Doing Business In Comparative Guide

1 Legal framework

1.1 Does your jurisdiction have a civil law system, a common law system or a hybrid system?

Pakistan is unique in its legal system, as it incorporates elements of both civil law and common law traditions. As a former British colony, Pakistan inherited the common law system from the British legal framework. However, with its geographical proximity to countries following civil law systems and its historical connections to regions governed by Islamic law, Pakistan also incorporates aspects of civil law into its legal structure. Article 227 of the Constitution mandates alignment of laws with Quranic and Sunnah teachings, to be enforced by the Federal Shariat Court.

Pakistan has a comprehensive legal code that encompasses various aspects of law, including commercial, contractual and administrative matters. These laws are primarily based on statutes and regulations enacted by the legislative bodies, such as the National Assembly and provincial assemblies. The judiciary in Pakistan applies and interprets these codified laws to resolve legal disputes, following the principles of civil law jurisprudence.

On the other hand, Pakistan's legal system also incorporates elements of common law, particularly in the areas of judicial precedent and case law. Courts in Pakistan – especially the higher courts such as the Supreme Court and the High Courts – frequently rely on precedents established through previous judicial decisions to guide their rulings and interpretations of the law. This reliance on case law contributes to the development and evolution of legal principles in Pakistan's jurisprudence.

Overall, Pakistan's legal system represents a unique blend of civil law and common law traditions, reflecting the country's diverse historical, cultural and legal influences.

1.2 Which legislative and regulatory provisions primarily govern the establishment and operation of enterprises in your jurisdiction?

In Pakistan, the Companies Act 2017 is the key statute governing the establishment and operation of private and public enterprises. Its objectives include:

• facilitating corporate sector development;
• regulating the operation of corporate entities;
• promoting good governance; and
• providing mechanisms for expeditious corporate resolution.

Moreover, the Companies Regulations 2024 framed under Section 512 of the Companies Act 2017 set out the main regulatory provisions that govern the establishment and operation of companies.

Various regulators issue regulatory provisions under delegated legislation, such as:

• the Securities and Exchange Commission of Pakistan (SECP);
• the State Bank of Pakistan (SBP);
• the Federal Board of Revenue; and
• the Competition Commission of Pakistan (CCP).

They derive their authority from laws including:

• the Companies Act 2017;
• the Foreign Exchange Regulation Act 1947;
• the State Bank of Pakistan Act 1956;
• the Income Tax Ordinance 2001; and
• the Competition Act 2010.

Additionally, the enactment of the State-Owned Enterprises (Governance and Operations) Act, 2023 addresses governance and operational aspects, including the management and financial efficiency of state-owned enterprises under the ownership and control of the Federal Government. This legislation authorises the establishment of state-owned enterprises to conduct specific activities on behalf of the federal government, regulating their ownership, governance and accountability.

For enterprises such as joint ventures, the applicable laws are:

• the Contract Act 1872; and
• the Companies Act 2017 for incorporated special purpose vehicles.

For public-private investment enterprises, the Public Private Partnership Authority Act 2016 governs public-private partnerships (PPPs) in Pakistan so as to promote domestic and foreign private investment in infrastructure in order to increase the availability of public infrastructure.

1.3 Which bodies are responsible for drafting and enforcing these provisions? What powers do they have?

The applicable laws fall within the domain of the federal legislature and are drafted by the National Assembly, while the applicable statutes empower various regulators to create delegated legislation and issue regulations. The key regulators in Pakistan are:

• the SECP;
• the SBP;
• the CCP;
• the PPP Authority; and
• the registrar of firms.

Initially established to oversee and regulate the corporate sector and capital markets, the SECP's mandate has been expanded to regulate:

• the insurance sector;
• non-banking financial companies; and
• pension funds.

The SECP deals with all company-related matters.

The SBP, Pakistan's central bank, regulates the banking sector and implements monetary policy. The SBP regulates banking in order to address changes in the economic climate and different purchasing and buying powers. It oversees various banking area, such as:

• monetary policy;
• banking supervision;
• payment systems;
• foreign exchange management;
• financial inclusion; and
• banking development.

The CCP is dedicated to:

• fostering competition;
• reducing barriers to entry; and
• curbing abuse of market power.

Upholding the CCP's independence and autonomy is essential to ensure a competitive and efficient economy.

2 Types of business structures

2.1 What are the main types of business structures in your jurisdiction and what are their key features?

Sole proprietorships: These are the simplest form of business entities, owned and operated by a single individual who bears full responsibility for all business aspects, including debts and liabilities. While easy to establish and maintain, these lack legal separation between the owner and the business, exposing the proprietor to personal liability.

Partnerships: A partnership is an unincorporated entity comprising two or more partners who contribute capital. It is created through a contract or partnership deed, where partners are liable for actions of the partnership and each other.

Companies:

• Single-member companies comprise only one shareholder and director.
• Private companies have a minimum of two shareholders and two directors, with a maximum of 50 shareholders. Private companies restrict share transfers and prohibit public invitations to subscribe to shares, debentures or redeemable capital. Unlike sole proprietorships, they offer limited liability protection to shareholders, safeguarding personal assets from liabilities.
• Public limited companies, listed or unlisted, must have a minimum of three shareholders, with no upper limit. They offer limited liability, but without restrictions on share transfers, and can invite the general public to subscribe to shares, facilitating greater access to capital compared to private companies.

Limited liability partnerships (LLPs): LLPs require a minimum of two partners, with no upper limit on the number of partners. They offer limited liability while providing greater flexibility than private and public companies, since they have no regulatory requirements regarding:

• minimum share capital;
• maintaining various registers;
• holding meetings; or
• presenting financial statements.

2.2 What capital requirements apply to these different types of business structures?

Sole proprietorships: There are no specific capital requirements for sole proprietorships in Pakistan. As the business is owned and operated by a single individual, the initial capital investment and ongoing financial obligations are determined by the proprietor's resources and business needs.

Partnerships: There are no minimum capital requirements for partnerships.

Companies:

• Single-member companies: Similar to a private limited company, there is no minimum paid-up capital requirement; however, the minimum authorised share capital is PKR 100,000.
• Private limited companies: There is no minimum paid-up capital requirement for private companies; however, the minimum authorised share capital is PKR 100,000.
• Public limited companies: The minimum amount of authorised share capital for a public limited company is PKR 5 million. For a public company to be listed on the Pakistan Stock Exchange, there is a requirement for the post-issue, paid-up capital to be PKR 200 million.

LLPs: There is no minimum capital requirement for LLPs.

2.3 What is the process for establishing these different types of business structures? What procedural and substantive requirements apply in this regard? What is the typical timeline for their establishment?

Sole proprietorships:

• Process: Establishing a sole proprietorship involves minimal formalities. It encompasses:
• • creating a business name;
  • developing a business logo or letterhead;
  • applying for national tax number (NTN) registration with the Federal Board of Revenue; and
  • setting up a dedicated bank account.
• The sole document obtained after registration is the NTN certificate.
• Timeline: Obtaining an NTN typically takes about one week after applying for registration.

Partnerships:

• Process: Proposed partners must execute a partnership agreement. The partnership may be registered with the registrar of firms by submitting:
• • a partnership deed executed on stamp paper;
  • the prescribed form;
  • the registration fee; and
  • attested copies of accompanying documents.
• Timeline: Registration applications are processed within seven days of receipt of all accompanying documents and subsequently, a certificate of registration is issued.

Companies:

• Process: Incorporating single-member, private and public companies involves:
• • reserving a company name; and
  • filing the incorporation application along with the articles and memorandum of the company with the Securities and Exchange Commission of Pakistan (SECP).
• Timeline: Incorporation takes approximately one month, depending on SECP response time and addressing and resolving any objections raised by the SECP.

LLPs:

• Process: Incorporating an LLP involves filing a name reservation application followed by an LLP incorporation application with the SECP, accompanied by the duly signed and notarised deed of the LLP agreement.
• Timeline: Incorporation typically takes around two weeks, factoring in SECP's response time and the resolution of any objections raised during the process.

2.4 What requirements and restrictions apply to foreign players that wish to establish a business directly in your jurisdiction?

Foreign players can establish a business in Pakistan either as:

• a registered Pakistani entity; or
• a representation of the foreign entity.

When setting up a sole proprietorship, company or LLP, the requirements and restrictions apply equally to foreign nationals. Foreigners can become partners in an LLP incorporated in Pakistan, but those wishing to incorporate a company must:

• obtain security clearance from the Ministry of Interior; and
• provide an undertaking to transfer their shares to cleared or exempt individuals in the event of a failure to obtain security clearance.

Foreign companies can also set up a branch or liaison office to represent the foreign entity rather than being a distinct entity. This involves:

• filing a name reservation application; and
• submitting the requisite documents to the SECP.

