Foreign Company Registration in Pakistan
A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country (i.e. Pakistan) by an entity based in another country. It is thus distinguished from foreign portfolio investment by a notion of direct control. In foreign portfolio investments an investor merely purchases equities of foreign-based companies.
Broadly, foreign direct investment includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans”. In a narrow sense, foreign direct investment refers just to building new facility, a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. FDI is the sum of equity capital, other long-term capital, and short-term capital as shown the balance of payments. FDI usually involves participation in management, joint-venture, transfer of technology and expertise. Stock of FDI is the net (i.e. outward FDI minus inward FDI) cumulative FDI for any given period. Direct investment excludes investment through purchase of shares.
Who can be a Foreign Investor?
A foreign direct investor may be classified in any sector of the economy and could be any one of the following:
- An individual;
- A group of related individuals;
- An incorporated or unincorporated entity;
- A public company or private company;
- A group of related enterprises;
- A government body;
- An estate (law), trust or other societal organization; or
- Any combination of the above.
Most of the foreign companies operating in Pakistan are “private limited companies” which can be incorporated by a minimum of two shareholders and two directors by registering the charter documents (Memorandum & Articles of Association) with the Securities & Exchange Commission of Pakistan (SECP).
How can a Foreign Investor invest his funds?
The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:
- By incorporating a wholly owned subsidiary or company anywhere.
- By acquiring shares in an associated enterprise.
- Through a merger or an acquisition of an unrelated enterprise.
- Participating in an equity joint venture with another investor or enterprise.
Incentives in Pakistan for Foreign Direct Investment
Making a direct foreign investment allows companies to accomplish several tasks:
- Avoiding foreign government pressure for local production.
- Circumventing trade barriers, hidden and otherwise.
- Making the move from domestic export sales to a locally-based national sales office.
- Capability to increase total production capacity.
- Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc.
- Low corporate tax and income tax rates in Pakistan.
- Tax concessions/exemptions to particular businesses.
- Special economic zones developed by the government of Pakistan.
- Cheap labor in Pakistan.
- Job training & employment subsidies.
- Infrastructure subsidies.
- Research and Development support.
- Early Entry Advantage.
Pakistan has a very liberal policy on repatriation for foreign direct investors, therefore, investing in Pakistan may give a foreign direct investors the following added advantages:
- Remittance of royalty, technology and franchise fee is allowed to projects in social, service, infrastructure, agriculture and international chains food franchise.
- Minimum share of the local (Pakistani) partner in a joint venture will be 60:40 for the service sector. However, 100% foreign equity can be owned for first 5 years.
- The FBR (Federal Board of Revenue) will not question as to the source of investment; however, the FBR will only want to know whether the investor has paid requisite Income Tax on that specific investment. The FBR will not inquire into the source of the funds.
- Foreign investors are allowed to invest in industrial project on 100% equity basis without any permission from the government.
- There is no requirement for a No Objection Certificate from the Provincial Government.
- In addition to manufacturing sector foreign investment on a repatriate-able basis is allowed in services, infrastructure and social sectors.
- Full repatriation of capital gains, dividends and profits.
- The facility for contracting foreign private loans is available to all those foreign investors who make investment in the approved sectors.
- Foreign controlled manufacturing concerns are allowed to borrow on the domestic market according to their requirements.
- Foreign controlled semi-manufacturing and non-manufacturing concerns can access loans equal to @ 75% & 50%, respectively, of their paid up capital including reserves.
- BOI’s (Board of Investment) approval is not required for foreign companies to open a bank account.
Various Corporate structures are available for setting up a place of business in Pakistan. In terms of the Investment Policy of the Government of Pakistan, there are three (03) ways, whereby, a foreign company may have its presence in Pakistan.
- Liaison Office;
- Branch Office; and
- Locally incorporated subsidiary
State Bank of Pakistan (SBP) regulates remittances in and out of Pakistan under legislature. There is no restriction on inward remittances by State Bank of Pakistan (SBP) but any outward remittances whether be royalty, technical fee and dividend have to have a prior approval from SBP, which the authorizing bank/agent would do on the company’s behalf. Similarly any contract for any such remittance needs prior approval of SBP.
