A holding company is a type of company that does not engage in active business operations but instead owns and controls other companies. Holding companies are often used for the purposes of investment, to manage and consolidate assets, and to facilitate mergers and acquisitions. In Pakistan, holding companies are subject to taxation under the Income Tax Ordinance, 2001.
Under Pakistani law, a holding company is defined as a company that owns at least 50% of the voting shares of one or more other companies. The holding company is referred to as the “parent” company, while the companies it owns are referred to as “subsidiaries.” A subsidiary company is one in which the parent company owns at least 50% of the voting shares.
The taxation of holding companies in Pakistan is based on the income earned by the company. The income is classified as either “active income” or “passive income.” Active income is income earned from business operations, while passive income is income earned from investments.
Active Income:
If a holding company earns active income, it is taxed at the normal corporate tax rate, which is currently 29%. This includes income from the business operations of the holding company and its subsidiaries. For example, if a holding company owns a manufacturing company and that manufacturing company earns a profit, the profit will be taxed at the normal corporate tax rate.
Passive Income:
If a holding company earns passive income, it is taxed at a reduced rate. The current rate for passive income is 20%. Passive income includes income earned from dividends, interest, and capital gains. For example, if a holding company owns shares in another company and receives dividends on those shares, the dividends will be taxed at the reduced rate of 20%.
There are certain exemptions available to holding companies in Pakistan. For example, if a holding company receives dividends from a subsidiary company, those dividends are exempt from taxation. This is known as the “dividend exemption.” However, in order to qualify for the dividend exemption, the subsidiary company must have paid tax on its profits. If the subsidiary company has not paid tax on its profits, the dividend exemption will not apply.
Another exemption available to holding companies is the “capital gains exemption.” If a holding company sells shares in a subsidiary company, any capital gains realized on the sale are exempt from taxation. However, in order to qualify for the capital gains exemption, the holding company must have owned the shares in the subsidiary company for at least 12 months.
In addition to the above exemptions, holding companies in Pakistan can also benefit from tax credits. A tax credit is a dollar-for-dollar reduction in the amount of tax owed. For example, if a holding company pays tax in another country on income earned from a subsidiary company located in that country, it may be eligible for a tax credit in Pakistan. The tax credit will reduce the amount of tax owed in Pakistan by the amount of tax paid in the other country.
It is important to note that the taxation of holding companies in Pakistan is subject to change. The government may introduce new laws or amend existing laws that affect the taxation of holding companies. Holding companies should consult with a tax professional to ensure compliance with current laws and regulations.
In conclusion, holding companies in Pakistan are subject to taxation based on the income earned by the company. Active income is taxed at the normal corporate tax rate, while passive income is taxed at a reduced rate. There are exemptions available to holding companies, including the dividend exemption and capital gains exemption, as well as tax credits. Holding companies should stay up-to-date with changes in tax laws and regulations to ensure compliance.