ISLAMABAD: The Tax Policy Office (TPO) of the Ministry of Finance is reviewing a proposal submitted by the Pakistan Business Council (PBC) to reduce multiple layers of tax on dividends paid within corporate group companies, known as Inter-Corporate Dividends (ICDs).
The PBC has shared a detailed recommendation with the TPO, urging the government to restore “tax neutrality” for dividends passed from one company to another within the same corporate group. The aim is to prevent the same income from being taxed repeatedly.
In a letter sent to Dr. Najeeb Ahmed Memon, Director General of the TPO, the PBC highlighted flaws in the current tax system. It explained that under existing laws, profits earned by a subsidiary company are first taxed through corporate income tax, super tax, and other charges. When these profits are then paid to a holding company as dividends, they are taxed again. If the holding company distributes the same income to its shareholders, a third round of tax applies.
Because of this repeated taxation, the total tax burden on corporate profits can reach nearly 68 percent. As a result, investors receive only about Rs32 out of every Rs100 earned at the business level.
The PBC warned that such heavy taxation makes doing business more expensive. It reduces returns for investors, discourages companies from reinvesting profits, and pushes capital toward informal or less transparent business structures.
According to the council, the current tax treatment of ICDs also discourages joint ventures, public listings, and strategic partnerships. Even small equity investments can trigger additional dividend taxes, making collaboration unattractive. In some cases, both local and foreign investors have delayed investments due to these tax inefficiencies.
The PBC also pointed out that this issue affects the privatization of state-owned enterprises (SOEs). Additional taxes on dividends lower company valuations. Estimates suggest that Pakistan’s SOE equity base, worth around Rs5.5 trillion, could lose up to 25 percent of its value because of ICD taxation—far more than the revenue currently collected from this tax.
The council recalled that the ICD tax-neutral system was originally introduced in 2007-08 after consultations involving the FBR, SECP, ICAP, and industry experts. Its purpose was to avoid taxing the same income multiple times within genuine corporate groups, in line with international standards.
That earlier system included strict conditions to prevent misuse, such as minimum ownership requirements, mandatory holding periods, business continuity rules, SECP certification, and limits on related-party transactions. These safeguards ensured that only genuine business groups benefited.
Globally, most developed and developing countries do not tax dividends paid within corporate groups. Tax neutrality for ICDs is widely seen as essential for encouraging business growth, investment, and competitiveness.
The PBC argued that Pakistan’s current approach puts compliant local businesses at a disadvantage compared to foreign investors and informal sectors. It has requested the government to restore tax neutrality for ICDs where holding companies meet substantial ownership thresholds, similar to the earlier framework.
According to the council, this change would not be a tax giveaway but a correction of a structural flaw. It would help attract investment, improve SOE privatization outcomes, strengthen capital markets, promote transparency, and support sustainable long-term revenue growth.