Upon registration, the SECP issues a certificate and assigns a corporate unique identification number. Additionally, a permission letter from the Board of Investment for maintaining a branch or liaison office must be furnished and renewed upon expiry.

To repatriate funds and profits, foreigners must:

• register shares with the State Bank of Pakistan (SBP); or
• provide an undertaking not to transfer funds abroad.

Depending on the business nature and industry, specific regulatory approvals or licences may be required from the SBP, the SECP or relevant ministries. While 100% foreign ownership is generally allowed, certain sectors require joint ventures with local partners, such as:

• airlines;
• banking;
• engineering;
• agriculture; and
• media.

To encourage foreign direct investment, Pakistan recently established the Special Investment Facilitation Council to harness the potential of sectors such as:

• information technology;
• energy; and
• agriculture.

2.5 What other opportunities, using people/entities not connected with the main person, are there to do business in your jurisdiction (eg, agency, resale); and what requirements and restrictions apply in this regard?

Alternative business opportunities in Pakistan include the following:

• Agency arrangements: Businesses can appoint independent agents to handle activities such as marketing, sales and contract negotiation on their behalf.
• Distributorship and resale: Companies can enter into distribution agreements with local entities to distribute and resell their products or services, leveraging the local market knowledge and distribution networks of these entities.
• Franchising: Businesses can expand in Pakistan by granting franchise rights to local entrepreneurs. Franchisees operate under the franchisor's brand name and business model.
• Joint ventures: Foreign entities can establish joint ventures with local partners for specific ventures, allowing investment, risk and expertise to be shared, which helps foreign businesses to navigate local market complexities more effectively.
• Licensing agreements: Businesses can license their intellectual property – such as patents, trademarks and copyrights – to local entities in Pakistan in exchange for royalties or other compensation.

Adherence to the Contract Act is essential to ensure the validity and enforceability of these arrangements under Pakistani law. For licensing agreements, businesses should ensure adequate protection of their IP rights in Pakistan through registration with the Intellectual Property Office.

The Competition Act 2017:

• prevents the abuse of dominant positions by undertakings; and
• specifies prohibited agreements that prevent, restrict or reduce competition.

Arrangements should not constitute an abuse of a dominant position or fall within prohibited agreements under the Competition Act 2017. Permission from the Competition Commission of Pakistan is required where an arrangement meets the thresholds specified in the Competition (Merger Control) Regulations 2016.

3 Directors and management

3.1 How is management typically organised in the different types of business structures in your jurisdiction?

• Sole proprietorship: Management is centralised and typically handled entirely by the owner. The proprietor makes all decisions regarding the operation of the business, including:
• • strategic planning;
  • financial management; and
  • day-to-day operations.
• Partnerships: Partnerships offer flexibility in management structure, allowing partners to organise management according to their preferences and the needs of the business. Therefore, management is organised according to the partnership deed.
• Companies: Management in private and public companies is typically structured hierarchically, with a board of directors overseeing strategic direction and major decisions. This board is elected by shareholders and appoints executive management, such as:
• • the chief executive officer (CEO), who is responsible for implementing the board's directives and overseeing daily operations; and
  • the chief financial officer (CFO).
• Private companies may also have management teams responsible for specific functional areas such as finance, operations and marketing. However, the management structure for public companies and listed public sector companies also includes non-executive directors, such as independent directors on the board.

Limited liability partnerships (LLPs): The management structure in LLPs is organised similarly to partnerships. However, LLPs require the appointment of at least one designated partner, who is responsible for performing all acts, matters and things required to be done by the LLP in compliance with the LLP Act, including filing all documents, returns, statements and reports. Where no partner is appointed as a designated partner, all partners will be deemed to be designated partners.

3.2 Is the establishment of specialist committees recommended or mandated for certain types of enterprises? If so, which areas should they cover?

Public companies in Pakistan may be listed or unlisted. The Listed Companies (Code of Corporate Governance) Regulations apply to public listed companies, of which Regulation 14 requires certain significant issues to be placed by the CEO before the board of directors or one of its committees. Chapter IX outlines the committees to be constituted by the board as follows:

• Audit committee: Regulation 27 mandates the formation of an audit committee for listed companies. It outlines the composition, functions and responsibilities of the committee, ensuring oversight of:
• • financial reporting;
  • internal controls; and
  • audit processes.
• Human resources (HR) and remuneration committee: Regulation 28 similarly mandates the formation of the HR and remuneration committee, which is responsible for:
• • recommending to the board for consideration and approval a policy framework for determining the remuneration of directors;
  • undertaking annually a formal evaluation of the performance of the board and its committees, either directly or by engaging external independent consultants; and
  • recommending to the board HR policies and the selection/evaluation/development/compensation of the CEO, CFO, company secretary and head of internal audit.
• Nomination committee: Regulation 29 provides that a nomination committee may be constituted which will be responsible for:
• • making recommendations to the board in respect of its committees and their chairmanship; and
  • regularly reviewing the structure, size and composition of the board and making recommendations for necessary changes thereto.
• Risk management committee: Regulation 30 provides that a risk management committee may be constituted to carry out a review of effectiveness of risk management procedures.

3.3 Is the appointment of corporate directors permitted in your jurisdiction?

No, the appointment of corporate directors is not permitted in Pakistan. Section 154(2) of the Companies Act 2017 explicitly provides that only natural persons may be directors.

3.4 What requirements and restrictions apply to the appointment of directors, in terms of factors such as number, residence, independence, diversity etc?

Section 154 of the Companies Act mandates the minimum director requirements for different types of companies in Pakistan, as follows:

• Single-member companies: One.
• Private limited companies: Two.
• Public unlisted companies: Three.
• Public listed companies: Seven.

There are no legal restrictions barring foreign nationals from serving as directors of companies incorporated in Pakistan. However, all foreign individuals, including shareholders and directors, must:

• obtain security clearance from the Ministry of Interior following the incorporation of the company; and
• furnish an undertaking stating that if their security clearance is revoked by the Ministry of Interior, they will promptly transfer their shares to an individual who either:
• • does not require security clearance; or
  • has successfully undergone the clearance process.

Additionally, public listed companies must have two or one-third of their board members, whichever is higher, as independent directors; while public listed companies must appoint at least one female director to their boards.

3.5 How are directors selected, appointed and removed? Do any restrictions or recommendations apply to their tenure?

All directors must comply with Section 153 of the Companies Act, which specifies the persons who are ineligible for appointment as directors. The appointment of directors occurs as follows:

• Initial appointment: The number and names of the first directors are determined by the memorandum. These directors hold office until the election of directors in the first annual general meeting of the company.
• Election process: The number of directors to be elected in the general meeting is determined by the incumbent directors. In companies with a share capital, directors are elected by members based on the number of votes held by each member. The candidate receiving the highest number of votes is declared elected, followed by the candidate with the next highest votes, until all positions are filled.
• Casual vacancy: Any casual vacancy occurring among the directors may be filled by the directors.
• Nominee directors: A company may have directors nominated by its creditors or other special interests by virtue of contractual arrangements.

Directors continue in office until their retirement upon the expiry of their office term (the first annual general meeting for first directors and three years for directors elected in the general meeting), unless they:

• resign;
• become disqualified from being a director; or
• otherwise cease to hold office.

Directors appointed in any of the above manners other than nominee directors may be removed by the company by resolution in general meeting.

3.6 What are the directors' primary roles and responsibilities, and how are these exercised?

The primary role and responsibilities of the board of directors are governed by the articles of association and encompass:

• managing the company's affairs; and
• exercising various powers on behalf of the company.

As outlined in Section 183 of the Companies Act 2017, these powers include:

• issuing shares, debentures or other financial instruments;
• borrowing money and making investments;
• making loans and authorising directors to enter contracts;
• approving financial statements, employee bonuses and interim dividends;
• managing capital expenditures and disposing of assets;
• undertaking leasing contracts and declaring dividends;
• making decisions on material matters specified by the board; and
• taking over or acquiring other companies, subject to certain conditions.

These powers are exercised through resolutions passed at board meetings. However, certain actions, such as the sale of significant parts of the business or subsidiaries, require consent from the general meeting. Failure to comply with these provisions may result in penalties and liabilities for directors.

3.7 Are the roles of individual directors restricted? Is this common in practice?

In Pakistan, the roles of individual directors are not necessarily restricted by law, but they are expected to fulfil certain fiduciary duties and responsibilities as per the Companies Act. These duties typically include:

• acting in good faith;
• exercising due care and diligence;
• avoiding conflicts of interest; and
• promoting the best interests of the company and its shareholders.

While there are no explicit restrictions on the roles of individual directors in terms of their specific functions within the company, the Companies Act does prescribe certain requirements regarding the composition and responsibilities of the board of directors. For example, the Companies Act mandates the appointment of independent directors in certain cases.

