Corporate - Income determination

Last reviewed - 31 December 2019

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 (open plots as well as constructed property) is subject to tax depending upon the amount of gain and holding period in the manner explained below:

Open plots:

Description Rate of tax
Where the holding period of open plot does not exceed one year A
Where holding period of open plot exceeds one year but does not exceed eight years A x ¾
Where holding period of open plot exceeds eight years 0

Constructed property:

Description Rate of tax
Where the holding period of constructed property does not exceed one year A
Where holding period of constructed property exceeds one year but does not exceed four years A x ¾
Where holding period of constructed property exceeds four years 0

The capital gains worked out in the above manner are subject to tax at the following rates:

Description Rate of tax (%)
Where the gain does not exceed PKR 5 million 5
Where the gain exceeds PKR 5 million but does not exceed PKR 10 million 10
Where the gain exceeds PKR 10 million but does not exceed PKR 15 million 15
Where the gain exceeds PKR 15 million 20

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, modaraba, and other specified ‘securities’ are exempt from tax if the date of acquisition of shares is before 1 July 2013. Capital gains on such instruments acquired after that date are taxed as follows:

Holding period Tax rates for persons appearing on ATL (%)
Securities acquired before 1 July 2016 Securities acquired after 1 July 2016
Less than 12 months 15 15
12 months, but less than 24 months 12.5 15
24 months or more 7.5 15

Previously, loss on disposal of listed and other securities could only be set off against capital gains (and was not allowed to be carried forward). From tax year 2019 and onwards, such loss is now been allowed to be carried forward and set off against future capital gains on such securities, up to a maximum of three tax years.

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 gain derived on disposal of assets by non-residents outside Pakistan

Gain on disposal/alienation of any asset derived outside Pakistan by a non-resident person in respect of any asset located in Pakistan shall constitute Pakistan-source income.

With respect to shares of a company, however, the asset shall be treated to be located in Pakistan if:

  • the share or interest derives, directly or indirectly, its value principally or wholly from the assets located in Pakistan
  • the share or interest representing 10% or more of the share capital of the non-resident company is disposed or alienated, and
  • the share or interest, as mentioned above, derives its value principally from an asset located in Pakistan if on the last day of the preceding tax year the value of such asset exceeds PKR 100 million and represents at least 50% of value of total assets.

Where the entire assets of the non-resident company are outside Pakistan, a share or interest in such company will be treated as located in Pakistan to the extent of reasonable attribution.

The above gain is subject to income tax (with no further incidence of tax under any other provisions of law) at the higher of:

  • 20% of the amount representing the difference between fair market value and cost of acquisition of the asset, or
  • 10% of the fair market value of the asset.

Dividend income

Dividend income received from a company (including mutual funds, etc.) is generally subject to final tax at 15%; however, a different rate would be apply in the following cases:

  • Dividend paid by independent power purchasers where such dividend is a pass through item under relevant energy agreements and is required to be reimbursed by the relevant agency:  7.5%.
  • Dividend from a company where no tax is payable by such company due to exemption of income or carry forward of business losses or claim of tax credits:  25%.

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 double tax treaty (DTT), which is also the final tax on such income.

Income from royalties and fees for technical services/offshore digital services

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’ and ‘fees for offshore digital services’ are 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.

‘Fees for technical services’ 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.

‘Fee for offshore digital services’ means any consideration for providing or rendering services by a non- resident person for online advertising, including digital advertising space; designing, creating, hosting, or maintenance of websites; digital or cyber space for websites, advertising, e-mails, online computing, blogs, online content, and online data; providing any facility or service for uploading, storing, or distribution of digital content, including digital text, digital audio, or digital video; online collection or processing of data related to users in Pakistan; any facility for online sale of goods or services; or any other online facility.

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 federal 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.

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 or manufacturing activity is exempt from tax if 90% of its profits are distributed as cash dividend.