Pakistan - Corporate - Taxes on corporate income (2024)

A resident company is taxed on its worldwide income. Non-resident companies operating in Pakistan through a branch are taxed on their Pakistan-source income attributable to the branch at rates applicable to a company.

The revised federal corporate tax rates on taxable income (for tax year 2023 and onwards) are as follows:

Company typeTax rate (%)
Banking company39
Public company* other than a banking company29
Any other company29
Small company (see the Tax credits and incentives section for more information)20

* The term ‘public company’ implies a company listed on any stock exchange in Pakistan or one in which not less than 50% of the shares are held by the federal government or a public trust.

Super tax

In addition to above, super tax is imposed at the following slab rates:

Income (PKR)Super tax rate (%)
OverNot over
150 million200 million1
200 million250 million2
250 million300 million3
300 million350 million4
350 million400 million6
400 million500 million8
500 million10

Note: For banking companies with income exceeding PKR 300 million, the super tax rate is 10% for tax year 2023.

The concept of super tax was reintroduced by the government on high earning persons in tax year 2022. Slab-wise rates were prescribed for tax year 2022 with a maximum rate of 4%. With regard to certain specified sectors, an enhanced rate of 10% was prescribed for tax year 2022 only, and for banking companies, 10% super tax was applicable for tax year 2023.

In relation to the retrospective application of super tax for tax year 2022 and enhanced rate applicable for specified sectors causing discrimination, Constitution Petitions were filed before Higher Courts in Pakistan. The matter is currently sub-judice before the Supreme Court.

Through Finance Act, 2023, new slab rates (as provided in tabular form above) for super tax have been introduced. As a result, the highest slab rate of 10% will be applicable on taxpayers from all sectors having income in excess of PKR 500 million, thus eliminating the discrimination.

Taxation of small and medium enterprises (SMEs) engaged in the manufacturing sector

An SME is defined as a person who is engaged in manufacturing of goods whose business turnover in a tax year does not exceed PKR 250 million. In the case that annual business turnover exceeds PKR 250 million, it shall cease to be an SME for such tax year and onwards.

An SME is required to register with the Federal Board of Revenue (FBR) on the IRIS web portal or the Small and Medium Enterprises Development Authority (SMEDA) on its SME registration portal. A company covered by the definition of anSME will not qualify as a ‘small company’.

For the purpose of taxation, SMEs are classified into the following two categories, and tax on taxable income is required to be computed at the rates given below:

  • Category 1: 7.5% of the taxable income, where annual business turnover does not exceed PKR 100 million.
  • Category 2: 15% of the taxable income, where annual business turnover exceeds PKR 100 million but does not exceed PKR 250 million.

SMEs can also opt to be taxed under the final tax regime (FTR). The said option is required to be exercised at the time of return filing, and the same will be irrevocable for three tax years. The SMEs who opt to be taxed under theFTR shall not be subject to tax audit under sections 177 and 214C. The category-wise rate of tax under theFTR is given below:

  • Category 1: 0.25% of the gross turnover, where annual business turnover does not exceed PKR 100 million.
  • Category 2: 0.5% of the gross turnover, where annual business turnover exceeds PKR 100 million but does not exceed PKR 250 million.

Minimum tax on turnover shall not apply toSMEs.

Taxation of a permanent establishment (PE)

The following principles shall apply in computing taxable income of a PE:

  • It is a distinct and separate entity dealing independently with the non-resident of which it is a PE.
  • In addition to business expenditure, executive and administrative expenditure, whether incurred in Pakistan or elsewhere, will be allowed as deductions.
  • Head office expenditure, including rent, salaries, travelling, and any other expenditure that may be prescribed, shall be allowed as a deduction in proportion to the turnover of the PE in the same proportion as the non-resident’s total head office expenditure bears to its worldwide turnover.
  • Royalties, compensation for services (including management services), and interest on loans (except in banking business) payable or receivable to or from a PE’s head office shall be considered in computing taxable income of the PE.
  • No deduction will be allowed for any interest paid on loans acquired by a non-resident to finance the operations of a PE (or for the insurance premium in respect of such loans).
  • Income from sale of goods (in the same state), rendering of services, and execution of contracts derived by a PE/branch of a non-resident person is subject to ‘minimum tax’ of the gross consideration at the following rates:
    DescriptionWHT rate (%)
    Sale of goods5
    Services9
    Execution of contract8
  • Further, in line with the regime applicable for resident service providers, a reduced tax/WHT rate of 4% is also applicable with respect to certain specified services rendered by a PE of a non-resident person. The services are as follows:
    • Transport services.
    • Freight forwarding services.
    • Air cargo services.
    • Courier services.
    • Manpower outsourcing services.
    • Hotel services.
    • Security guard services.
    • Software development services.
    • IT services and IT enabled services.
    • Tracking services.
    • Advertising services (other than by print or electronic media).
    • Share registrar services.
    • Car rental services.
    • Building maintenance services.
    • Engineering services.
    • Services rendered by Pakistan Stock Exchange Limited and Pakistan Mercantile Exchange Limited.
    • Inspection, certification, testing, and training services.
    • Oil field services.

The above stated rates are enhanced by 100% in case of inactive taxpayers.

Minimum tax on turnover is also applicable at a rate of 1.25% on PE of a non-resident. In certain cases/sectors, such turnover tax is payable at rates less than 1.25% (ranging from 0.25% to 0.75% of turnover). For detail, refer to Minimum tax on turnover below.

Taxation of certain contracts executed by non-resident persons

Income derived by non-resident persons/their affiliates from turnkey contracts that are part of an overall arrangement for supply of goods, installation, construction, assembly, commission, guarantee, and supervisory activities, including offshore supply of goods (i.e. cohesive business operation), constitutes Pakistan-source income.

‘Cohesive business operations’, 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 includes the goods imported in the name of the associate or any other person, whether or not the title to the goods passes outside Pakistan.

In case of payment against transactions that constitutes part of an overall arrangement of a cohesive business operation, the Commissioner (on application made by the payer) may allow the person to make payment after deduction of tax equal to 20% of tax chargeable on such payment, which is normally 7%. Consequently, the effective rate of withholding in the instant case shall be 1.4%. This rate is 1% in case of offshore supply contract for an independent power producer (IPP) located in Azad Jammu and Kashmir, subject to certain conditions.

Minimum tax on turnover

Where the tax payable by a company is less than 1.25% of the turnover, the company is required to pay a minimum tax equivalent to 1.25% of the turnover, except where the company is exempt from levy of minimum tax. In certain cases/sectors, such turnover tax is payable at rates less than 1.25% (ranging from 0.25% to 0.75 % of turnover).

Tax paid in excess of normal tax liability in the instant case can be carried forward for adjustment against normal tax liability of the subsequent three tax years.

Transaction-based minimum taxes

Certain WHTsapplicable on payments made to residents and non-residents are considered as minimum tax while determining their corporate tax liability on a net income basis. These transactions, interalia,includesale of goods(unless by a company being a manufacturer of such goods or by a company listed on a Pakistani stock exchange), rendering of services, and execution of contracts (unless payment received by a company listed on a Pakistani stock exchange).

Advance income tax paid at the import stage is minimum tax in case of commercial importers, while it is an adjustable tax on import of raw material by industrial undertakings, with few exceptions.

Alternate Corporate Tax (ACT)

Under the ACT, the minimum tax liability of a company is the higher of 17% of accounting income or the corporate tax liability determined under the Ordinance, including minimum tax on turnover. This concept is applicable for all companies except insurance companies, companies engaged in exploration and production of petroleum, banking companies, and companies enjoying a reduced rate of tax.

Exempt incomes, capital gain on disposal of specified listed securities, income entitled to 100% tax credit on account of equity investment, and income of non-profit organisations, trusts, and welfare institutions are not subject to levy of ACT.

Pakistan - Corporate - Taxes on corporate income (2024)

FAQs

Pakistan - Corporate - Taxes on corporate income? ›

Statutory Tax Rate

Do corporations pay income tax on corporate earnings? ›

A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders. The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax.