In practice, the roles of individual directors may vary depending on factors such as:

• the size and nature of the company;
• the industry in which it operates; and
• its corporate governance practices.

Larger companies – particularly publicly listed ones – often have more structured governance frameworks with clearly defined roles for directors, including executive and non-executive directors.

The roles of individual directors may also be influenced by the company's articles, shareholders' agreements, and board resolutions, which may outline specific duties, powers and responsibilities for directors.

Thus, although there are no widespread restrictions on the roles of individual directors in Pakistan, companies are encouraged to:

• adopt good corporate governance practices; and
• ensure that directors:
• • understand their duties; and
  • act in accordance with legal and regulatory requirements.

3.8 What are the legal duties of individual directors? To whom are these duties owed?

Directors may be classified as executive and non-executive directors. Executive directors participate in the routine running of the company; while non-executive directors, despite possessing a seat on the board, do not perform any managerial functions. Non-executive directors also include independent directors and nominee directors. Independent directors have no material relationship with the company, ensuring unbiased judgement; while nominee directors are nominated by a company's creditors or other special interests by virtue of contractual arrangements.

The legal duties of directors, owed to the company, are outlined in Section 204 of the Companies Act as follows:

• Directors must adhere to the company's articles;
• Directors must act in good faith to promote the company's objectives for the benefit of:
• • its members, employees and shareholders;
  • the community; and
  • the protection of the environment.
• Directors must execute their duties with due care, skill and diligence, exercising independent judgement.
• Directors must not engage in situations where their interests conflict with those of the company, whether directly or indirectly.
• Directors must:
• • refrain from seeking undue gain or advantage for themselves, their relatives, partners or associates; and
  • if found guilty, reimburse the company for any undue gain obtained.
• Directors cannot transfer their position and any such attempt will be considered void.
• Breaches of duty, default or negligence may be ratified by the company through a special resolution, with the Securities and Exchange Commission of Pakistan (SECP) empowered to impose restrictions.
• Further duties and roles for directors may be specified by the SECP.

3.9 To what civil and criminal liabilities are individual directors primarily potentially subject?

Section 172 of the Companies Act lists the circumstances in which the SECP may disqualify persons from becoming directors of a company. As per Section 173 of the Companies Act, a disqualified person who is involved in the management of the company or another person who is involved in the management of the company but acts on the instruction of a disqualified person will be personally liable for all debts of the company.

Additionally, Section 180 of the Companies Act declares as void any provisions for exempting any officer or auditor from, or indemnifying him or her against, any liability which would otherwise attach to him or her in respect of any negligence, default, breach of duty or breach of trust which he or she may be guilty of in relation to the company.

Independent and non-executive directors, however, are liable only in respect of acts or omissions which occurred with their knowledge, attributable through board processes and with their consent, where they did not act diligently.

4 Shareholders/members

4.1 What requirements and restrictions apply to shareholders/members in your jurisdiction, in terms of factors such as age, bankruptcy status etc?

There are no general restrictions on shareholders/members in Pakistan based on age or bankruptcy status. Any legal or natural person may become a shareholder of a company in Pakistan.

However, the Contract Act provides that a minor does not have capacity to enter into a valid contract. Therefore, while a minor may become a shareholder by acquiring shares through a gift or in inheritance, a minor cannot become a shareholder by acquiring shares through a share purchase agreement.

For a company limited by shares, no contribution is required from any past or present member exceeding the amount remaining unpaid on its shares. If a contributory is adjudged insolvent, its assignees in insolvency:

• will represent it for the purposes of winding up and will be contributories accordingly; and
• may be required to allow payment from its assets for any money owed due to its liability to contribute to the company's assets.

Additionally, the Companies Act disqualifies certain individuals from becoming a director of a company. These disqualifications include:

• persons who have applied to be adjudicated as an insolvent;
• undischarged insolvents;
• individuals convicted for offences involving moral turpitude; and
• individuals debarred from holding such office under any provisions of the companies act.

4.2 What rights do shareholders/members enjoy with regard to the company in which they have invested?

The rights of shareholders/members are governed by a company's articles, subject to the provisions of the Companies Act. These key rights include the following:

• Voting rights: Shareholders' votes correspond to the paid-up value of their shares carrying voting rights. No shareholder holding shares carrying voting rights may be debarred from casting its vote or prevented from doing so in the articles.
• Right to receive dividends: Shareholders are entitled to receive dividends declared by the company, which directors cannot not withhold or defer.
• Right to participate in meetings: Shareholders have the right to attend and vote at annual general meetings and extraordinary general meetings of shareholders, where significant decisions regarding the company are made.
• Right to information: Shareholders have the right to inspect and obtain certified copies of the various registers and indexes maintained by the company.
• Right to transfer shares: Shareholders can transfer their shares to other members, and outsiders, subject to restrictions outlined in the company's articles and the Companies Act.
• Right to sue: Shareholders with a 10% shareholding may file a petition to court if the affairs of the company are being conducted in:
• • an unlawful or fraudulent manner;
  • a manner not provided for in its memorandum;
  • a manner that is oppressive to any of the members or creditors; or
  • a manner that is unfairly prejudicial to the public interest.
• Pre-emptive rights: Shareholders have the opportunity to purchase shares of other members and newly issued shares in proportion to their existing shareholding, before they are offered to outsiders.

4.3 How do shareholders/members exercise these rights? Do they have a right to call shareholders' meetings and, if so, in what circumstances?

Some of the rights mentioned in question 4.2 are inherent to shareholders and require no action on their part, such as:

• proprietary rights, including receiving dividends and transferring shares; and
• pre-emptive rights, which are granted solely by virtue of shareholding and can only be altered by amending the Company's articles.

Shareholders exercise certain rights, such as voting at and participating in meetings.

Under Section 133 of the Companies Act, shareholders holding 10% of the total voting power can request the board to convene an extraordinary general meeting by submitting a signed request stating the meeting's purpose to the company's registered office. If the board fails to convene the meeting within 21 days, shareholders may organise it themselves, with reasonable expenses reimbursed by the company, deducted from the remuneration of directors responsible for the delay. The meeting must occur within 90 days of the request's submission.

Similarly, according to Section 124 of the Companies Act, any shareholder can request to inspect or obtain certified copies of the company's registers. Additionally, under Section 286 of the Companies Act, shareholders owning 10% of the company's shares may petition the court to address oppression and mismanagement.

4.4 What influence can shareholders/members exert on the appointment and operations of the directors?

Shareholders wield significant influence over the appointment and operations of directors through their:

• voting power;
• participation in annual general meetings;
• passage of resolutions; and
• ability to remove directors and the chief executive officer (CEO).

Following the determination of the number of directors to be elected in the general meeting by the incumbent directors, shareholders will, in the general meeting, elect directors by voting for candidates, either directly or through proxies. Each shareholder's voting power corresponds to:

• the number of voting shares it possesses; and
• the number of directors to be elected.

Shareholders have the option to allocate all their votes to a single candidate or distribute them among multiple candidates.

Once directors have been elected, shareholders can:

• hold them accountable for their actions and decisions at annual general meetings; and
• raise concerns or express preferences regarding the operations of the company and the performance of its directors.

Shareholders may also express approval or disapproval of director actions or decisions through general resolutions.

Moreover, shareholders:

• hold significant power to remove directors by resolution in general meeting; and
• may also remove the CEO through special resolution.

4.5 What are the legal duties/responsibilities and potential liabilities, if any, of shareholders/members?

Since shareholders delegate to the board of directors the responsibility for managing the affairs of the company by electing them through exercising their voting rights at shareholders' meetings, there are no explicit legal obligations placed on shareholders concerning the company.

However, in order to protect their long-term economic interests, it is advisable for shareholders to monitor the performance of the board of directors and hold the directors accountable by:

• scrutinising and questioning them at annual general meetings; and
• exercising their voting rights judiciously.

Additionally, in exceptional circumstances, the corporate veil may be lifted to hold shareholders and/or directors liable. Pakistani courts have determined that the corporate veil can be lifted to examine the realities of a company's operations and ownership in situations where:

• a statute itself contemplates lifting the veil;
• companies are so closely connected as to be part of one entity; or
• a company is used:
• • for fraudulent purposes; or
  • to defeat or circumvent the law.

However, there must be justifiable reasons for lifting the corporate veil. Courts have held that the decision to lift the corporate veil depends on the specific facts of each case, with no rigid rule limiting the cases in which the veil can be lifted. The legal stance has been that a corporate entity cannot be used to conceal wrongful acts.

4.6 To what civil and criminal liabilities might individual shareholders/members be subject?

In respect of any call or contribution to the debts and liabilities of the company, Section 94 of the Companies Act stipulates that the liability of shareholders is limited to the amount remaining unpaid on theirs shares.

As there are no particular legal duties or obligations imposed on shareholders regarding the companies in which they have invested shares, individual shareholders are not subject to specific civil or criminal liabilities.