Security of Foreign Investment
Foreign Private Investment (Promotion and Protection) Act, 1976 and the Furtherance and Protection of Economic Reforms Act, 1992 provide legal cover for protection of foreign investors/investment in Pakistan.
Bilateral Investment Treaties (BITs):
Pakistan has entered into Bilateral Agreements on Promotion and Protection of Investment with more than 46 countries. These Agreements provide the following:
- The Contracting Parties shall encourage investments in their respective territories by investors of the other Contracting Parties
- Non-discrimination between local investors and foreign investors
- Equal/non-discriminatory treatment in case of compensation for losses owing to war, other armed conflicts or a state of national emergency
- Free transfer of investments, and income deriving therefrom including profits, dividends, interest income, proceeds of sales or liquidation, repayments of loans, salaries, wages and other compensation, etc.
- A dispute settlement mechanism to settle any dispute between the countries with respect to the interpretation of the respective agreement and a dispute settlement procedure to settle any dispute between a host country and an investor of the other country
Important Features of the Foreign Investment Policy
Permissible Businesses Sectors:
Foreign direct equity investment is permissible in almost all sectors and types of businesses, except few on the negative list are restricted for foreign as well as local investors for reason of national interest and public safety
Businesses on negative list are Arms and ammunition, High Explosives, Radioactive substances, Security Printing, Currency and Mint and Consumable Alcohol,
No prior permission; only registration:
No prior permission is required for bringing in FDI into the country. The investment, however, has to be registered with the State Bank of Pakistan (SBP) so as to classify them as repatriable in nature.
No need for License:
There is no requirement to obtain any license or permission from either the Federal or the Provincial Government, even by a foreign investor. Only registration of legal entity gives the right to commence commercial activities, except in few regulated sectors where approval of relevant regulatory bodies are required.
Cent Percent Foreign Ownership Allowed:
The investment policy allows 100% foreign ownership in all permitted sectors except in Agriculture sector where 60% foreign ownership is permitted. In Corporate Agriculture farming 100% is ownership is allowed.
No Restriction as to Minimum Investment:
There is no restriction of minimum foreign investment in all sectors i.e. manufacturing, non-manufacturing and services.
No Restriction upon Origin of Investment:
There is no specific restriction as to the origin of investment. However, restriction on repatriation of dividend to Israel and India effectively serves as a limitation to the source of investment.
Continuity of Ownership:
The investment laws of Pakistan do not place any restriction as to the perpetuity of the foreign investment and the ownership of business. It also does not require divestment to local investors after any period of time.
Right to Acquire Property & Equipment:
A foreign investor can acquire property and equipment in the name of the entity and also enter into leasing and rental agreements.
FOREIGN EXCHANGE CONTROL
Foreign Exchange Transactions:
Foreign exchange dealings are regulated under the FERA of SBP. Any transactions related to inward remittances of foreign exchange require reporting to SBP by the Authorized Dealers. Outward remittances of foreign exchange fall under either of the general or special permissions of SBP. Those under general permission are only subject to review while the ones under special permission have to be approved in prior by the SBP.
Availability of Currency and Exchange Rate:
All permissible remittances into and out of Pakistan can be made in major foreign currencies at the exchange rate prevalent on the date of transaction.
Foreign Currency Account:
Investors can open and operate foreign currency accounts for the purposes of managing their equity. Foreign currency brought into the country can be retained in a special foreign currency account and used subsequently only for the modes and in the manner prescribed. Otherwise, in general, all receipts have to be converted into Pak Rupees.
Repatriation of investment and profit
The repatriations are subject to taxation and banking laws:
Divestment and repatriation of capital:
The right to sell or transfer all or a part of its ownership interest to any resident or non-resident individual / entity is available. Foreign investors are permitted to remit the sale proceeds out of Pakistan, after review of the transaction details by the SBP. In this respect an important factor for consideration is that remittance of gross sale proceeds, exceeding the breakup value of original investment, will not be allowed.
Repatriation of Profits:
Foreign investors are permitted to transfer net profits outside Pakistan in the shape of dividend. The dividend remittance, in case of company, is allowed on shares held on a repatriable basis i.e. those registered with SBP. The repatriation of net remittable profits by a branch office is also permitted under the FERA.
