Dividends are a common form of income for shareholders and investors in Pakistan. When a company earns profit and chooses to distribute a portion of it to its shareholders, this distribution is known as a dividend. However, dividends are not exempt from taxation. In Pakistan, both resident and non-resident shareholders are subject to dividend tax under the Income Tax Ordinance, 2001, which is regularly updated through the Finance Act each year.
This article provides a comprehensive overview of how dividends are taxed in Pakistan, including applicable rates, exemptions, procedural compliance, and regulatory implications for companies and investors.
What is a Dividend?
A dividend is a payment made by a corporation to its shareholders, usually from profits. It can take the form of:
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Cash Dividend: A direct cash payment
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Stock Dividend: Additional shares issued to shareholders
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Interim Dividend: Paid before annual profits are finalized
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Final Dividend: Declared after the financial year’s end by the board and approved in the AGM
Dividends are generally distributed by listed companies, private companies, and mutual funds, and they are subject to withholding tax at source.
Legal Framework for Dividend Tax in Pakistan
The primary law governing dividend tax is the Income Tax Ordinance, 2001, under the following key provisions:
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Section 5: Tax on dividends
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Section 150: Withholding tax on dividend income
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Section 8: Final tax regime applicability
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First & Second Schedule: Contains exemptions and specific rate provisions
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Finance Act: Updates rates and rules each year
Dividend Tax Rates in Pakistan (2024–2025)
1. Cash Dividends from Listed Companies
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General Rate: 15% for filers
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Non-Filers: 30% under section 150
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Mutual Funds: 15% (filers), 30% (non-filers)
2. Dividends from Unlisted/Private Companies
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Filers: 25%
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Non-Filers: 30%
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These companies must deduct the tax at source before distributing the dividend.
3. Dividend Paid by IPPs or REITs
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Independent Power Producers (IPPs): 7.5% for resident companies
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REIT Schemes: Exempt, subject to conditions under the Finance Act
4. Inter-corporate Dividends (Holding/Subsidiary Companies)
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100% Group Ownership: Exempt under Section 103C
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Less than 100% Ownership: Subject to reduced rate or full tax, depending on structure and SECP conditions
Tax Treatment for Resident vs. Non-Resident Shareholders
1. Resident Shareholders
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Dividend tax is deducted at source by the company.
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This tax is usually considered final tax (Section 8).
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Not subject to further taxation when filing returns.
2. Non-Resident Shareholders
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Subject to withholding tax at standard rates.
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May benefit from Double Taxation Agreements (DTAs) with Pakistan.
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Withholding rates under DTA can be as low as 10% or 15%, depending on the treaty country.
Withholding Tax Procedure under Section 150
Responsibilities of the Company
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Deduct tax at the time of dividend payment
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Deposit the tax within seven days into the government treasury
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File withholding statements (quarterly) using IRIS Portal
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Issue a withholding certificate (CPR) to the shareholder
Failure to deduct or deposit withholding tax may lead to default surcharge, penalties, and disallowance of expenses under section 161/205.
Exemptions from Dividend Tax
Common Exemptions
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Government shareholders receiving dividends from public sector entities
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Mutual funds income distributed to REIT investors (under certain conditions)
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Dividends received by charities and trusts registered under Section 100C
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Dividends from power generation companies established under Power Policy 1994
These exemptions are generally listed in the Second Schedule of the Income Tax Ordinance.
Tax Credit for Dividend Income (Section 62)
Although dividend tax is final, certain shareholders may claim a tax credit under Section 62 of the Income Tax Ordinance for investment in shares of listed companies, provided the shares are held for 24 months. This encourages long-term investment.
Conditions:
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Investment in listed companies only
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Holding period of two years or more
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Maximum credit allowed: Lower of actual investment or 20% of taxable income
Compliance by Companies Paying Dividends
Steps to Ensure Compliance:
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Board Approval: Approve dividend in board meeting or AGM
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Filing of Return: File Form 29 if change in directorship/shareholding occurred
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Withholding Deduction: Deduct applicable WHT rates
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Deposit WHT: Deposit to FBR within 7 days
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Update IRIS: Submit online withholding tax statement
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Payment & Dispatch: Transfer dividends to shareholders’ accounts or send cheques
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Issue CPR: Share copy of tax certificate with shareholders
FBR frequently audits dividend withholding transactions, especially for large corporates.
Double Taxation Treaties (DTTs)
Pakistan has DTTs with over 65 countries, allowing non-resident investors to benefit from reduced withholding tax on dividends.
Example Rates under DTTs:
| Country | WHT on Dividends (%) |
|---|---|
| United Kingdom | 15% |
| UAE | 10% |
| Canada | 15% |
| China | 10% |
| Germany | 10% |
To claim benefit, the non-resident must submit a Tax Residency Certificate (TRC) from their home country and file application with FBR.
Dividend Distribution Under Companies Act, 2017
The Companies Act, 2017 governs how dividends are declared and paid.
Key Provisions:
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Dividend must be paid within 15 working days of declaration
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No dividend can be paid if company is in loss
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Interim dividend can be declared by board without AGM
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Unpaid dividends must be deposited to Unclaimed Dividend Account within 15 days
Violation may lead to penalties and personal liability of directors.
Common Compliance Issues in Dividend Taxation
Despite clear laws, many companies and shareholders face challenges:
For Companies:
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Incorrect application of withholding rates
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Delay in depositing WHT
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Non-submission of WHT statements
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Not updating shareholders’ NTN/Filer status
For Investors:
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No tax certificate issued
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Misclassification of filer/non-filer
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Double taxation in home country
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No TRC submission for tax treaty relief
Businesses must consult tax advisors to ensure full compliance and documentation.
Impact on Investment Decisions
Dividend taxation plays a crucial role in investor behavior:
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Higher tax rates discourage income investors
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Final tax regime makes dividend attractive for passive investors
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Availability of DTT benefits encourages FDI in listed companies
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Increased tax on non-filers pushes people toward documentation
A consistent, transparent dividend tax policy fosters a stronger stock market and capital formation.
Government Reforms and Changes (2023–2025)
To enhance compliance and boost investor confidence, the FBR and SECP have introduced:
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Linking dividend payments with bank accounts
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Auto-detection of filer/non-filer status via Active Taxpayer List (ATL)
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Simplified IRIS dashboard for company WHT statements
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Inclusion of REITs and startups in dividend tax reforms
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Encouraging use of Central Depository Company (CDC) for dividend issuance
Comparison with Other Countries
| Country | Dividend Tax Rate | Comments |
|---|---|---|
| Pakistan | 15% (filers) / 30% (non-filers) | Final tax regime |
| India | 10% – 20% | Based on slabs; plus surcharge |
| UK | First £1,000 tax-free | Progressive beyond that |
| USA | 15% – 20% | Qualified dividends taxed lower |
| UAE | 0% | No personal income tax |
Conclusion
Tax on dividends in Pakistan is a critical element of the broader taxation framework. While it ensures government revenue from profit distributions, it also directly affects investor decisions, corporate payout strategies, and capital market development. Companies must adhere strictly to withholding and reporting procedures, and investors—especially non-residents—must be aware of treaty benefits and filing obligations. With digital reforms and increased enforcement, dividend tax compliance is no longer optional—it’s a necessity.