4.7 Are there rules governing the issuance of further securities in a company? Do rights of pre-emption exist and, if so, how do they operate? Can they be circumvented? If so, how and to what extent?

Section 83 of the Companies Act governs the further issuance of shares of a company.

If directors decide to increase the share capital of the company by issuing further shares, they must offer them through a letter of offer to shareholders strictly in proportion to the existing shares held by them in respective kinds and classes.

The shareholders will be granted a timeframe of not less than 30 days to accept the offer. Upon failure to accept the offer within 30 days, it will be deemed to have been declined. Furthermore, shareholders of a listed company have the right to renounce the shares offered to them in favour of any other person.

These rights of pre-emption can be circumvented through a special resolution. For instance, for a public company, and subject to the approval of the Securities and Exchange Commission of Pakistan (SECP), directors may offer the further shares issued to any person for cash or for consideration other than cash, on the basis of a special resolution. For a private company, subject to the articles and special resolution, directors may offer the issued shares to any person, for cash or consideration other than cash, on such conditions and requirements as may be notified by the SECP.

4.8 Are there any rules on the public disclosure of levels of shareholding and/or stake building?

While companies need not publicly disclose levels of shareholding or stake building, all of their corporate filings with the SECP may be accessed by the public by conducting a file inspection of the company at SECP's Company Registration Office after paying the requisite fee. Additionally, anyone may obtain certified copies from the SECP of any of the corporate filings of a company. These filings include:

• the articles and memorandum;
• the company's annual return; and
• the returns filed when there is a change of more than 25% in a shareholding, membership or voting rights.

Every company must maintain a register of its members, with those exceeding 50 members also required to maintain an index of member names unless the register itself serves as an index. These records must be available for member inspection during business hours, subject to reasonable company-imposed restrictions. Members are entitled to inspect without charge, while non-members may be charged a fee set by the company for the same. Furthermore, any individual can request a certified copy of the register and index upon payment of the specified fee.

Additionally, companies are mandated to:

• document information about their 'ultimate beneficial owners'; and
• maintain a register of such owners.

An 'ultimate beneficial owner' is defined as a natural person who ultimately owns or controls a company, indirectly or directly, by:

• holding at least 25% of the shares or voting rights of the company; or
• exercising control in the company through other means.

5 Operations

5.1 What are the main routes for obtaining working capital in your jurisdiction? What are the advantages and disadvantages of each?

Businesses have several routes for obtaining working capital in Pakistan, each with its own pros and cons:

• Traditional bank loans and overdrafts:
• • Advantages: Various loan products offer flexibility in repayment terms and interest rates, with overdraft facilities ensuring liquidity.
  • Disadvantages: Strict prerequisites such as robust credit history and collateral, coupled with lengthy approval processes, can deter small businesses and startups.
• Trade credit:
• • Advantages: Enhances cash flow and operational flexibility.
  • Disadvantages: Overreliance on trade credit strains supplier relations, while extended payment terms may incur higher costs.
• Invoice factoring:
• • Advantages: Predictable cash flow facilitates accurate business planning and forecasting.
  • Disadvantages: Unsuitable for businesses with few customers, as factoring companies avoid high invoice concentrations. Long-term contracts or bulk takeover of accounts receivable may be required. Potential damage to customer relationships, depending on the manner of the factoring company.
• Equity financing:
• • Advantages: Provides working capital without repayment obligations, often accompanied by investor expertise.
  • Disadvantages: Dilution of ownership and control can occur and complex negotiations with investors may be required.
• Government grants and subsidies:
• • Advantages: Offer low-interest rates or no repayment requirements.
  • Disadvantages: Stringent eligibility criteria, competitive application processes and compliance restrictions on fund usage.

5.2 What are the main routes for the return of proceeds in your jurisdiction? What are the advantages and disadvantages of each?

In Pakistan, companies have several main routes for the return of proceeds:

• Dividend distributions:
• • Advantages: Dividends offer shareholders direct profits, regular income and tangible reward for their investment, fostering shareholder confidence and attracting new investors.
  • Disadvantages: Dividend payments are discretionary and may vary with the company's financial performance and strategic priorities. High dividend payouts can limit reinvestment opportunities.
• Share buybacks:
• • Advantages: Reducing outstanding shares can boost earnings per share, enhancing shareholder value and signalling confidence in the company's prospects.
  • Disadvantages: Buybacks may be seen as a short-term strategy to inflate stock prices, potentially diverting funds from reinvestment into more productive uses such as research and development or expansion.
• Special dividends:
• • Advantages: These one-time payments from surplus cash reserves or asset sales proceeds provide shareholders with a significant windfall and enhance shareholder returns.
  • Disadvantages: These may signal a lack of long-term growth opportunities or strategic direction, and shareholder expectations regarding their frequency and size vary.
• Fresh issuance of shares:
• • Advantages: Bonus issues involve issuing additional shares to existing shareholders on a pro rata basis, effectively distributing company profits as new shares. This can enhance liquidity and promote shareholder participation.
  • Disadvantages: They dilute existing ownership stakes and may not yield immediate cash returns, potentially conflicting with preferences for cash dividends or buybacks.

The State Bank of Pakistan (SBP) is the main regulator responsible for:

• regulating the country's monetary and credit system;
• managing foreign exchange reserves; and
• maintaining exchange rate stability.

To repatriate profits, shares must be registered with the SBP.

5.3 What requirements and restrictions apply to foreign direct investment in your jurisdiction?

Pakistan welcomes foreign direct investment (FDI) through a relatively open framework, overseen by the Board of Investment, the primary agency facilitating foreign investment. The recent introduction of the Pakistan Investment Policy 2023 (PIP 2023) continues the liberalisation efforts initiated by the Investment Policy 2013. PIP 2023 extends liberalisation to all sectors unless specifically prohibited or restricted for reasons of national security and public safety, eliminating:

• minimum capital requirements for foreign equity investment; and
• the restrictions on maximum allowable equity, except in specific sectors such as:
• • airlines;
  • banking;
  • agriculture; and
  • media.

Notably, foreign investments no longer require pre-screening or approval. While all sectors are open for investment under PIP 2023, certain industries necessitate government permission, such as:

• casinos;
• arms;
• ammunition; and
• atomic energy.

Entry and admission of foreign investment is through enterprise registration, where foreign investors are required to fulfil the conditions of corporate registration under the Companies Act 2017. Foreign investors operating through foreign companies may open branch or liaison offices in Pakistan.

Regarding profit repatriation, the transfer of securities to non-residents requires SBP approval. However, purchases made via special convertible rupee accounts (SCRAs) do not require prior SBP permission, as these may be opened by a non-resident with any bank operating in Pakistan. SCRAs facilitate not only fund remittance into Pakistan but also the repatriation of overseas dividends, capital gains and disinvestment proceeds.

5.4 What exchange control requirements apply in your jurisdiction?

In Pakistan, exchange control requirements are governed by the SBP under the authority of the Foreign Exchange Regulations Act, 1947. Some key exchange control requirements applicable in Pakistan include the following:

• Foreign exchange transactions and remittance of funds: All foreign exchange transactions must comply with the provisions of the Foreign Exchange Regulations Act, 1947. The SBP oversees and regulates foreign exchange operations. Residents must obtain approval from authorised dealers for outward remittances, while non-residents may freely repatriate funds subject to SBP guidelines.
• Purchase of foreign currency: Regarding the purchase of foreign currency, the SBP has specified that no individual may buy foreign exchange of more than $10,000 per day and $100,000 per calendar year (or equivalent in other currencies) in the form of cash or outward remittance.
• Import and export restrictions: Imports and exports of goods and services are subject to SBP regulations, including requirements for foreign exchange transactions and documentation.
• Reporting requirements: Residents and businesses must report foreign exchange transactions and holdings to the SBP or authorised dealers as per regulatory requirements.

5.5 What role do stakeholders such as employees, pensioners, creditors, customers and suppliers play in shaping business operations in your jurisdiction? What other influence can they exert on an enterprise?

In Pakistan, stakeholders such as employees, pensioners, creditors, customers and suppliers significantly influence business operations. Employees contribute to business operations through their skills, labour and dedication. Their productivity directly impacts operational efficiency and organisational success. Employees performing clerical or manual work falling into the category of 'workers' or 'workmen' may organise into unions to form collective bargaining units to negotiate better working conditions.

Pensioners may have vested interests in the company's stability and performance, as their pension benefits may depend on the financial health of the organisation. Employers must contribute to the Employees' Old-Age Benefits Institution, a federal institution aimed at providing pensions to retired employees, which ensures that businesses allocate resources towards the social security of their workforce.

