In Pakistan, both local and foreign companies can register their businesses, but the registration process, legal requirements, and tax obligations differ for each type of company. This article will discuss the differences between local and foreign company registration in Pakistan, including definitions and examples.
Definition of a Local Company:
A local company is a company that is incorporated and registered in Pakistan. A local company is owned and managed by Pakistani nationals and operates within the country’s jurisdiction. Local companies may take different legal forms, including private limited companies, public limited companies, sole proprietorships, and partnerships.
Definition of a Foreign Company:
A foreign company is a company that is incorporated and registered outside of Pakistan but intends to do business within the country’s jurisdiction. A foreign company may set up a subsidiary or branch office in Pakistan to conduct its business activities. Foreign companies may take different legal forms, including limited liability companies, corporations, and partnerships.
Differences in Registration Process:
The registration process for local and foreign companies differs in Pakistan. Local companies can register with the Securities and Exchange Commission of Pakistan (SECP) under the Companies Act, 2017. The registration process for local companies includes the following steps:
The first step in the registration process is to reserve a unique name for the company with the SECP.
Memorandum of Association (MOA) and Articles of Association (AOA):
The MOA and AOA are legal documents that define the company’s scope of business, management structure, and rules and regulations for shareholders and directors.
After obtaining name reservation and preparing the MOA and AOA, the local company can apply for incorporation with the SECP. The SECP will review the application, and if approved, issue a Certificate of Incorporation.
Foreign companies, on the other hand, must register with the SECP under the Companies Act, 2017, and also obtain permission from the Board of Investment (BOI) and the State Bank of Pakistan (SBP) before conducting business activities in Pakistan. The registration process for foreign companies includes the following steps:
The first step is to reserve a unique name for the company with the SECP.
Permission from BOI:
The foreign company must obtain permission from the BOI, which is responsible for promoting and facilitating foreign investment in Pakistan.
Permission from SBP:
The foreign company must also obtain permission from the SBP, which regulates foreign exchange transactions in Pakistan.
After obtaining name reservation, permission from BOI and SBP, and preparing the required legal documents, the foreign company can apply for incorporation with the SECP. The SECP will review the application, and if approved, issue a Certificate of Incorporation.
Differences in Legal Requirements:
Local and foreign companies in Pakistan have different legal requirements, including the minimum number of shareholders, directors, and authorized capital.
Local companies must have a minimum of two shareholders and two directors, with no maximum limit on the number of shareholders. The authorized capital of a local company must be stated in the MOA and AOA.
Foreign companies must also have a minimum of two shareholders and two directors, with no maximum limit on the number of shareholders. The authorized capital of a foreign company must be specified in the application for registration.
Differences in Tax Obligations:
Local and foreign companies in Pakistan have different tax obligations, including income tax, sales tax, and withholding tax.
Local companies are subject to income tax, which is calculated on their annual profits. The current corporate tax rate for local companies in Pakistan is 29%.
Foreign companies are also subject to income tax on their profits in Pakistan, but the tax rate may vary depending on the nature of their business and the country of origin. Foreign companies may also be subject to withholding tax on certain transactions, including payments to non-resident persons, such as dividends, interest, and royalties. The withholding tax rates for foreign companies may vary depending on the type of payment.
Sales tax is also applicable to both local and foreign companies in Pakistan. Sales tax is a consumption tax levied on the sale of goods and services. The current sales tax rate in Pakistan is 17%.
Differences in Compliance Requirements:
Local and foreign companies in Pakistan have different compliance requirements, including annual filings, audits, and reporting obligations.
Local companies are required to file annual tax returns and financial statements with the Federal Board of Revenue (FBR) and SECP. The annual financial statements must be audited by a qualified auditor.
Foreign companies are also required to file annual tax returns and financial statements with the FBR and SECP. However, foreign companies may be required to submit additional documents, including a statement of their global income, expenses, assets, and liabilities.
Foreign companies may also be required to appoint a resident agent in Pakistan who is authorized to accept legal notices on behalf of the company.
Examples of Local and Foreign Companies in Pakistan:
Some examples of local companies in Pakistan include:
Engro Corporation Limited: Engro is a Pakistani conglomerate that operates in various industries, including fertilizer, petrochemicals, and energy.
Packages Limited: Packages Limited is a Pakistani packaging company that provides solutions for food, pharmaceutical, and consumer goods industries.
K-Electric Limited: K-Electric is a Pakistani electric power company that supplies electricity to Karachi and its surrounding areas.
Some examples of foreign companies in Pakistan include:
Unilever Pakistan Limited: Unilever is a British-Dutch multinational company that operates in various industries, including food, personal care, and home care products.
Nestle Pakistan Limited: Nestle is a Swiss multinational company that produces food and beverages.
Telenor Pakistan Limited: Telenor is a Norwegian multinational telecommunications company that provides mobile and data services in Pakistan.
In conclusion, local and foreign companies in Pakistan have different registration processes, legal requirements, tax obligations, and compliance requirements. Local companies are incorporated and registered in Pakistan and are owned and managed by Pakistani nationals. Foreign companies, on the other hand, are incorporated and registered outside of Pakistan but intend to do business within the country’s jurisdiction. Understanding these differences is crucial for companies planning to do business in Pakistan to ensure compliance with the legal and regulatory framework in the country.