Pakistan

A company is resident in Pakistan if it is incorporated or formed by or under the law of Pakistan or if the control and management of its affairs is situated wholly in Pakistan in that year.

The term ‘company’ includes a trust, a cooperative society, a finance society, or any other society established or constituted by or under any law; a corporate body incorporated outside Pakistan; and any foreign association, incorporated or unincorporated, that the Federal Revenue authorities may declare to be a company.

Permanent establishment (PE)

As per the local tax law, PE in relation to a person means a place of business through which the business of the person is wholly or partly carried on, and includes the following:

• A place of management, branch, office, factory or workshop, premises for soliciting orders, warehouse, permanent sales exhibition, or sales outlet, other than a liaison office, except where the office engages in the negotiation of contracts (other than contracts of purchase).
• A mine, oil or gas well, quarry, or any other place of extraction of natural resources.
• An agricultural, pastoral, or forestry property.
• Virtual business presence in Pakistan, including any business where transactions are conducted through the Internet or any other electronic medium, with or without having any physical presence.
• A building site; a construction, assembly, or installation project; or supervisory activities connected with such site or project but only where such site, project, and its connected supervisory activities continue for a period of or periods aggregating more than 90 days within any 12-months period.
• The furnishing of services, including consultancy services, by any person through employees or other personnel, including an entity engaged by the person for such purpose.
• A person acting in Pakistan on behalf of the person (hereinafter referred to as the 'agent'), other than an agent of independent status acting in the ordinary course of business as such, if the agent:
  • has and habitually exercises an authority to conclude contracts on behalf of the other person or habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the person and these contracts are:
    • in the name of the person
    • 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
    • for the provision of services by that person, or
  • has no such authority but habitually maintains a stock-in-trade or other merchandise from which the agent regularly delivers goods or merchandise on behalf of the other person.

  For removal of doubt, it is clarified that an agent of independent status acting in the ordinary course of business does not include a person acting exclusively or almost exclusively on behalf of the person to which it is an associate.

• Any substantial equipment installed, or other asset or property capable of activity giving rise to income.
• A 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:
  • that place or other place constitutes a PE of the person or an associate of the person under this sub-clause, or
  • the business carried on by the person or an associate of the person at the same place or at more than one place constitute complementary functions that are part of a 'cohesive business operation'.

  For the removal of doubt, it is clarified that:

  • the term 'cohesive business operation' includes an overall arrangement for the supply of goods, installation, construction, assembly, commission, guarantees, or supervisory activities, and all or principal activities are undertaken or performed either by the person or the associates of the person, and
  • supply of goods include the goods imported in the name of the associate or any other person, whether or not the title to the goods passes outside Pakistan.

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

Associates

Two persons shall be associates in the following instances:

• The relationship between the two is such that one may reasonably be expected to act in accordance with the intentions of the other or both persons may reasonably be expected to act in accordance with the intentions of a third person.
• One person sufficiently influences, either alone or together with an associate or associates, the other person. For this purpose, two persons shall be treated as sufficiently influencing each other, where one or both persons, directly or indirectly, are economically and financially dependent of each other and decisions are made in accordance with the directions, instructions, or wishes of each other for a common economic goal.
• A person enters into a transaction, directly or indirectly, with another person who is a resident of a jurisdiction with a zero-taxation regime.

Two persons shall not be associates solely by reason of the fact that one person is an employee of the other or both persons are employees of a third person.

Without limiting the generality of the descriptions above and below, the following shall be treated as associates:

• An individual and a relative of the individual.
• Members of an association of persons.
• A member of an association of persons and the association, where the member, either alone or together with an associate or associates under another application of this section, controls 50% or more of the rights to income or capital of the association.
• A trust and any person who benefits or may benefit under the trust.
• A shareholder in a company and the company, where the shareholder, either alone or together with an associate or associates under another application of this section, controls either directly or through one or more interposed persons: (i) 50% or more of the voting power in the company, (ii) 50% or more of the rights to dividends, or (iii) 50% or more of the rights to capital.
• Two companies, where a person, either alone or together with an associate or associates under another application of this section, controls either directly or through one or more interposed persons: (i) 50% or more of the voting power in both companies, (ii) 50% or more of the rights to dividends in both companies, or (iii) 50% or more of the rights to capital in both companies.

Two persons shall not be associates under the first two bullet points above where the Commissioner is satisfied that neither person may reasonably be expected to act in accordance with the intentions of the other.

Under this scheme:

• ‘Relative’ in relation to an individual means:
  1. an ancestor, a descendant of any of the grandparents, or an adopted child of the individual or of a spouse of the individual, or
  2. a spouse of the individual or of any person specified in (i).
• ‘Jurisdiction with a zero-taxation regime’ means jurisdiction as may be prescribed.

Business connection

Business income of a non-resident is, inter-alia, considered to be Pakistan-sourced income to the extent to which it is directly or indirectly attributable to a ‘business connection’ in Pakistan. Through the Finance Act 2024, the concept of ‘business connection’ has been expanded to include ‘significant economic presence in Pakistan’ of a non-resident.

‘Significant economic presence in Pakistan’ has been defined as:

• a transaction in respect of any goods, services, or property carried out by a non-resident with any person in Pakistan, including provision of download of data or software in Pakistan, if aggregate of payments arising from such transactions during a tax year exceeds such amount as may be prescribed, or
• systematic and continuous soliciting of business activities or engaging in interaction through digital means with such number of users in Pakistan as may be prescribed, irrespective of whether or not:
  • the agreement for such transactions or activities is signed in Pakistan
  • the non-resident has a residence or place of business in Pakistan, or
  • the non-resident renders services in Pakistan.

Non-resident persons covered by an applicable DTT shall not be affected by the above amendment as the provisions of the DTT override domestic tax legislation, subject to certain general anti-avoidance provisions.