In the event of a share capital reduction involving payments to shareholders of paid-up capital, every creditor with an outstanding debt or claim has the right to object to the reduction. Creditors may also be entitled to nominate directors to the company's board. Furthermore, creditors holding an interest equal to at least 10% of the company's paid-up capital can petition the court for relief in cases of oppression and mismanagement that are detrimental to their interests.

Furthermore, stakeholders exert influence through various channels beyond their immediate roles. Customers' purchasing decisions can drive product innovation and market expansion. Suppliers may collaborate closely with companies to enhance efficiency and sustainability in the supply chain. Moreover, stakeholders may advocate for corporate social responsibility initiatives, influencing business practices and reputation.

5.6 What key concerns and considerations should be borne in mind with regard to general business operations in your jurisdiction?

In Pakistan, several key concerns and considerations should be borne in mind with regard to general business operations:

• Legal and regulatory compliance: Businesses must adhere to local laws, regulations, and compliance standards encompassing tax, labour, environmental and industry-specific regulations. Non-compliance can lead to fines, legal liabilities and reputational harm.
• Political environment: Pakistan's political landscape is often marked by periodic changes and occasional instability due to factors such as elections, government transitions and civil unrest. Businesses need to monitor political developments closely to anticipate potential impacts on policies, regulations and market conditions.
• Security risks: Security risks – including terrorism and regional conflicts – pose significant challenges to businesses, necessitating robust security measures to protect personnel, assets and operations.
• Government stability: Political instability can affect the stability and efficiency of government institutions, leading to uncertainties in decision-making, regulatory enforcement and policy implementation. Businesses must engage with relevant stakeholders to navigate potential risks and opportunities.
• Cybersecurity: With the increasing digitisation of operations, cybersecurity has become critical. Protecting data, networks and digital assets from cyber threats requires robust protocols and employee training.
• Religious sensitivities: Religious beliefs are integral to Pakistani society. Respecting religious sensitivities, observing religious holidays and accommodating religious practices in the workplace foster inclusivity and harmony.
• Social norms and etiquette: Understanding Pakistani social norms and etiquette is vital for building positive relationships. Adhering to local customs in greetings, communication and business conduct enhances trust with stakeholders.

6 Accounting reporting

6.1 What primary accounting reporting obligations apply in your jurisdiction?

In Pakistan, businesses are primarily obliged to adhere to accounting reporting requirements outlined in the Companies Act, 2017. These key accounting reporting obligations include the following:

• Financial statements: Companies must prepare and present financial statements – including the balance sheet, income statement, cash-flow statement and statement of changes in equity – in accordance with applicable accounting standards.
• Annual reports: Companies must prepare annual reports, which typically include:
• • the financial statements;
  • the director's report;
  • the auditor's report; and
  • other relevant disclosures.
• These reports provide stakeholders with a comprehensive overview of the company's financial performance and position.
• Audited financial statements: Public listed companies and certain private companies must have their financial statements audited by independent auditors. The auditors provide an opinion on the fairness and accuracy of the financial statements.
• Tax reporting: Companies must comply with tax reporting obligations, including filing income tax returns and providing information to tax authorities in accordance with the Income Tax Ordinance, 2001.
• Regulatory disclosures: Listed companies are subject to additional disclosure requirements imposed by regulatory bodies such as:
• • the Securities and Exchange Commission of Pakistan (SECP); and
  • the Pakistan Stock Exchange (PSX).
• These disclosures include:
• • financial statements;
  • quarterly reports; and
  • other material information relevant to investors.

6.2 What role do the directors play in this regard?

Directors are responsible for:

• overseeing the financial reporting process; and
• ensuring that financial statements are prepared in accordance with applicable accounting standards and regulatory requirements.

They play a key role in establishing and maintaining effective internal control systems to safeguard assets and mitigate financial risks.

Directors are typically responsible for appointing external auditors to conduct independent audits of the company's financial statements. They ensure that auditors are qualified, independent and objective in their assessment of the company's financial performance and position.

Additionally, the directors are responsible for laying down financial statements, audited and otherwise, before the company in its annual general meeting; failure to do so leads to penalties.

6.3 What role do accountants and auditors play in this regard?

Accountants and auditors play essential roles in ensuring the accuracy, reliability and compliance of financial reporting in Pakistan:

• Preparation of financial statements: Accountants are responsible for preparing financial statements in accordance with applicable accounting standards. They:
• • compile financial data;
  • record transactions; and
  • prepare financial statements, including the balance sheet, income statement and cash-flow statement.
• Auditing financial statements: Auditors conduct independent audits of financial statements to provide assurance on their fairness, accuracy and compliance with accounting standards and regulatory requirements. They:
• • examine financial records;
  • assess internal controls; and
  • perform substantive testing to verify the reliability of financial information.
• Audit opinions: Auditors issue audit opinions – such as unqualified, qualified, adverse or disclaimer opinions – based on their assessment of the company's financial statements. These opinions provide stakeholders with assurance regarding the integrity and reliability of financial reporting.
• Regulatory compliance: Auditors ensure that financial statements comply with regulatory requirements imposed by regulatory bodies such as:
• • the SECP;
  • the PSX; and
  • other relevant authorities.

They assist companies in meeting regulatory filing deadlines and disclosure requirements.

6.4 What key concerns and considerations should be borne in mind with regard to accounting reporting in your jurisdiction?

Several key concerns and considerations should be carefully addressed regarding accounting reporting in Pakistan:

• Regulatory compliance: Adhering to regulatory requirements imposed by regulatory bodies such as the SECP, the PSX and other relevant authorities is crucial. Failure to comply with regulatory obligations can lead to penalties and reputational damage.
• Transparency and disclosure: Maintaining transparency and providing adequate disclosure of material information in financial reporting is essential for stakeholders' informed decision making. Companies must disclose relevant financial information – including significant accounting policies, estimates and judgements – to enhance transparency and accountability.
• Audit quality and independence: Ensuring the quality and independence of audits conducted by external auditors is critical for providing assurance on the reliability of financial statements. Companies must engage qualified and independent auditors and facilitate their work to conduct thorough audits in accordance with auditing standards.
• Training and professional development: Investing in training and professional development programmes for accountants, auditors and finance professionals is crucial to enhance their skills and knowledge of accounting reporting practices. Continuous education ensures compliance with evolving accounting standards and regulatory requirements.

7 Executive performance and compensation

7.1 How is executive compensation regulated in your jurisdiction?

Executive compensation is regulated in Pakistan by:

• the Companies Act 2017; and
• the articles of association of the company.

7.2 How is executive compensation determined? Do any disclosure requirements apply?

As per Section 170 of the Companies Act, executive compensation is determined by the company or the board, in accordance with the articles of association. This section further provides that a director's remuneration for providing extra services is determined by the board or the company in general meeting, in accordance with the articles of association.

As per Section 277 of the Companies Act, the directors of a public company, or a private company which is a subsidiary of a public company, must disclose in the directors' report appended to the financial statement the remuneration package of each of the directors and chief executive, including but not limited to:

• salary;
• benefits;
• bonuses;
• stock options;
• pensions; and
• other incentives.

7.3 How is executive performance monitored and managed?

Executive performance is monitored and managed through various mechanisms, including:

• oversight by the board of directors;
• performance evaluations; and
• accountability to shareholders.

Shareholders hold executives accountable for their performance primarily through the general meeting, where they have the opportunity to:

• voice concerns;
• ask questions; and
• vote on important matters.

At the annual general meeting (AGM), the executives – including the chief executive officer and other key executives – often present reports on the company's performance and answer questions from shareholders. Shareholders have the power to:

• propose resolutions at the AGM; or
• vote on resolutions put forward by the board of directors.

Resolutions related to executive compensation, the appointment or removal of directors, and other governance matters directly impact executive performance and accountability. Shareholders vote on these resolutions to signal their support or dissatisfaction with executive leadership. Shareholders that are unable to attend the AGM in person can appoint proxies to vote on their behalf.

Depending on the articles, the shareholders can review and vote on executive compensation packages, including:

• salaries;
• bonuses;
• stock options; and
• other incentives.

Shareholders may express concerns about excessive compensation or poorly aligned incentives by voting against executive compensation plans or resolutions.

Lastly, shareholders hold the power to remove directors and executives through special resolution, which keeps their performance in check.

7.4 What key concerns and considerations should be borne in mind with regard to executive performance and compensation in your jurisdiction?

Executive compensation should be closely aligned with shareholder interests to ensure that executives are incentivised to maximise shareholder value. There should be transparency regarding the link between executive pay and company performance.

Companies should adhere to disclosure requirements regarding executive compensation in annual reports and such other regulatory filings as may be imposed by the Securities and Exchange Commission of Pakistan.

Including performance-based elements such as bonuses, stock options or performance shares tied to achieving predetermined financial or operational targets in the compensation structures of executives encourages executives to focus on driving the company's performance and long-term growth.