Royalty & Fee for Technical Services:
Payment of royalty by manufacturing concern in Pakistan, to the foreign collaborator in consideration of “Licence to use the foreign manufacturers” patent/brand name for marketing the product, and FTS for engineering and technical services including assistance on manufacturing process, are permitted under foreign exchange regulations.
Non-manufacturing business is allowed to remit royalty to a foreign collaborator, including its parent company, in consideration of permission to use patents and brand names. Moreover, payment for technical services can also be made. However, there are regulations concerning the amount both in absolute and in percentage terms and for the period uptill which such payments in the life of the company can be made.
Foreign Currency Borrowing:
FERA allows foreign controlled companies (FCC) including branches of foreign companies, to obtain foreign currency loans of various terms and features including long term loans and short term subordinated foreign currency loans from foreign banks, its parent company and any of the group companies. These are in addition to suppliers’ credit option allowed by the FERA.
Local Currency Borrowing:
A subsidiary of foreign company can obtain Pak Rupee loans from local financial institutions both for working capital requirements and capital expenditures. These loans will however be subject to meeting the prudential regulations of the SBP.
Guarantees of Non-residents and Collateral held outside Pakistan:
Similarly, a FCC is also permitted to obtain loan and overdraft facility against guarantees of non-residents, as well as against collateral held outside Pakistan.
The accounting and audit environment
Every company incorporated in Pakistan or operating as a branch / liaison office of foreign company in Pakistan is required to keep its accounting records in the manner prescribed under the Companies Ordinance, 1984 and prepare financial statements for a period not exceeding 12 months.
Audit of annual financial statements by the external auditors, as per local requirements, is also mandatory obligation for every company. Members of Institute of Chartered Accountants of Pakistan (ICAP) are qualified to conduct external audit of companies.
Taxation in regime in Pakistan includes direct and indirect taxes. Registration of every business and taxable individual with tax authorities is mandatory.
Income Tax Implications:
Income Tax in Pakistan is governed by the Income Tax Ordinance, 2001 (the Ordinance). Like in many developed tax regimes of the world, income tax in Pakistan, also, is levied on the basis of residence of a taxpayer.
A resident person is required to pay income tax on its income earned both from inside Pakistan and outside Pakistan while a non-resident person has to pay income tax only on that income which has been earned from Pakistan, however, foreign income of a non-resident person shall also be subjected to income tax where his stay, in Pakistan, is more than three (03) fiscal years.
A company becomes resident based on geographical location of its management and control office. Therefore all of the income earned whether in Pakistan or outside the Pakistan will be subjected to income tax in Pakistan. In case of Branch Office, the same is chargeable to tax for income earned from Pakistan alone.
Other Direct Taxes:
Besides income tax there are various other direct taxes some of the important ones are:
- Capital Value Tax
- Property Tax
- Stamp Duties
Goods and Services Tax:
- Sales Tax
- Federal Excise / Customs Duty
Employment of foreign nationals, visas and work permits
Employment of Foreign Nationals:
Employment of non-resident managers and experts of all nationalities is permitted to foreign investors. Moreover it can also enter into service contracts with such foreign personnel. Work Permits shall, however, have to be obtained for all such personnel from the BOI. For nationalities of some countries police reporting is also mandatory.
Foreign nationals working in Pakistan are allowed to maintain bank accounts and remit their salaries outside Pakistan, subject to local tax laws.
Visa Policy and Work Permits:
Work Visas are granted to foreign technical and managerial personnel for the purpose of imparting technical know-how and skills to the local population. The nationals of counties found on Business Visa List (BVL) are eligible for work visa. The options for extension of work visa and conversion of visit visa into work visa or vice versa are also available.
Multiple-entries work visa is issued for duration up to 2 years or to the date of expiry of the applicant’s passport, whichever is earlier. The Pakistani Missions in foreign countries grant work visas to the applicant, whereas extension is endorsed by the Regional Passport Office of the city where the expatriate is working, upon authorization by the Ministry of Interior.
All applications are processed through Board of Investment, upon submission of prescribed documents and processing fee. BOI after obtaining clearance from relevant departments of Government of Pakistan, which normally takes 4 weeks, issue a recommendation to Ministry of Interior for issuance of visa advice to the relevant Pakistani Mission.