Islamabad, August 10, 2025 – The Federal Board of Revenue (FBR) has issued a detailed explanation of the concept of permanent establishment under Pakistan’s income tax laws to remove ambiguities and help businesses correctly determine their tax liabilities.
This clarification is particularly important for multinational companies, foreign investors, and entities operating digitally in the country.
What is a Permanent Establishment?
Under the Income Tax Ordinance, 2001, the term permanent establishment refers to a fixed place of business through which a company or any other legal entity carries out its operations, either wholly or partially. This legal definition is crucial because the existence of a permanent establishment in Pakistan often triggers specific tax obligations, including corporate income tax, withholding tax, and compliance requirements.
The FBR has outlined several forms that a permanent establishment can take, including:
1. Physical Business Locations – A place of management, branch, office, factory, or workshop. It also covers premises for soliciting orders, warehouses, permanent sales exhibitions, or sales outlets. Liaison offices are generally excluded unless they engage in contract negotiations other than purchasing agreements.
2. Natural Resource Sites – Any mine, oil or gas well, quarry, or other location where natural resources are extracted. Agricultural, pastoral, or forestry properties also qualify.
3. Digital Presence – In today’s economy, businesses can operate in Pakistan without physical offices. The law now recognizes virtual business presence as a form of permanent establishment if transactions are conducted via the internet or other electronic mediums.
4. Construction and Installation Projects – A building site, construction, assembly, or installation project lasting more than 90 days within a 12-month period, including any connected supervisory activities.
5. Service Provision – Providing services, such as consultancy, through employees, contractors, or any engaged entity.
6. Agents Operating in Pakistan – If a person in Pakistan acts on behalf of the business and habitually concludes contracts or plays a principal role in concluding contracts, they may create a permanent establishment. This includes agents who deliver goods from regularly maintained stock.
7. Equipment and Assets – Any substantial equipment installed, or other property capable of generating income, may qualify as a permanent establishment.
8. Multiple Business Locations – If a business or its associates operate from one or more places in Pakistan and these locations are interconnected as part of a cohesive business operation, they can collectively be treated as a permanent establishment.
Why Does It Matter?
The classification of a permanent establishment has a direct impact on how income is taxed. If an entity is deemed to have a permanent establishment in Pakistan, its income attributable to that establishment becomes taxable in the country. This ensures that businesses with significant operations in Pakistan contribute fairly to the national revenue.
Clarifications and Avoidance of Misinterpretation
To prevent misuse, the FBR has clarified that an agent of independent status, acting in the ordinary course of business, does not automatically create a permanent establishment. However, if such an agent works almost exclusively for one company and is closely associated with it, the situation changes.
Similarly, the definition of “cohesive business operation” covers integrated arrangements for supplying goods, installation, construction, and other activities that collectively form a single operational structure. Even goods imported in the name of an associate or another person can be considered part of this cohesive business operation.
Implications for Businesses
Foreign companies entering the Pakistani market—whether physically, through resource extraction, or digitally—must carefully assess whether their operations create a permanent establishment. Failure to recognize and declare a permanent establishment can result in significant penalties, back taxes, and reputational damage.
The FBR’s detailed explanation aims to provide greater legal certainty, enhance tax compliance, and align Pakistan’s tax framework with international best practices. As the country’s economy becomes increasingly interconnected with global trade and e-commerce, understanding the scope of a permanent establishment will be essential for lawful and efficient business operations.