Taxation of Holding Companies in Pakistan

A holding company is a corporate entity that owns and controls other companies by holding a significant portion of their shares or ownership interests. In Pakistan, holding companies are typically structured as private or public limited companies registered under the Companies Act, 2017. These companies do not necessarily engage in direct business operations but derive income from dividends, capital gains, management fees, and royalties received from subsidiary companies. Due to their unique nature, holding companies in Pakistan are subject to specific tax rules under the Income Tax Ordinance, 2001, and related statutes. This article provides a comprehensive analysis of the taxation of holding companies in Pakistan, including income tax treatment, inter-corporate dividends, group relief, and compliance requirements.

Legal Framework Governing Holding Companies
The taxation and regulation of holding companies are governed by the following:

• Income Tax Ordinance, 2001

• Income Tax Rules, 2002

• Companies Act, 2017

• SECP Group Company Regulations

• Finance Acts (updated annually)

• Securities and Exchange Commission of Pakistan (SECP) for registration and oversight

There is no separate “Holding Company Tax Law,” but specific provisions apply to group structures, inter-corporate dividends, and consolidation benefits.

Nature of Income for Holding Companies
Holding companies primarily earn passive or investment income, including:

• Dividends from subsidiary companies

• Capital gains from share disposals

• Interest income from inter-company loans

• Royalties, technical fees, and management service charges

• Rent from leasing assets to subsidiaries

Each of these income types has its own tax treatment and associated compliance requirements under Pakistani tax laws.

Corporate Tax Rate for Holding Companies
Holding companies are taxed at the standard corporate rate applicable to other companies:

• 29% for general companies (as per Tax Year 2025)

• 20% for those qualifying as small companies under Section 2(59A) (rare for holding entities)

Even though the nature of income differs, there is no reduced or preferential rate solely for holding companies.

Minimum Tax on Turnover (Section 113)
Minimum tax applies to all companies, including holding companies. However, the treatment depends on the type of income:

• Passive income (e.g., dividends, interest) may not attract turnover tax

• If a holding company has active revenue (management fee, rent), it may be subject to 1.25% minimum tax on gross receipts, if normal tax payable is less

Inter-Corporate Dividend Exemption (Section 103A)
One of the major tax advantages for holding companies is the inter-corporate dividend exemption.

Key Conditions:

• The recipient (holding company) must hold more than 50% shares in the subsidiary

• Both companies must be resident Pakistani entities

• The dividend must not be received from an association of persons (AOP)

• Proper documentation, including audited financials and shareholding confirmations, must be available

Result:

• If conditions are met, no tax is imposed on the dividend received from the subsidiary

If the exemption is not available, normal withholding tax at 15% applies under Section 150, and the holding company must declare this as income.

Group Relief under Section 59B
The Group Relief Regime allows a holding company to adjust the business loss of one subsidiary against the taxable income of another within the same group.

Eligibility Criteria:

• Companies must form a group under Section 59B

• Shareholding of at least 55% (direct) or 75% (indirect)

• Companies must be SECP-approved group members

• Must submit a Group Taxation Certificate

• Group structure must be intact for five years

How It Works:

• A profitable group company can reduce its tax liability by adjusting the accumulated loss of another group company

• Loss can be surrendered within three years

• Effective tool for startups under a group, helping offset early losses

Group Taxation vs. Group Relief:

• Group Taxation (Section 59AA) allows consolidated tax filing for wholly-owned subsidiaries

• Group Relief (Section 59B) allows only loss adjustment without consolidated return

Group taxation is more complex and requires SECP approval, common board, and unified accounts.

Withholding Tax Obligations of Holding Companies
Despite being passive income earners, holding companies may act as withholding agents when:

• Paying management fees

• Distributing dividends to ultimate shareholders

• Making interest payments or service charges to unrelated parties

Common withholding scenarios:

Capital Gains Tax on Sale of Subsidiary Shares
When a holding company sells shares of its subsidiary, the resulting capital gain is taxable under Section 37.

