Answer ... Taxation of AIFs is governed by the Income Tax Ordinance, 2001 (the ‘Tax Ordinance’). Under the tax laws of Pakistan, investments in AIFs have been encouraged by the introduction of various incentives, tax credits and tax exemptions. The tax treatment of AIFs and some of the tax incentives to which AIFs are entitled are as follows:

• Pursuant to Section 62 of the Tax Ordinance, a resident taxpayer, other than a company, is entitled to a tax credit on investments in new shares (including units of a mutual fund) offered to the public by a public company listed on a stock exchange in Pakistan. The tax credit is computed based on the lower of:
• • the total cost of acquiring the shares;
  • 20% of the person’s taxable income for that year; or
  • Pakistani Rupees Two Million.

In terms of Section 62, such tax credit is clawed back if the resident taxpayer undertakes a disposition of the units within a period of 24 months from the date of acquisition.

• Capital gains tax does not apply to the redemption of units of a mutual fund or a REIT scheme by domestic investors, to the extent that such units are held for more than four years. If the units are held for less than four years, a variable capital gains tax rate applies, depending on the nature of the investee and the investment.
• Any income derived by a mutual fund, a REIT scheme or a private fund from any instrument of redeemable capital is exempt from tax if not less than 90% of its income of that year is distributed among the unit holders.
• The profit and gains on the sale of immovable property to a developmental REIT scheme with the object of development and construction of residential buildings is exempt up to 30 June 2020.
• The profit and gains on sales of immovable property to a rental REIT scheme are exempt from tax up to 30 June 2021.
• Any distribution received by a taxpayer from a mutual fund, REIT scheme or private fund out of the capital gains of that fund or scheme is also exempt from tax, to the extent such fund or scheme is a debt or money market fund and does not invest in shares.
• The income of Modarabas (other than trading Modarabas) is fully exempt from income tax, as long as they distribute 90% of their profits among the certificate holders. For trading Modarabas, the maximum tax rate is 20%.
• Contributions made to pension funds during any tax year are entitled to a tax credit under Section 63 of the Tax Ordinance.
• The accumulated balance of up to 50% received from a pension fund at the time of an eligible person’s retirement, disability rendering him or her unable to work, or death is exempt from tax under the Second Schedule of the Tax Ordinance.
• Any profit or gain or benefit derived by a pension fund manager from a pension fund on redemption of the seed capital invested in the pension fund is also exempt from tax.

Answer ... Under the Tax Ordinance, the income of AIF managing entities is subject to corporate tax at the rate of 29% and minimum tax at the rate of 8% of the turnover. There have been proposals by the AIFs industry to abolish or reduce the rate of tax on AIF managing entities. In addition, the profits and gains of tech start-ups from the export of computer software, information technology (IT) services, or IT-enabled services have been exempted from tax until June 30, 2025.

AIF managing entities are also liable to pay sales tax on services at varying rates pursuant to the provincial sales tax on services laws of Pakistan. Such taxes are being actively contested by AIF managing entities.

Answer ... Please see question 8.1.

Answer ... The SBP, the Pakistan Banks Association, the SECP, the Federal Board of Revenue (the federal revenue/tax authority of Pakistan) (FBR), individual commercial banks, non-banking finance companies and other stakeholders in their respective capacities are taking steps to comply with the Foreign Account Tax Compliance Act. The SBP, through Circular 16/2014, advised banks/development financial institutions/microfinance banks to complete the registration process with the US Internal Revenue Service (IRS) as participating foreign financial institutions (PFFIs). In compliance with the SBP’s directions, several financial institutions have registered with the IRS as PFFIs.

In addition, the SBP, through Circular 10/2017 dated 19 April 2017, and the FBR, by way of SRO 166(I)/2017 dated 15 March 2017, now require all banks in Pakistan to ensure compliance with the Common Reporting Standard rules.

Answer ... Pakistan has entered into tax treaties with several countries with the objective of eliminating double taxation of income or gains arising in one jurisdiction and paid to residents of another. In the event of conflict, such treaties in most cases supersede the tax laws applicable in Pakistan with respect to taxation of Pakistan-source income of a non-resident person. Foreign investors that wish to invest in AIFs in Pakistan may seek to take advantage of the double tax treaties entered into by Pakistan with different countries, whereby withholding tax on dividends issued to foreign investors incorporated in such countries is reduced and/or capped. Generally, a resident entity pays tax at the rate of 15% on dividend income, while a non-resident pays withholding tax on Pakistan-source dividends at the rate of 15% or a reduced rate under the relevant tax treaty. In making their corporate structuring decision, investors can incorporate parent/holding companies of domestic AIF managing entities in tax-favourable jurisdictions.