What is the corporate tax system in Pakistan? ›

There is a direct link between corporate taxes and Foreign Direct Investment (FDI). Currently, Pakistan has one of the highest corporate tax rates in the world: 29%, plus a 10% super tax for companies with income equal to or greater than Rs500 million, a 2% workers' welfare fund, and a 5% workers' participation fund.

How much tax is imposed on corporate profits? ›

The corporate tax rate is a tax levied on a corporation's profits, collected by a government as a source of income. It applies to a company's income, which is revenue minus expenses. In the U.S., the federal corporate tax rate is a flat rate of 21%. States may also impose a separate corporate tax on companies.

Are corporations taxed twice? ›

The company pays the taxes on its annual profits first. Then, after the company pays its dividends to shareholders, shareholders pay a second tax.

Is corporate tax based on net income? ›

Like most other countries, the United States levies a tax on the net profits — that is, the total income minus the costs associated with generating that income — of corporations.

How is corporate tax calculated in Pakistan? ›

Statutory Tax Rate

The standard corporate tax rate is 29%. Other rates apply as follows: For banking companies, the standard corporate tax rate is 39% (increased from 35% effective 1 July 2022).

What is the alternative corporate tax in Pakistan? ›

Alternate Corporate Tax (ACT)

Under the ACT, the minimum tax liability of a company is the higher of 17% of accounting income or the corporate tax liability determined under the Ordinance, including minimum tax on turnover.

How do taxes work in Pakistan? ›

Pakistan levies tax on its residents on their worldwide income. A non-resident individual is taxed only on Pakistan-source income, including income received or deemed to be received in Pakistan or deemed to accrue or arise in Pakistan.

How much foreign income is tax free in Pakistan? ›

Foreign remittances exceeding Rs 5 million do not attract any addition to income chargeable to tax.

What is the turnover tax in Pakistan? ›

Resident companies, permanent establishments of nonresident companies, individuals and AOPs with turnover of PKR 100 million and above must pay a 0.75% minimum tax on turnover.

What is the highest income tax in Pakistan? ›

Discussions are revolving around whether to charge a new backbreaking 45% income tax from salaried and non-salaried individuals on a monthly income of just over Pakistani Rs 4,67,000, sources said. At present, the maximum rate of 35% applies to a monthly income of over Pakistani Rs 5,00,000.

Who pays income tax on corporate profits? ›

The corporation must file a corporate tax return, IRS Form 1120, and pay taxes at a corporate income tax rate on any profits. If a corporation will owe taxes, it must estimate the amount of tax due for the year and make quarterly payments to the IRS by the 15th day of the 4th, 6th, 9th, and 12th months of the tax year.

What percentage do corporations pay in taxes? ›

The United States imposes a tax on the profits of US resident corporations at a rate of 21 percent (reduced from 35 percent by the 2017 Tax Cuts and Jobs Act). The corporate income tax raised $424.7 billion in fiscal year 2022, accounting for 8.7 percent of total federal receipts and 1.7 percent of GDP.

Who actually pays corporate income tax? ›

It turns out there is an ongoing debate among economists over the incidence of the corporate income tax. TPC assumes that 80 percent of the burden falls on capital and shareholders, while labor bears about 20 percent.

Why do corporations not pay taxes? ›

How do profitable corporations get away with paying no U.S. income tax? Their most lucrative (and perfectly legal) tax avoidance strategies include accelerated depreciation, the offshoring of profits, generous deductions for appreciated employee stock options, and tax credits.

What is the difference between corporate income tax and individual income tax? ›

Corporate tax is an expense of a business (cash outflow) levied by the government that represents a country's main source of income, whereas personal income tax is a type of tax governmentally imposed on an individual's income, such as wages and salaries.

Who pays individual income taxes corporate income taxes? ›

Companies pay corporate income and payroll taxes, and employees pay individual income and payroll taxes. Those who are self-employed may have to pay individual income, corporate income, and payroll taxes. Which items are part of mandatory spending in the federal government?

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