Tax payable on income of controlled foreign company

Tax payable on income of controlled foreign company

Section 109A of Income Tax Ordinance, 2001 stated that income of a controlled foreign company shall be included in the taxable income of a resident.

The Federal Board of Revenue (FBR) issued the Income Tax Ordinance, 2001 updated up to June 30, 2021. The Ordinance incorporated amendments brought through Finance Act, 2021.

Following is the text of Section 109A of the Income Tax Ordinance, 2001:

109A. Controlled foreign company.— (1) There shall be included in the taxable income of a resident person for a tax year an income attributable to controlled foreign company as defined in sub- section (2).

(2) For the purpose of this section, controlled foreign company means a non-resident company, if ─

(a) more than fifty percent of the capital or voting rights of the non-resident company are held, directly or indirectly, by one or more persons resident in Pakistan or more than forty percent of the capital of the or voting rights of the non-resident company are held, directly or indirectly, by a single resident person in Pakistan;

(b) tax paid, after taking into account any foreign tax credits available to the non-resident company, on the income derived or accrued, during a foreign tax year, by the non-resident company to any tax authority outside Pakistan is less than sixty percent of the tax payable on the said income under this Ordinance;

(c) the non-resident company does not derive active business income as defined under sub-section (3); and

(d) the shares of the company are not traded on any stock exchange recognized by law of the country or jurisdiction of which the non-resident company is resident for tax purposes.

(3) A company shall be treated to have derived active income if─

(a) more than eighty percent of income of the company does not include income from dividend, interest, property, capital gains, royalty, annuity payment, supply of goods or services to an associate, sale or licensing of intangibles and management, holding or investment in securities and financial assets; and

(b) principally derives income under the head “income from business” in the country or jurisdiction of which it is a resident.

(4) Income of a controlled foreign company is an amount equal to the taxable income of that company determined in accordance with the provisions of this Ordinance as if that controlled foreign company is a resident taxpayer and shall be taxed at the rate specified in Division III of Part I of the First Schedule.

(5) The amount of attributable income under sub-section (1) for a tax year shall be computed according to the following formula, namely:—

A x (B/100)

Where –

A is the amount of income of a controlled foreign company under sub-section (2); and

B is the percentage of capital or voting rights, whichever is higher, held by the person, directly or indirectly, in the controlled foreign company.

(6) The amount of attributable income shall be treated as zero, if the capital or voting rights of the resident person is less than ten percent.

(7) Income of a controlled foreign company shall be treated as zero, if it is less than ten million Rupees.

(8) The income of a controlled foreign company in respect of a foreign tax year, as defined in sub-section (9), shall be determined in the currency of that controlled foreign company and shall, for purposes of determining the amount to be included in the income of any resident person during any tax year under the provisions of this section, be converted into Rupees at the State Bank of Pakistan rate applying between that foreign currency and the Rupee on the last day of the tax year.

(9) Foreign tax year, in relation to a non-resident company, means any year or period of reporting for income tax purposes by that non-resident company in the country or jurisdiction of residence or, if that company is not subject to income tax, any annual period of financial reporting by that company.

(10) The income attributable to controlled foreign company under sub-section (1) and taxed in Pakistan under this section shall not be taxed again when the same income is received in Pakistan by the resident taxpayer.

(11) Where tax has been paid by the resident person on the income attributable to controlled foreign company and in a subsequent tax year the resident person receives dividend distributed by the controlled foreign company, after deduction of tax on dividend, the resident person shall be allowed a tax credit equal to the lesser of, —

(i) foreign tax paid, as defined in sub-section (8) of section 103, on dividends; and

(ii) Pakistan tax payable, as defined in section 103, for the tax year in which the dividend is received by the resident taxpayer.

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