FBR has outlined the tax, reporting and withholding requirements for gains arising from offshore disposals involving assets linked to Pakistan.
The Federal Board of Revenue (FBR) has explained the tax treatment of gains arising from the disposal or alienation outside Pakistan of certain assets connected with Pakistan during Tax Year 2027.
The FBR’s Income Tax Ordinance, 2001, has been updated up to June 30, 2026, for the relevant tax year covering July 1, 2026 to June 30, 2027.
Section 101A covers offshore asset disposals
Under Section 101A of the Income Tax Ordinance, 2001, any gain arising from the disposal or alienation outside Pakistan of an asset located in Pakistan and owned by a non-resident company is treated as Pakistan-source income.
The gain is chargeable to tax at the rate and in the manner specified under Section 101A(10).
Rules for shares in non-resident companies
Where the asset being disposed of is a share or interest in a non-resident company, it is treated as being located in Pakistan when two conditions are satisfied.
First, the share or interest must derive, directly or indirectly, its value wholly or principally from assets located in Pakistan.
Second, shares or interests representing 10% or more of the share capital of the non-resident company must be disposed of or alienated.
When assets are considered principally located in Pakistan
A share or interest is considered to derive its value principally from assets located in Pakistan when, on the last day of the tax year preceding the date of transfer, the value of those assets:
• exceeds Rs100 million; and
• represents at least 50% of the value of all assets owned by the non-resident company.
The value of the assets is determined according to their fair market value in the prescribed manner.
The provision applies notwithstanding Section 68, while the fair market value is determined without reducing liabilities.
Tax treatment where assets are partly in Pakistan
Where only some of the assets of a non-resident company are located in Pakistan, the income arising from the offshore disposal of a share or interest in that company is treated as arising from assets located in Pakistan to the extent reasonably attributable to those assets.
The determination is to be made in the prescribed manner.
Resident companies face reporting obligations
Section 101A also establishes reporting requirements for a resident company where the value of an asset of a non-resident company derives, directly or indirectly, wholly or principally from assets located in Pakistan.
Where the relevant Pakistani assets are held directly or indirectly through a resident company, that company must furnish the prescribed information, documents and statement to the Commissioner for determining the gain and tax payable.
The information must generally be submitted within 60 days of the non-resident company disposing of or alienating the asset.
However, the Commissioner may issue a written notice requiring the resident company to provide the information, documents or statement within a shorter period.
Acquirer required to deduct tax
Under Section 101A(8), the person acquiring the asset from the non-resident person is required to deduct tax from the gross consideration paid for the asset.
The tax is to be deducted at 10% of the fair market value of the asset.
The deducted amount must be paid to the Commissioner for credit to the Federal Government through remittance to the Government Treasury or by deposit with an authorised branch of the State Bank of Pakistan or the National Bank of Pakistan.
The payment must be made within 15 days of the payment to the non-resident.
Resident company must collect advance tax
The resident company covered by Section 101A(7) is required to collect advance tax from the non-resident company within 30 days of the disposal or alienation transaction.
The amount of advance tax is calculated under Section 101A(10).
Where tax has already been deducted and paid by the acquirer under Section 101A(8), that amount is treated as tax collected and paid under Section 101A(9).
The resident company is allowed a tax credit for the amount already deducted when determining the tax payable under Section 101A(10).
Tax calculated using two alternatives
Section 101A(10) provides that the tax to be collected is the higher of two amounts:
• 20% of A, where A represents the fair market value of the asset minus its cost of acquisition; or
• 10% of the fair market value of the asset.
The mechanism therefore establishes a minimum tax amount based on the fair market value of the asset.
No further tax on specified gains
Where tax has been paid under Section 101A(8) or Section 101A(9), the non-resident company is not required to pay further tax on the gain under Section 22(8) or capital gains under Sections 37 or 37A.
Other applicable provisions take priority
Section 101A(12) provides that where a gain is taxable under this section as well as under another provision of the Income Tax Ordinance, 2001, the gain is taxed under the other applicable provision.
The provisions of Section 101A therefore establish a specific framework for offshore disposals involving assets or interests that derive their value wholly or principally from assets located in Pakistan. The framework covers the circumstances in which such gains become Pakistan-source income, as well as reporting, withholding and advance-tax obligations for the parties involved.