Taxation of Permanent Establishments in Pakistan

As the global economy becomes increasingly interconnected, businesses frequently operate across borders through subsidiaries, branches, liaison offices, and agents. In Pakistan, foreign companies conducting business activities within the country are subject to local taxation if they create a Permanent Establishment (PE). A PE is a fixed place of business or agent through which a non-resident company carries out part or whole of its business operations in Pakistan. The taxation of PEs is governed under the Income Tax Ordinance, 2001, and affected by double taxation treaties (DTTs) signed by Pakistan with other countries. This article provides a comprehensive guide to the concept, criteria, tax implications, and compliance requirements for permanent establishments in Pakistan.

What is a Permanent Establishment (PE)?

Under Section 2(41) of the Income Tax Ordinance, 2001, a Permanent Establishment of a non-resident in Pakistan means a place of business or any other presence through which the non-resident wholly or partly carries on its operations in Pakistan. The definition broadly follows the OECD Model Tax Convention, with specific inclusions and exclusions.

Types of Permanent Establishments in Pakistan

A PE may take various forms including:

1. Fixed Place PE:

• A physical place such as an office, branch, workshop, factory, warehouse, etc.

2. Construction PE:

• A site or project for construction, installation, or supervisory activities lasting more than 90 days in any 12-month period

3. Agency PE:

• A person (other than an independent agent) acting on behalf of a non-resident, and habitually:

  • Concludes contracts

  • Maintains a stock of goods

  • Secures orders

4. Service PE:

• Provision of services in Pakistan for a period exceeding 183 days in any 12-month period, whether by employees or other personnel

5. Dependent Agent PE:

• When a Pakistani agent performs activities exclusively or almost exclusively on behalf of the foreign enterprise

Exclusions from PE Status
Certain activities do not constitute a PE, including:

• Use of facilities solely for storage or display of goods

• Maintenance of a fixed place solely for purchasing goods

• Advertising or market research activities

• Preparatory or auxiliary services

Taxation Framework for PEs in Pakistan

1. Tax Rate:

• A PE is treated as a resident taxpayer for the purpose of taxation

• Subject to corporate income tax at the standard rate of 29% (Tax Year 2025)

2. Minimum Tax (Section 113):

• Minimum tax at 1.25% of turnover is applicable if the tax on net income is lower or the PE incurs a loss

3. Advance Tax (Section 147):

• PEs are required to pay quarterly advance tax, just like resident companies

4. Withholding Tax Obligations:

• PEs are considered withholding agents

• Must deduct tax from payments such as:

  • Salaries (Section 149)

  • Services (Section 153)

  • Rent (Section 155)

  • Dividends or royalties (if applicable)

5. Capital Gains Tax (Section 37):

• Gains from sale of assets situated in Pakistan by the PE are taxable

• CGT at 15% for ATL filers, higher for non-filers

Attribution of Profits to a PE

Under Section 105, only the income attributable to the activities of the PE in Pakistan is taxable. Attribution must be based on:

• Separate accounts maintained for Pakistani operations

• Arm’s length pricing for transactions between PE and head office

• Allocation of expenses incurred for generating Pakistani income

If accounts are not maintained, tax authorities may assess income on a deemed basis.

Transfer Pricing and PE Transactions

If a PE engages in inter-company transactions with its foreign head office or related entities:

• Transactions must comply with transfer pricing rules under Section 108

• Arms-length pricing principles must be followed

• Maintain Transfer Pricing Documentation File (TPDF)

• FBR may adjust profits if underreporting is detected

Tax Treaties and Double Taxation Avoidance

Pakistan has signed double tax treaties (DTTs) with over 60 countries. These treaties:

• Define PE in accordance with OECD or UN models

• Provide relief from double taxation

• Offer credit or exemption for foreign taxes paid

• Often include specific PE duration thresholds (e.g., construction PE > 6 months)

Example:
A German engineering firm working on a project in Pakistan for 8 months creates a Construction PE under the Pakistan-Germany DTT, and its profits attributable to that project are taxable in Pakistan.

Taxation of Branch Offices (Form of PE)

Foreign companies opening a branch office in Pakistan under SECP registration are considered PEs. Taxation includes:

1. Corporate Tax:

• 29% of net taxable income

2. Repatriation Tax (Section 152(5)):

• 15% withholding tax on remittance of after-tax profits to the foreign parent company

3. Filing Obligations:

• Income tax return (IT-2)

• Audited accounts

• Withholding tax statements

• Sales tax returns (if applicable)

Sales Tax on PE Activities

If the PE is involved in:

• Provision of taxable goods: 17% General Sales Tax (GST)

• Provision of services (e.g., consultancy, construction): 13%–16% Provincial Sales Tax (SRB, PRA, KPRA)

Registration with FBR and provincial tax authorities is mandatory.

Permanent Establishment vs. Liaison Office

A liaison or representative office is permitted to undertake non-commercial activities, such as:

• Information collection

• Marketing

• Coordination with headquarters

Such offices are not PEs if they do not generate income. However, if they cross the line into commercial activity, FBR can reclassify them as PEs, and tax them accordingly.

Compliance Requirements for PEs

1. Registration:

• Obtain NTN from FBR

• Register with SECP (for branches)

2. Books and Audit:

• Maintain accounts under Companies Act

• Annual audit by Chartered Accountant

3. Tax Filings:

• Annual income tax return

• Quarterly advance tax

• Monthly withholding tax returns

• Sales tax returns if applicable

4. Documentation:

• Inter-company agreements

• Invoices and billing logs

• Profit attribution methodology

• Payroll and HR records

Penalties for Non-Compliance

Anti-Avoidance and Artificial PE Rules

FBR has the authority to declare a PE exists even if the foreign company:

• Operates through a dependent agent

• Structures contracts to avoid PE thresholds

• Splits contracts to stay below the duration thresholds

Such actions are covered under anti-avoidance rules and economic substance principles.

Digital Permanent Establishments (Digital PE)

Under emerging tax trends and OECD BEPS Action Plan, digital companies with:

• Significant economic presence (even without physical presence)

• User base and market access in Pakistan
  may be deemed to have a digital PE

While Pakistan has not yet implemented a full digital PE regime, FBR has started taxing:

• Online ads (Facebook, Google)

• Digital services by NRPs
  through withholding and sales tax mechanisms

FAQs on Permanent Establishment Taxation

Q. What is the standard tax rate for a PE in Pakistan?
A. 29%, the same as for local companies.

Q. Is minimum tax applicable to PEs?
A. Yes, minimum tax under Section 113 applies at 1.25% of turnover.

Q. Can a liaison office become a PE?
A. Yes, if it undertakes commercial activity or generates income.

Q. Are PEs subject to sales tax?
A. Yes, if they provide taxable goods or services in Pakistan.

Q. How is profit attributed to a PE?
A. Based on actual accounts or deemed profits using arm’s-length methods.

Q. Is there double taxation relief available for PEs?
A. Yes, under Pakistan’s tax treaties, credit or exemption is available.

Conclusion
Permanent Establishments are a vital link for foreign companies doing business in Pakistan, and their taxation is carefully regulated to ensure fair contribution to the tax base. From construction sites to service providers and branches, PEs must comply with income tax, sales tax, and withholding obligations. By maintaining proper documentation, observing transfer pricing rules, and understanding treaty protections, foreign enterprises can ensure compliance while optimizing their tax exposure. As tax enforcement intensifies and global rules evolve, proper planning and local expertise are essential for managing PE taxation in Pakistan