Additionally, executive compensation plans should incorporate measures that strike a healthy balance between:

• short-term rewards that accompany potential risks (which may encourage excessive risk taking); and
• the need to ensure long-term sustainability for the company.

8 Employment

8.1 What is the applicable employment regime in your jurisdiction and what are its key features?

The Constitution of Pakistan contains various provisions regarding labour rights. Following a constitutional amendment in 2010, employment legislation falls under the exclusive jurisdiction of the provincial legislatures. Despite this shift, federal labour laws previously enacted remain in effect, due to either constitutional provisions or specific provincial adoption. Some provinces have modified these laws upon adoption, leading to variations in employment laws across provinces.

Pakistani law distinguishes between:

• employees performing clerical or manual work ('workers' or 'workmen'); and
• those in managerial or supervisory roles ('non-workmen').

Statutory benefits typically apply to workmen, while non-workmen are usually governed by their employment contracts under a master-servant relationship.

Organisations, commercial establishments, industrial establishments and factories operating in Pakistan must comply with the following labour laws:

• the Industrial Relations Act, 2012;
• the Industrial and Commercial Employment Ordinance (Standing Orders), 1968;
• the Shops and Establishments Ordinance, 1969;
• the Factories Act of 1934;
• the Minimum Wages Ordinance, 1961;
• the Payment of Wages Act, 1936;
• the Workmen's Compensation Act, 1923;
• the Employees Old Age Benefits Act, 1976;
• the Provincial Employees Social Security Ordinance, 1965;
• the Companies Profits (Workers Participation) Act, 1968;
• the Workers' Welfare Fund Ordinance, 1971;
• the Workers Children (Education) Ordinance, 1972;
• the West Pakistan Maternity Benefit Ordinance, 1962;
• the Apprenticeship Ordinance, 1962; and
• the Disabled Persons (Employment and Rehabilitation) Ordinance, 1981

Provincial labour laws provide for the resolution of disputes through the labour courts, which handle industrial disputes, settlement violations and offences under provincial labour laws, following procedures similar to those in the criminal and civil courts.

8.2 Are trade unions or other types of employee representation recognised in your jurisdiction?

With respect to trade unions and employers' associations, the Constitution of Pakistan guarantees the right to association under Article 17.

The Industrial Relations Act 2012 and the various pari materia provincial laws recognise the right of workers to establish and join trade unions. Trade unions are registered with the registrar of trade unions, conferring legal status and enabling representation. Collective bargaining agents are elected trade unions authorised to:

• negotiate employment terms;
• formulate collective agreements; and
• settle disputes.

Such agreements, when executed, become legally binding and cover various employment aspects.

Trade union office-bearers are protected against unfair employer actions, while various provisions of the aforesaid laws address unfair labour practices by workers and unions. This framework ensures security of service and fair labour practices, fostering a balanced industrial relations environment in Pakistan

8.3 How are dismissals, both individual and collective, governed in your jurisdiction? What is the process for effecting dismissals?

For workmen, under the Industrial and Commercial Employment (Standing Orders) Ordinance 1968, a permanent worker's employment may be terminated only:

• for misconduct; or
• with one month's notice or wages in lieu of notice.

Similarly, workmen may also resign from service by providing the same notice period. The calculation of one month's wages is based on the average wage earned during the last three months of service. However, other categories of workers are not entitled to notice or payment in lieu of notice.

Furthermore, all terminations must be documented in writing, with specified reasons. Workers aggrieved by termination may seek recourse under the relevant provincial Industrial Relations Act, which aims to regulate labour-management relations. The worker must communicate their grievance to the employer – either personally, through a shop steward or through their trade union – within three months of the occurrence of the cause of action. Terminations can be categorised as:

• removal;
• retrenchment;
• discharge; or
• dismissal from service.

To prevent abuse of power, victimisation or unfair labour practices, the labour courts are empowered to examine and intervene to determine whether:

• there has been a violation of the principles of natural justice; and
• the employer's actions were bona fide or unjust.

Employees not categorised as workmen are governed by the principles of the master-servant relationship and considered to be employed at the employer's pleasure. Accordingly, their protection against dismissal is governed by:

• the employment contract; and
• any applicable rules of the employer to which they have consented.

8.4 How can specialist talent be attracted from overseas where necessary?

Life in Pakistan is relatively affordable, particularly for individuals earning in stronger currencies. The costs of living, healthcare, insurance, real estate and investment are notably lower than in other countries. Therefore, to effectively attract and retain top talent, employers in Pakistan can offer various benefits such as:

• remuneration indexed to a foreign currency such as the US dollar;
• flexible working arrangements; and
• remote work options.

The Special Investment Facilitation Council of Pakistan has launched a new visa regime to attract foreign investors and business professionals, looking to invest in Pakistan's promising sectors and to establish or expand their businesses in the country. This initiative offers:

• short-term investor visas valid for three years;
• long-term investor visas for five years; and
• business visas ranging from six months to five years.

All enjoy expedited processing times ranging from 24 hours to two weeks and extensions are available for up to two years.

Acquiring permanent residence is also straightforward, with eligibility laid out under:

• Section 9 of the Citizenship Act 1951; and
• the process set out in Section 4 of the Naturalisation Act 1926.

Foreigners can obtain citizenship or residency through naturalisation after residing in the country for a specified period, with additional requirements for Commonwealth citizens.

8.5 What key concerns and considerations should be borne in mind with regard to employment in your jurisdiction?

The key concern with respect to employment in Pakistan is that population growth has left a severe imbalance in supply and demand for employment. A good majority of labour is private/domestic/agricultural, which is not regulated or standardised, leaving workers unaware of their rights and open to exploitation and abuse.

The Factories Act, 1934 prohibits:

• adult workers from working more than nine hours a day or 48 hours a week; and
• young workers under 18 years from working more than seven hours a day or 42 hours a week.

Special provisions apply to seasonal factories and continuous work processes. Additionally, the West Pakistan Shops and Establishments Ordinance, 1969 sets weekly work hours at 48 for establishments not covered by the Factories Act or Mines Act. However, in practice, these provisions are not strictly enforced.

Child labour is strictly regulated, with the Factories Act allowing employment of children aged 14 to 18 with medical certification. Child labour hours are limited to five per day and no work is permitted between 7:00 pm and 6:00 am. Factory managers must maintain registers of child workers and cleanliness and safety measures are mandated. The Employment of Children Rules, 1995 supplements the Factories Act, imposing penalties for violations, including fines and imprisonment. These rules ensure workplace cleanliness, proper ventilation, lighting and safety measures, with strict penalties for non-compliance.

These laws aim to protect workers' rights, ensure fair working conditions and safeguard young workers from exploitation, aligning with constitutional principles and international labour standards.

9 Tax

9.1 What is the applicable tax regime in your jurisdiction and what are its key features?

Pakistan's taxation system, overseen by the Federal Board of Revenue, operates under:

• the Income Tax Ordinance 2001 for direct taxes; and
• the Sales Tax Act 1990 for indirect taxes.

The Income Tax Ordinance 2001 delineates various tax regimes, as follows:

• The normal tax regime applies standard taxation rates to income, factoring in revenue minus expenses. It allows deductions and allowances for eligible taxpayers, with tax computed based on taxable income as outlined in the First Schedule, possibly reduced by applicable tax credits.
• The separate tax regime enables certain transactions to be kept separate and charged to tax at specified tax rates instead of normal tax rates.
• The final tax regime shifts to transaction-based taxation for specific categories, such as commercial importers, deeming income as final tax liability without deductions or credits. Tax withheld at source serves as final tax, with no refunds provided.
• The minimum tax regime imposes a minimum tax when normal tax falls below the minimum rate, treating tax withheld at source as the minimum tax for relevant transactions.
• Certain transactions are taxed separately at specified rates under the separate block of income regime, without deductions or credits, except for specific provisions such as share costs and incidental expenses under Section 37A. Tax withheld at source is treated as final tax, without refunds.

Additionally, there is a category for exempt income, where income is exempt due to provisions outlined in the Second Schedule and other sections of the Income Tax Ordinance (eg, agricultural income is exempt under Section 41 of the Income Tax Ordinance).

9.2 What taxes apply to capital inflows and outflows?

Pakistan's corporate tax regulations encompass diverse areas, including taxation on:

• debt securities;
• mutual funds; and
• real estate investment trusts (REITs).

Companies issuing debt securities are subject to corporate tax rates. Mutual funds and REITs must deduct capital gains tax upon redemption, with rates of:

• 10% for stock funds; and
• 25% for others.

However, if dividend receipts are lower than capital gains, the rate may be 12.5%; and no tax is deducted for securities held over six years. Losses on listed securities disposal can now be carried forward for up to three years from tax year 2019.

Capital gains on statutory depreciable assets, except immovable property, are taxed as normal business income. Special provisions apply to assets held through special convertible rupee accounts and Roshan digital accounts.