Rates (2025):

• 15% for filers

• 30% for non-filers

Exemptions or Reductions:

• No CGT if shares are gifted to another group member (subject to documentation)

• Holding company may adjust capital losses carried forward from previous years (valid for six years)

Sales Tax and FED Applicability
Typically, holding companies do not supply goods or services, hence are not required to register for sales tax. However, exceptions apply:

• If the holding company charges management fees or consultancy to its subsidiaries, it may need to register for sales tax on services

• Sales tax rates vary by province (e.g., 13% in Sindh, 16% in Punjab)

Federal Excise Duty (FED) is generally not applicable unless the holding company operates in regulated sectors like telecom or banking.

Tax Treatment of Management Fees and Royalty
Management charges and royalty income received by the holding company from its subsidiaries are:

• Taxable at the normal rate (29%)

• Subject to withholding tax by the paying subsidiary

• Must be backed by a valid inter-company agreement

• In case of cross-border fees, double taxation agreements (DTAs) and withholding exemptions under Section 152 may apply

Filing Requirements for Holding Companies

1. Annual Income Tax Return (IT-2):

• Due by September 30 (unless financial year differs)

• Must include:

  • Financial statements

  • Income from dividends, capital gains, royalties

  • Advance tax computation

  • Inter-corporate declarations

2. Withholding Tax Statements (Monthly):

• Filed on FBR IRIS portal by 15th of every month

3. Sales Tax Return (if registered):

• Filed monthly via eFBR (where applicable)

4. SECP Compliance:

• Must file Form A, Form 29, financials, and Group Certificate (if claiming group relief)

Audit Requirements
All holding companies must undergo annual external audit by a Chartered Accountant. The audit report must be:

• Filed with SECP

• Attached to the income tax return

• Submitted to shareholders in the Annual General Meeting (AGM)

Repatriation of Profits by Foreign Holding Companies
If the holding company is foreign-owned, the repatriation of profits from Pakistani subsidiaries is allowed:

• After deduction of withholding tax on dividends

• Subject to State Bank of Pakistan (SBP) approval

• Must comply with Foreign Exchange Manual regulations

Tax Planning Considerations for Holding Companies

• Avail inter-corporate dividend exemptions where applicable

• Structure groups to qualify for group relief under Section 59B

• Use capital losses strategically to offset gains

• Maintain separate documentation for inter-company transactions

• Align tax year and board approvals across group entities

Common Pitfalls to Avoid

• Not maintaining shareholding thresholds for dividend exemption

• Failing to document management fee arrangements

• Claiming group relief without SECP approval

• Missing withholding obligations on shareholder payouts

• Overlooking provincial sales tax on services

FAQs on Taxation of Holding Companies

Q. Are holding companies taxed differently from operational companies?
A. No. They are taxed at the standard corporate rate (29%) but may benefit from inter-corporate dividend exemptions and group relief.

Q. Is dividend from a subsidiary always exempt?
A. Only if the holding company owns more than 50% and both are resident companies.

Q. Can a holding company claim group relief?
A. Yes, under Section 59B, subject to SECP certification and shareholding criteria.

Q. Does a holding company need to register for sales tax?
A. Only if it provides taxable services (e.g., management or consultancy) to subsidiaries or third parties.

Q. What happens if a holding company sells subsidiary shares?
A. Capital gains tax (15%) applies for filers. Losses may be adjusted if declared in prior years.

Conclusion
Holding companies in Pakistan enjoy specific tax advantages, such as inter-corporate dividend exemptions and group relief, that are unavailable to standalone entities. While they are taxed at the regular corporate rate, the structure of income and transactions across subsidiaries introduces complexity. Proper documentation, timely compliance, and group planning can lead to substantial tax savings and efficiency. Holding companies must also maintain strong governance standards, audit practices, and transparent inter-company dealings to fully benefit from available tax provisions.