Corporate - Income determination

Last reviewed - 01 January 2021

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 are taxable. Capital gains on the sale of immovable property are subject to tax depending upon the amount of gain and holding period in the manner tabulated below:

Holding period (years) Amount of gain
0 to 1 A
1 to 2 A x ¾
2 to 3 A x ½
3 to 4 A x ¼
4 + 0

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

Gain amount (PKR in millions) Rate of tax (%)
0 to 5 2.5
5 to 10 5.0
10 to 15 7.5
15 + 10.0

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. Moreover, ‘shares of a public company’ shall be considered as securities if such company is a public company at the time of disposal of such shares. Capital gains on such instruments are taxed as follows:

Holding period (months) Tax rates: Persons appearing on the ATL (%)
Securities acquired before 1 July 2016 Securities acquired after 1 July 2016
0 to 12 15.0 15.0
12 to 24 12.5 15.0
24 + 7.5 15.0

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.

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.

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 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 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%).

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/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.

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.