Dividend income from companies, including mutual funds and REITs, is generally taxed at a final rate of 15%. Different rates apply to dividends from specific sources such as independent power producers.

Income from interest, royalties and technical service fees is subject to taxation, with specific rules for non-residents. Sales tax applies to goods and services, managed by federal and provincial governments. Provisions for small and medium enterprises offer reduced tax rates based on turnover or gross receipts.

Corporate tax rates typically stand at 29%, with a 39% rate for the banking industry and a 29% rate for small companies. The alternate corporate tax ensures a minimum tax liability for companies, with exemptions for certain income types.

9.3 What key exemptions and incentives are available to encourage enterprises to do business in your jurisdiction?

The Income Tax Ordinance 2001 outlines a range of provisions for tax exemptions, reduced rates and credits within Pakistan's tax framework. Notable exemptions include:

• an exemption for profits from electric power generation projects set up in Pakistan until June 2021, specifically for entities with agreements or letters of intent from the federal or provincial government;
• an exemption for income derived by collective investment schemes or REIT schemes, provided that at least 90% of the accounting income is distributed among unit holders;
• a 10-year exemption for profits and gains from transmission line projects set up in Pakistan after July 2015, subject to certain conditions;
• a 10-year tax holiday for income earned by zone enterprises in special economic zones from the commencement of commercial operations;
• an exemption for profits and gains from bagasse/biomass-based cogeneration power projects, along with a reduced withholding tax rate on dividends;
• a 20-year exemption for profits and gains from new deep conversion refineries, subject to approval by the federal government;
• an exemption for profits from the sale of electricity by the National Power Parks Management Company or its demerged entities, starting from their commercial operation dates;
• an exemption for profits and gains earned by venture capital companies and funds until June 2025; and
• a reduced income tax rate of 20% for small companies meeting specific criteria outlined in the Income Tax Ordinance.

Charitable donations operate under a tax credit regime, incentivising investments and charitable activities. Residents earning foreign-source income can claim a tax credit equivalent to foreign income tax paid or Pakistan tax payable within two years, with the aim of stimulating investment and fostering economic growth.

9.4 What key concerns and considerations should be borne in mind with regard to tax in your jurisdiction?

Pakistan's taxation system faces numerous challenges:

• Tax evasion is a significant issue, exacerbated by weak enforcement mechanisms and inadequate documentation,
• High tax rates in Pakistan:
• • deter compliance;
  • hamper economic growth; and
  • discourage foreign investment.
• The complexity of the tax system further complicates matters, fostering opportunities for corruption and bribery.
• The tax administration in Pakistan is often inefficient and ineffective, lacking resources and transparency.
• The country's limited tax base heavily relies on indirect taxes, reducing government revenue and hindering economic development.

Reforms are necessary to address these challenges, including improvements to:

• tax policies;
• administration; and
• enforcement mechanisms.

Other issues that contribute to the problem include:

• poorly drafted tax laws;
• a failure to document the informal economy;
• corrupt practices among officials; and
• unskilled administrative staff.

Additionally, tax collection remains a challenge, with outdated systems and enforcement issues affecting both federal and provincial tax authorities.

Addressing tax losses requires comprehensive reforms, including:

• simplifying tax rates;
• incentivising accurate self-assessment; and
• promoting voluntary tax compliance.

These reforms are essential to promote fiscal stability and economic growth in Pakistan, ensuring that tax revenue is utilised efficiently and effectively to meet government expenditures and reduce fiscal deficits.

10 M&A

10.1 What provisions govern mergers and acquisitions in your jurisdiction and what are their key features?

Mergers and acquisitions in Pakistan are governed by:

• the Companies Act 2017;
• the Corporate Restructuring Companies Act 2015;
• the Competition Act 2010; and
• the Competition (Merger Control) Regulations 2016.

According to Section 465(4) of the Companies Act, targets undergoing a share acquisition exceeding 25% must:

• inform the Securities and Exchange Commission of Pakistan using statutory Form 3; and
• submit an annual return via statutory Form A, reflecting changes in shareholding.

The Competition Commission of Pakistan (CCP) conducts a first-phase review to assess the merger's compliance with thresholds and presumption of dominance. If met, a second-phase review is initiated, with the CCP assessing whether the merger substantially lessens competition within 90 days of receiving requested information. Failure to render a decision within this timeframe implies no objection to the merger.

Under Section 11(10) of the Competition Act 2010, the CCP reserves the right to approve a transaction even if it diminishes competition under certain conditions, as follows:

• The transaction significantly enhances the efficiency of:
• • the production or distribution of goods; or
  • the provision of services;
• Achieving such efficiency would not be possible through less restrictive competition methods;
• The benefits derived from this efficiency clearly outweigh the negative impact of reduced competition; and
• The transaction is deemed to be the least anti-competitive solution, particularly when one of the involved undertakings faces actual or imminent financial failure.

10.2 How are mergers and acquisitions regulated from a competition perspective in your jurisdiction?

In Pakistan, mergers and acquisitions are regulated from a competition perspective primarily under:

• the Competition Act 2010; and
• the Competition (Merger Control) Regulations 2016.

The process is as follows:

• Thresholds and notifications: Merging parties must meet specified thresholds outlined in the Merger Control Regulations and notify the CCP for clearance.
• Pre-merger application: The parties submit a pre-merger application to the CCP, detailing the transaction's nature, purpose and competitive effects, along with the prescribed fees.
• Review process: The CCP conducts a comprehensive review in two phases:
• • an initial review to assess thresholds and dominance; and
  • a detailed evaluation in the second phase.
• Decision making: The CCP makes a decision within 90 days of receiving the requested information. Failure to do so implies no objection to the merger.

10.3 How are mergers and acquisitions regulated from an employment perspective in your jurisdiction?

In Pakistan, mergers and acquisitions are regulated from an employment perspective through various labour laws and regulations. Key considerations include the following:

• Labour law compliance: Employers involved in M&A transactions must ensure compliance with the applicable labour laws. Compliance entails adhering to:
• • minimum wage requirements;
  • working hour regulations; and
  • occupational health and safety standards.
• Transfer of employment contracts: In cases where there is a transfer of undertaking as a result of the merger, the employment contracts of affected employees may transfer to the acquiring company or the newly merged entity. The transfer of employment contracts must:
• • comply with relevant labour laws; and
  • ensure continuity of employment rights and benefits.
• Redundancies and retrenchment: Mergers and acquisitions may lead to redundancies or retrenchment of employees due to restructuring or consolidation of operations. Employers must adhere to legal requirements regarding:
• • notice periods;
  • severance pay; and
  • consultation with employee representatives or trade unions.
• Employee benefits and entitlements: Employers must ensure that employee benefits and entitlements – such as accrued leave, gratuity and pension contributions – are properly accounted for and transferred in accordance with applicable laws and collective bargaining agreements.

10.4 What key concerns and considerations should be borne in mind with regard to M&A activity in your jurisdiction?

Several key concerns and considerations should be carefully weighed in M&A activity in Pakistan:

• Regulatory compliance: Ensuring compliance with applicable laws and other relevant legislation is paramount. Non-compliance may lead to penalties and delays in transaction completion.
• Financial due diligence: Conducting thorough financial due diligence is necessary to assess the financial health, liabilities and risks associated with the target, helping determine valuation and negotiating favourable terms.
• Legal due diligence: Legal due diligence is crucial in:
• • helping to identify and assess legal risks, contractual obligations, IP rights and potential litigation issues associated with the target; and
  • ensuring ongoing regulatory compliance.
• Operational integration: Planning and executing a seamless integration strategy post-merger is vital for maximising operational efficiency. Addressing cultural differences, harmonising processes and retaining key talent are critical aspects of integration.
• Employee concerns: Managing employee expectations and concerns – including potential job redundancies, changes in roles and benefits – is crucial for maintaining workforce morale and productivity during and after the merger.
• Stakeholder communication: Transparent communication with shareholders, employees, customers, suppliers and other stakeholders is essential to:
• • build trust;
  • mitigate uncertainty; and
  • facilitate a smooth transition.
• Cultural compatibility: Assessing cultural compatibility between the merging entities and fostering a collaborative and cohesive organisational culture is essential for successful integration and long-term success.
• Exit strategy: Developing a contingency plan and exit strategy in case the merger does not yield the anticipated results or faces unforeseen challenges is prudent in order to mitigate potential losses and preserve stakeholder interests.

11 Financial crime

11.1 What provisions govern money laundering and other forms of financial crime in your jurisdiction?

The Anti-money Laundering (AML) Act 2010 contains comprehensive provisions:

• criminalising money laundering; and
• establishing the Financial Monitoring Unit (FMU).

