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Pakistan Corporate - Income determination

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Inventory valuation

Inventories are to be stated at the lower of cost or market. The first in first out (FIFO) and average methods are accepted. Conformity of methods used for book and tax reporting is desirable, and the method used should be consistently applied.

Capital gains

Capital gain on the sale of immovable property acquired after 1 July 2016, on which depreciation is not allowed, is taxed at the rate of 10% if disposed of within one year, 7.5% if disposed of within two years, and 5% if disposed of within three years. However, if the retention period is more than three years, the gain is not taxable. Capital gain on the sale of immovable property acquired before 1 July 2016 is taxed at 5% if disposed of within three years. No tax is payable if the retention period is more than three years.

Gain on the disposal of shares of a resident company or a non-resident company, whose assets wholly or principally consist of immovable property situated in Pakistan or rights to explore/exploit natural resources in Pakistan, shall be Pakistan-source income.

Tax rates on capital gains on the sale of shares of public companies or modaraba (profit sharing) certificates are exempt from tax if held for a period of more than four years if the date of acquisition is before 1 July 2013. Capital gains on shares and modaraba are taxable for tax year 2018 at 15% if held for less than four years. However, the rate for persons not filing tax returns (non-filers) is 20%.

Capital gain on future commodity contracts entered into by members of the Pakistan Mercantile Exchange is 5% for both filers and non-filers.

Capital gain, other than on statutory depreciable assets, realised within one year of acquisition is fully taxed; after one year, 75% of such gains are taxed and 25% are exempt.

Capital gains on statutory depreciable assets (other than immovable property) are chargeable to tax as normal business income in the year of sale. They are measured as the difference between the sale proceeds and the tax written-down value of the relevant asset sold.

In the case of an asset disposal transaction that is on a non-arm’s-length basis, fair market value of the asset shall be taken to be the consideration received by the seller, as well as the cost for the buyer.

Where assets are transferred outside Pakistan, the original cost is treated as the sale price, which means that the entire depreciation is recaptured at the time of export, except if the assets are used in oil or gas exploration, in which case only the initial depreciation is recaptured.

No gain or loss shall be taken to arise on disposal of an asset by a resident company to another resident company, provided certain conditions are met. The required conditions include, inter alia, that the transferor is 100% owned by the transferee or vice versa or both companies are 100% owned by a third company, and the transferee income is not exempt in the year of transfer. The scheme of arrangement is approved by the Securities and Exchange Commission of Pakistan or State Bank of Pakistan.

Any distribution to the shareholders of a company, to the extent that it relates to undistributed profits, is treated as a dividend.

Capital loss can be offset only against capital gains. Unabsorbed capital loss can be carried forward for adjustment against capital gains for six years.

Dividend income

Dividend income is subject to WHT of 15% or a lower tax treaty rate. The rate is 20% for persons receiving dividend income but not filing income tax returns (non-filers).

The deduction at source shall be the full and final discharge of tax liability on dividend income, except for non-filers, who can claim a refund of 5% upon filing of an income tax return.

Stock dividends

Stock dividends declared by resident companies are taxable as bonus shares at the rate of 5%.

Interest income

Interest earned by a company is taxed as its income from other sources. Interest earned by a non-resident company without a PE in Pakistan attracts WHT at the rate of 10%, except where a lower rate is provided in the related DTT, which is also the final tax on such income.

Income from royalties and fees for technical services (FTS)

Royalties received by non-residents are deemed to accrue or arise in Pakistan and are taxable if paid by a resident in Pakistan or borne by a PE of a non-resident in Pakistan.

Income from ‘fees for technical services’ (FTS) is deemed to accrue or arise in Pakistan if paid by a resident in Pakistan or borne by a PE of a non-resident in Pakistan. FTS means any consideration for the rendering of any managerial, technical, or consultancy services (including the provision of the services of technical or other personnel), but does not include consideration for any construction, assembly, or like project undertaken by the recipient or consideration that would be income of the recipient chargeable under the head salary.

Other significant items

Liabilities allowed as a tax deduction in a tax year and remaining unpaid for three subsequent years are deemed to be income in the first tax year following the said three years. Such items are then allowed as a deduction in the year the liability is discharged.

Agricultural income is exempt from income tax.

Foreign income

A resident company is taxed on its worldwide income and on its foreign income as earned. Double taxation of foreign income is avoided by means of foreign tax credits; this relief is allowed to the resident company on the doubly taxed income at the lower of the Pakistan or foreign tax rate. Undistributed income of a non-resident subsidiary is not subject to tax.

Foreign loss can only be offset against foreign income and can be carried forward for six years.


Modaraba (profit sharing) is a financing vehicle that enables a management company to control and manage the business of a modaraba company with a minimum of 10% equity participation. The management company is entitled to remuneration based on an agreed percentage (but not exceeding 10%) of annual profits of the modaraba business. A modaraba can be for a specific purpose or many purposes and for a limited or unlimited period. The income of a modaraba not relating to trading activity is free from tax if 90% of its profits are distributed as cash dividend.

Last Reviewed - 15 December 2017

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