Section 83 of the Income Tax Ordinance, 2001 lays out specific conditions that define a resident company during a tax year.
The Federal Board of Revenue (FBR) has included this section in the updated Income Tax Ordinance, incorporating amendments through the Finance Act, 2021, up to June 30, 2021.
Text of Section 83 – Residency Status for Companies:
Section 83 of the Income Tax Ordinance, 2001 outlines the conditions under which a company is considered a resident company for a tax year. The section reads as follows:
83. Resident company.
A company shall be a resident company for a tax year if —
(a) it is incorporated or formed by or under any law in force in Pakistan;
(b) the control and management of the affairs of the company are situated wholly in Pakistan at any time in the year; or
(c) it is a Provincial Government or Local Government in Pakistan.
(1) Incorporation or Formation in Pakistan: According to Section 83(a), a company is considered a resident company if it is incorporated or formed under any law in force in Pakistan. This criterion establishes a clear link between the legal status of the company and its tax residency. Companies created or established under Pakistani law fall under the umbrella of resident companies.
(2) Control and Management in Pakistan: Section 83(b) outlines that a company qualifies as a resident company if the control and management of its affairs are situated wholly in Pakistan at any time during the tax year. This criterion emphasizes the significance of where key decision-making processes occur within the company. If these processes are entirely within Pakistan, the company is deemed a resident for tax purposes.
(3) Government Entities: Section 83(c) extends the definition of a resident company to include Provincial Government or Local Government entities in Pakistan. This recognition acknowledges that certain governmental organizations operate as companies for tax purposes, and their residency is established based on their governmental affiliations within the country.
(4) Significance of Residency Status: Determining the residency status of a company is pivotal in the context of income taxation. Resident companies are subject to taxation on their worldwide income, while non-resident companies are taxed only on income sourced within Pakistan. The conditions outlined in Section 83 ensure a comprehensive approach to defining the residency status of companies, offering clarity to businesses and tax authorities.
(5) Compliance and Reporting: For companies operating in Pakistan, understanding and complying with the residency criteria outlined in Section 83 is essential. It dictates the scope of taxation and reporting requirements for these entities. Adherence to these criteria contributes to a transparent and accountable taxation system.
(6) Alignment with International Standards: The conditions set forth in Section 83 align with international standards for determining the residency of companies. This alignment ensures that Pakistan’s tax regulations are consistent with global practices, promoting a conducive environment for international business and investment.
Section 83 of the Income Tax Ordinance, 2001 serves as a cornerstone in defining the residency status of companies operating in Pakistan. The inclusion of specific criteria, including incorporation, control and management, and government affiliations, offers a comprehensive framework for determining tax residency. As the FBR continues to refine and update tax regulations, businesses are advised to stay informed about such provisions to ensure compliance with the residency requirements outlined in Section 83.
