FBR’s Tax Year 2027 rules cover physical offices, digital operations, services, agents, equipment and interconnected business activities as potential permanent establishments.
ISLAMABAD: The Federal Board of Revenue (FBR) has outlined a broad definition of permanent establishment (PE) for Tax Year (TY) 2027 under the Income Tax Ordinance, 2001, covering physical business locations, digital operations, service arrangements, agents and substantial equipment in Pakistan.
The FBR’s updated Income Tax Ordinance, incorporating amendments up to June 30, 2026, sets out the circumstances in which a business or person may be considered to have a permanent establishment in Pakistan for income tax purposes.
What is a permanent establishment?
Under the updated law, a permanent establishment in relation to a person means a place of business through which that person’s business is wholly or partly carried on.
The definition extends beyond conventional offices and factories to cover a wide range of physical, digital and business arrangements that may establish a taxable presence in Pakistan.
Places of business covered
A permanent establishment includes a place of management, branch, office, factory or workshop.
The definition also covers premises used for soliciting orders, warehouses, permanent sales exhibitions and sales outlets.
A liaison office is generally excluded, except where it engages in the negotiation of contracts other than contracts relating to purchases.
Natural resource extraction
The definition also covers locations where natural resources are extracted.
A mine, oil or gas well, quarry or other place of natural resource extraction can constitute a permanent establishment.
Agricultural, pastoral and forestry properties are also covered by the definition.
Virtual business presence
The FBR’s definition specifically recognises a virtual business presence in Pakistan.
A business may fall within the definition where transactions are conducted through the internet or another electronic medium, regardless of whether the business maintains a physical presence in Pakistan.
This provision extends the concept of permanent establishment beyond traditional brick-and-mortar business operations.
Construction and installation projects
A building site or a construction, assembly or installation project can also constitute a permanent establishment.
However, the relevant site, project and associated supervisory activities must continue for more than 90 days, whether continuously or in aggregate, within any 12-month period.
Provision of services
The furnishing of services, including consultancy services, may also create a permanent establishment in Pakistan.
This applies where services are provided through employees, other personnel or an entity engaged by the person for that purpose.
The provision therefore has implications for foreign businesses providing services in Pakistan without necessarily maintaining a conventional office.
Permanent establishment through an agent
A person acting in Pakistan on behalf of another person may also create a permanent establishment, subject to prescribed conditions.
An independent-status agent acting in the ordinary course of business is generally excluded.
However, an agent may create a PE where the agent habitually:
• Exercises authority to conclude contracts on behalf of another person;
• Concludes contracts on behalf of that person; or
• Plays the principal role leading to contracts that are routinely concluded without material modification.
Such contracts may relate to contracts made in the name of the person, the transfer of ownership or right to use property owned or used by the enterprise, or the provision of services by the person.
An agent may also constitute a PE where, despite lacking authority to conclude contracts, the agent habitually maintains stock-in-trade or other merchandise from which goods are regularly delivered on behalf of the other person.
The FBR further clarifies that an independent-status agent acting in the ordinary course of business does not include a person acting exclusively or almost exclusively on behalf of an associated person.
Substantial equipment and assets
A permanent establishment may also arise through substantial equipment installed in Pakistan.
The definition covers any other asset or property capable of undertaking activities that give rise to income.
This provision can therefore bring certain equipment-based business activities within the scope of PE rules even where a conventional office or branch does not exist.
Connected business operations
The FBR’s definition also covers a place of business used or maintained by a person where that person or an associate carries on business at the same place or at another location in Pakistan.
This may apply where the relevant location or another place constitutes a permanent establishment of the person or an associate.
It can also apply where businesses conducted by the person or an associate at the same or multiple locations perform complementary functions forming part of a cohesive business operation.
What is a cohesive business operation?
The FBR explains that a cohesive business operation can include an overall arrangement involving the supply of goods, installation, construction, assembly, commissioning, guarantees or supervisory activities.
The provision applies where all or the principal activities are undertaken or performed either by the person or by associates of that person.
The definition of supply of goods also covers goods imported in the name of an associate or another person, regardless of whether ownership of the goods passes outside Pakistan.
Implications for businesses
The broad definition means businesses operating in Pakistan need to carefully assess whether their activities, assets, agents, service arrangements or digital operations could create a permanent establishment and corresponding tax obligations.
For Tax Year 2027, the FBR’s updated definition encompasses traditional offices and factories as well as natural-resource operations, construction projects, service providers, dependent agents, substantial equipment, virtual business activities and interconnected business operations.
Businesses with cross-border operations may therefore need to review their structures and activities in Pakistan against the PE criteria prescribed under the Income Tax Ordinance, 2001.