Corporate - Income determination

Last reviewed - 23 January 2024

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 gains on the sale, exchange, or transfer of movable capital assets held by a company, except for securities traded at a stock exchange, are taxable at the normal corporate rate of tax. Capital gain arising on these capital assets held for more than one year, which was earlier taxable to the extent of 75% of the total gain, is now fully taxable.

Capital gain on immovable properties

The gain arising on the disposal of immovable property shall be computed as the consideration received on disposal of the asset less the cost of the asset and is subject to tax at the following rates:

Holding period Tax (%)
Open plots Constructed property Flats
Where the holding period does not exceed one year 15.0 15.0 15.0
Where the holding period exceeds one year but does not exceed two years 12.5 10.0 7.5
Where the holding period exceeds two years but does not exceed three years 10.0 7.5 0
Where the holding period exceeds three years but does not exceed four years 7.5 5.0 0
Where the holding period exceeds four years but does not exceed five years 5.0 0 0
Where the holding period exceeds five years but does not exceed six years 2.5 0 0
Where the holding period exceeds six years 0 0 0

Capital gain on securities 

Gain on disposal of listed securities is subject to tax based on holding period for securities purchased post 1 July 2022. The tax rates are as follows:

Holding period Tax (%)
Less than one year 15.0
From one year to two years 12.5
From two years to three years 10.0
From three years to four years 7.5
From four years to five years 5.0
From five years to six years 2.5
More than six years


Future commodity contracts entered into by members of the Pakistan Mercantile Exchange are subject to tax at a rate of 5%.

The rate shall be 12.5%, irrespective of the holding period, for securities purchased on or before 30 June 2022. The rate shall be 0% for securities acquired before 1 July 2013.

Companies shall be subject to tax at the corporate rate of tax under the normal tax regime in respect of debt securities.

A mutual fund, collective investment scheme, or real estate investment trust (REIT) scheme shall, at redemption of securities, deduct capital gain tax at a rate of 10% for stock funds in case of individual / association of persons or a company. However, the rate shall be 25% for other funds in case of a company. In case of stock funds, if dividend receipts of the fund are less than capital gains, the rate of deduction shall be 12.5%. No tax shall be deducted if the holding period of a security is more than six years.

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

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.

No gain or loss shall be taken to arise on disposal of an asset by a resident company to another resident company if 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 must be approved by the Securities and Exchange Commission of Pakistan or State Bank of Pakistan.

Capital gain on disposal of Special Convertible Rupee Accounts (SCRAs) and Roshan Digital Accounts (RDAs)

Foreign companies (not having PE in Pakistan) and non-resident individuals investing in Pakistan in debt instruments and government securities through SCRAs and RDAs are subject to a blanket 10% WHT rate on capital gain arising on disposal of these debt instruments and government securities. This deduction shall be full and final discharge of their tax liability.

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 and REITs, etc.) is generally subject to final tax at 15%; however, a different rate would apply in the following cases:

  • Dividend paid by IPPs where such dividend is a pass-through item under relevant energy agreements and is required to be reimbursed by the relevant agency at 7.5% (applicable rate of tax deduction also at 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 at 25% (applicable rate of tax deduction also at 25%).
  • Dividend received by a REIT scheme from a special purpose vehicle (SPV; as defined under Real Estate Investment Trust Regulations, 2015) at 0% (applicable WHT rate also 25%).
  • Dividend received by any other person from an SPV (as defined under Real Estate Investment Trust Regulations, 2015) at 35% (applicable WHT rate also 35%).

Interest income

Interest earned by a company is taxed as its income from other sources, subject to tax at corporate rate of tax on a net income basis. Interest earned by a non-resident company without a PE in Pakistan is taxable subject to the rate provided in the relevant DTT.

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.

Apart from above, income in the form of fees for money transfer operations, card network services, payment gateway services, and inter-bank financial telecommunication services derived by non-resident companies (with no PE) are also brought to tax-net in Pakistan.

The above are subject to DTT provisions for treaty countries.

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 where the related provincial tax has been paid.

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.