The FMU is tasked with combating money laundering and terrorist financing. It collects and analyses cash transaction reports and suspicious transaction reports from various reporting entities, disseminating pertinent financial intelligence to law enforcement and supervisory authorities. These include agencies such as:

• the National Accountability Bureau;
• the Federal Investigation Agency; and
• the State Bank of Pakistan (SBP).

Other regulators, including the Securities and Exchange Commission of Pakistan, and professional bodies such as the Institute of Chartered Accountants of Pakistan also play roles in oversight.

Pakistan's legal framework for AML/countering the financing of terrorism (CFT) is governed by laws such as the Anti-terrorism Act (ATA) 1997 and the National Accountability Ordinance of 1999, which establish specialised courts (Section 13 of the ATA 1997) and enforcement agencies.

Internationally, Pakistan has undergone scrutiny by the Financial Action Task Force (FATF) regarding its compliance with AML/CFT standards. Recognising Pakistan's efforts, the FATF has acknowledged improvements in its AML/CFT regime and removed it from stricter monitoring. Moreover, Pakistan continues to collaborate with the Asia/Pacific Group on Money Laundering to further enhance its AML/CFT system and address any remaining deficiencies.

11.2 What key concerns and considerations should be borne in mind with regard to the prevention of financial crime in your jurisdiction?

In 2018, Pakistan was placed on the FATF grey list due to structural deficiencies in targeting terrorist financing and money laundering. These deficiencies included a lack of:

• necessary legal frameworks;
• coordination among government agencies;
• coherent risk-based assessment tools;
• regulations for high-risk sectors; and
• mechanisms for international cooperation.

To address these issues, Pakistan committed to a 27-point action plan to enhance its AML/CFT frameworks to meet international standards. Since then, significant legislative and administrative reforms have been undertaken, including:

• amendments to laws such as the ATA and the AML Act; and
• the passage of numerous rules and regulations.

The progress made was acknowledged in the June 2021 Plenary, at which Pakistan was found to be largely compliant with all 34 items of the action plan, leading to an on-site inspection conducted by September 2022. The recent Fourth Follow-Up Report to the Mutual Evaluation Report also highlights significant improvement in technical compliance across all sectors, with Pakistan rated largely or fully compliant with 38 out of 40 FATF recommendations as of February 2022.

Pakistan's commitment to implementing FATF standards has been commendable, with comprehensive efforts made since 2018. The dual evaluation process, covering both mutual evaluation and action plan points, has led to effective AML/CFT regulation and supervision across all sectors of the economy. With continued political commitment, Pakistan remains hopeful of formally exiting the grey list during the upcoming FATF plenary.

12 Audits and auditors

12.1 When is an audit required in your jurisdiction? What exemptions from the auditing requirements apply?

The board of directors of every company is under a statutory obligation under Section 223 of the Companies Act 2017 to lay its audited financial statements for a financial year before the company in the annual general meeting (AGM), within 120 days of the close of the financial year.

Additionally, Section 237 of the Companies Act mandates listed companies to prepare quarterly financial statements, which are subject to a limited scope review by the statutory auditors of the company. Moreover, as per Rule 10 of the Public Sector Companies (Corporate Governance) Rules 2013, listed public sector companies must also:

• prepare half-yearly financial statements; and
• undergo limited scope review by the auditors of the company.

However, private companies with a paid-up capital not exceeding PKR 1 million (or such other amount notified by the Securities and Exchange Commission of Pakistan (SECP)) are not required to have their annual financial statements audited.

12.2 What rules relate to the appointment, tenure and removal of auditors in your jurisdiction?

Section 246 of the Companies Act sets out in detail the appointment, removal and fees of auditors.

The board must appoint the first auditors within 90 days of incorporation and they retire at the conclusion of the first annual general meeting.

The company appoints subsequent auditors in the AGM based on the board's recommendation, subject to shareholder approval. Shareholders with at least a 10% shareholding can propose auditor, and such proposals must be communicated to the company and the retiring auditors. If new auditors are proposed, the retiring auditors have the right to make a representation, which must be presented at the general meeting before the appointment agenda.

The board must fill any casual vacancies in the auditor position within 30 days. If auditors are removed during their tenure, the board needs prior approval from the SECP to appoint new auditors. Auditors appointed by the board or the members at the AGM may be removed through a special resolution.

Section 247 of the Companies Act mentions the qualifications and disqualifications for appointment as auditors. If, subsequent to being appointed, auditors encounter any of the disqualifications outlined in this section, they will be considered to have ceased holding their position as auditor from the date on which they become disqualified.

The remuneration of the auditors of a company will be fixed by the company in its general meeting, or by the board or the SECP, if the auditors are appointed by the board or the SECP.

12.3 Are there any rules or recommendations that limit the scope of services as regards the provision of non-audit services by an auditor?

The Pakistan Stock Exchange (PSX) Rule Book applies to public listed companies. Rule 5.10.3 of the PSX Rule Book lists several services which the auditors of a listed company are prohibited from offering to listed companies, as follows:

• preparing financial statements, accounting records and accounting services;
• providing financial information technology system design and implementation, significant to overall financial statements;
• providing appraisal or valuation services for material items of financial statements;
• acting as an 'appointed actuary' within the meaning of the term defined by the Insurance Ordinance, 2000;
• providing actuarial advice and reviews in respect of provisioning and loss assessments for an insurance entity;
• providing internal audit services related to internal accounting controls, financial systems or financial statements;
• providing human resources services relating to:
• • executive recruitment; or
  • work performed (including secondments) where management decisions will be made on behalf of a listed audit client;
• providing legal services;
• fulfilling management functions or decisions;
• providing corporate finance services, advice or assistance which may involve independence threats such as promoting, dealing in or underwriting of shares of audit clients;
• exercising or assigning for estimation of the financial effect of a transaction or event where the auditor provides litigation support services as identified in Paragraph 9.187 of the Code of Ethics for Chartered Accountants;
• providing share registration services (transfer agents); and
• providing any other service which the Institute of Chartered Accountants of Pakistan, with the prior approval of the SECP, may determine to be a 'prohibited service'.

12.4 Are there any rules or recommendations which cap the remuneration of an auditor as regards payment for the provision of non-audit services?

The law is silent on a cap on the remuneration of auditors for the provision of non-audit services.

13 Termination of activities

13.1 What are the main routes for terminating business activities in your jurisdiction? What are the advantages and disadvantages of each?

The modes of terminating business activities of a company and the advantages and disadvantages of each are as follows:

• Winding up through court:
• • Advantages: This provides legal protection to creditors and ensures fair treatment of all stakeholders. The court ensures that the winding-up process follows a structured and orderly manner, minimising the risk of disputes or irregularities. Company directors and shareholders may lose control over the winding-up process, as it is supervised and managed by the court.
  • Disadvantages: This is a time-consuming and costly process, which also potentially reduces the amount available for distribution to creditors.
• Creditors' voluntary winding up:
• • Advantages: This is initiated by the directors, allowing them control over the timing and management of the winding-up process.
  • Disadvantages: Creditors may not agree with the proposed liquidation plan and directors lose control over the assets of the company, which, once the company enters liquidation, are distributed among the creditors according to statutory practices.
• Easy exit scheme:
• • Advantages: This is a simplified, cost-effective and time-efficient process. It helps to companies avoid the burden of ongoing compliance requirements, such as annual filings and statutory obligations, associated with maintaining a dormant entity.
  • Disadvantages: Since an eligibility criteria needs to be met, some companies will be excluded. While the scheme offers a simplified process, there is a possibility of objections being raised by the Securities and Exchange Commission of Pakistan and the attendant need to resolve these objections. This route may only be used for defunct companies.

13.2 What key concerns and considerations should be borne in mind with regard to the termination of business activities in your jurisdiction?

The processes for the termination of defunct companies and operational companies, and the concerns and considerations relating to these, differ slightly. A defunct company, as opposed to an operational company, is one that:

• has no assets and liabilities;
• is not carrying on any business; and
• is not in operation.

For an operational company, termination of business activities often also involves terminating contracts with suppliers, customers and other stakeholders. In order to avoid breach of contract, important considerations and steps include:

• a review of contractual terms, including:
• • termination clauses;
  • notice periods; and
  • penalties for early termination;
• negotiation with counterparties to minimise legal exposure and financial impact; and
• adherence to contractual obligations, including settlement of outstanding payments and return of goods or services.

Similarly, if there any employees, employment contracts must be reviewed to ensure compliance with labour law provisions, particularly those relating to:

• severance pay and notice period prior to termination; and
• the provision of a gratuity, calculated according to the years of service of the employee.

Since defunct companies have no creditors, it is important to note that for an operational company, it is the creditors that, upon termination, hold preferential rights over the assets of a company.

Additionally, businesses should consider the impact of business termination on their reputation and relationships with stakeholders. Key considerations include:

• active communication with stakeholders in a transparent and sensitive manner; and
• mitigation of negative publicity through proactive PR strategies.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.