Updated income tax rules specify distributions, shareholder payments and branch profit remittances that qualify as dividend income.
ISLAMABAD: The Federal Board of Revenue (FBR) will treat several types of distributions, payments and profit remittances as dividend income for Tax Year (TY) 2027 under the Income Tax Ordinance, 2001.
The FBR has issued the Income Tax Ordinance, 2001, updated up to June 30, 2026, which sets out the payments and distributions that constitute dividend income for tax purposes.
According to the updated ordinance, dividend includes any distribution by a company of its accumulated profits to shareholders, whether those profits have been capitalised or not, where the distribution involves the release of all or any part of the company’s assets, including money, to shareholders.
Dividend income also includes any distribution by a company to its shareholders of debentures, debenture stock or deposit certificates, with or without profit, to the extent that the company possesses accumulated profits, whether capitalised or not.
Distributions on liquidation and capital reduction
The definition further covers distributions made to shareholders upon the liquidation of a company, to the extent that the amount distributed is attributable to accumulated profits immediately before liquidation.
Similarly, any distribution made to shareholders following a reduction in the company’s capital will be treated as dividend to the extent that the company possesses accumulated profits, whether or not those profits have been capitalised.
Loans and advances to shareholders
The FBR will also treat certain payments by a private company or trust as dividend income.
These include any advance or loan made to a shareholder, whether representing part of the company’s or trust’s assets or otherwise, as well as any payment made on behalf of, or for the individual benefit of, a shareholder.
Such payments will be treated as dividend to the extent that the company or trust possesses accumulated profits.
The definition also includes the remittance of after-tax profit by a branch of a foreign company operating in Pakistan.
Payments excluded from dividend definition
The Income Tax Ordinance also specifies certain payments that will not be treated as dividend income.
These include distributions made in connection with the liquidation or reduction of capital in respect of shares acquired for full cash consideration, or the redemption of debentures or debenture stock, where the holder is not entitled to participate in surplus assets upon liquidation.
An advance or loan made to a shareholder in the ordinary course of business is also excluded where lending money constitutes a substantial part of the company’s business.
The definition further excludes a dividend paid by a company that is set off against the whole or part of an amount previously paid by the company and treated as a dividend, to the extent of the amount so set off.
Exception for petroleum E&P companies
The FBR has also excluded the remittance of after-tax profit by a branch of a foreign Petroleum Exploration and Production (E&P) company operating in Pakistan from the definition of dividend.
The provisions form part of the Income Tax Ordinance, 2001, updated by the FBR up to June 30, 2026, and are relevant to the treatment of dividend income for Tax Year 2027.