused, sustained by any person that relies upon it.
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