Updated Income Tax Ordinance sets revised withholding tax rates for dividends from IPPs, REITs, mutual funds and SPVs
ISLAMABAD: The Federal Board of Revenue (FBR) has notified the dividend tax rates applicable for Tax Year 2027, effective from July 1, 2026, through the updated Income Tax Ordinance, 2001, incorporating amendments introduced by the Finance Act, 2026.
The updated law prescribes different withholding tax rates on dividend income depending on the nature of the company distributing the dividend and the status of the recipient.
The revised provisions retain concessional tax treatment for certain dividends paid by Independent Power Producers (IPPs), while specifying separate rates for Real Estate Investment Trusts (REITs), mutual funds, Special Purpose Vehicles (SPVs) and companies benefiting from tax exemptions.
Dividend tax rates for Tax Year 2027
Under the updated Income Tax Ordinance, the following withholding tax rates will apply:
• 7.5% on dividends paid by Independent Power Producers (IPPs), where the dividend is a pass-through item under an Implementation Agreement, Power Purchase Agreement or Energy Purchase Agreement and is reimbursed by the Central Power Purchasing Agency (CPPA-G) or its predecessor or successor.
• 15% on dividends distributed by Real Estate Investment Trusts (REITs) and all other dividend payments not covered under specific provisions.
• 15% on dividends received from the equity component of mutual funds.
• 25% on dividends attributable to the debt securities component of mutual funds.
• 29% where a corporate entity receives dividends from the debt securities component of a mutual fund.
• 0% on dividends received by a REIT Scheme from a Special Purpose Vehicle (SPV) under the Real Estate Investment Trust Regulations, 2015.
• 35% on dividends received by any other person from a Special Purpose Vehicle (SPV).
• 25% on dividends paid by a company that has no income tax liability because of tax exemptions, carried-forward business losses or tax credits.
Special provisions retained
The updated law continues to provide preferential tax treatment for dividends distributed by Independent Power Producers (IPPs). The concessional 7.5% tax rate will apply only where the dividend qualifies as a pass-through item under an Implementation Agreement, Power Purchase Agreement or Energy Purchase Agreement and is reimbursed by CPPA-G or its predecessor or successor entity.
The FBR has also retained the 15% withholding tax on dividends distributed by Real Estate Investment Trusts (REITs) and on dividend income that does not fall within any other specified category.
Mutual fund dividend taxation
The taxation of dividends received from mutual funds will continue to depend on the composition of the fund’s income.
Dividends attributable to the equity component of a mutual fund will be taxed at 15%, while income arising from the debt securities component will be subject to 25% tax.
However, where the recipient is a corporate entity, dividends attributable to the debt securities component will be taxed at the higher rate of 29%.
Treatment of SPV and tax-exempt company dividends
The updated provisions maintain the exemption for dividends received by a REIT Scheme from a Special Purpose Vehicle (SPV) established under the Real Estate Investment Trust Regulations, 2015.
In contrast, dividends received from an SPV by any other person will attract a 35% withholding tax.
The law also provides that a 25% tax will apply to dividends distributed by companies that have no income tax liability due to tax exemptions, carried-forward business losses under Part VIII of Chapter III, or tax credits claimed under Part X of Chapter III of the Income Tax Ordinance.
The notified dividend tax rates form part of the updated Income Tax Ordinance, 2001, as amended through the Finance Act, 2026, and are applicable from July 1, 2026 for Tax Year 2027. Taxpayers and withholding agents are required to apply the relevant withholding tax rate based on the nature of the dividend, the distributing entity and the status of the recipient when determining tax liabilities and ensuring compliance with the law.