Foreign Investment In Pakistan
Pakistan’s investment and corporate laws permit wholly-owned subsidiaries with 100% foreign equity in all sectors of the economy including manufacturing, trading and service sectors with full repatriation rights as to capital and dividends remittable through a commercial bank without the frequent need to access the State Bank of Pakistan (Central Bank).
Foreign investors have also been provided added legal protection against nationalization, expropriation and currency inconvertibility and for such contingencies the foreign investor would be entitled to fair compensation at the prevailing market value.
Most of the foreign companies operating in Pakistan are ‘private limited companies’ which can be incorporated by a minimum of two shareholders and two directors by registering the charter documents (Memorandum & Articles of Association) with the Securities & Exchange Commission of Pakistan (SECP). While previously there was a requirement for foreign companies to invest a minimum of USD 150,000, this requirement has now been done away with. This was acting as a major deterrent as many foreign companies were not willing to commit this amount of capital at the point of initially coming into Pakistan.
A foreign company can now set-up a wholly owned subsidiary in Pakistan without the minimum capital requirement. This measure has been taken to encourage further foreign investment into Pakistan.
Pakistan prides itself when it comes to ease of doing business. In a private limited company, there is full freedom for the Board to meet as often as they deem fit and in any country or location which might be convenient to all Board Members. Board Resolution can also be passed by circulation, with unanimous consent of all Board Members. Directors are elected for a term of three years on the basis one share-one vote. The Directors are eligible for re-election for more than one term. The Chairman, Directors and Chief Executive Officer can be of any nationality. However Indian, Israel and Yemen nationals are not preferred.
The day-to-day management of a company is entrusted to its Chief Executive who is appointed by the Board with a specific mandate. He operates under the supervision of the Board. The CEO is considered by law to be a statutory member of the Board with a full vote.
While the Directors need not be resident in Pakistan, the Chief Executive is expected to be resident in Pakistan to conduct day-to-day affairs of the company. If the Chief Executive is a foreign national, he would need to apply and obtain a ‘multiple work visa’, which is a combination of ‘work permit’ and ‘multiple visas’.
The company is statutorily required to retain a full time firm of auditors and lawyers. Any change as to the name, registered address, directors / shareholders / CEO / auditors/ lawyers, etc. would need to be notified to the SECP within maximum period of 15 days from the date of the change.
In terms of taxation, currently the corporate tax rate is set at 35% of the net income. Pakistan has signed Double Taxation Treaties with 52 countries which enable foreign investors to claim tax credit in their home-country in respect of corporate taxes paid in Pakistan. To encourage timely payment of dividend, an additional tax is levied if the reserves exceed the paid-up capital.
A private limited company can borrow up to 100% of paid up capital. Additionally a company with majority foreign equity can also borrow against a 5 year repatriable loan from its parent company at the rate of LIBOR (London Interbank Offered Rate) plus 1.5% interest.
As per SECP Instruction No.4 of 2011, it is now mandatory in case of companies with foreign shareholders and directors, to obtain an NOC (No Objection Certificate) from the Ministry of Interior Islamabad as a part of the company incorporation process. Information pertaining to the foreign shareholder as well as all foreign directors has to be provided to the SECP which forwards it to the Board of Investment who in turn forward it to the Ministry of Interior / Security Agencies which will review and give a security clearance to the SECP.
This Instruction was acting as a major deterrent for foreign investors as the e-security clearance usually ended up taking up to 3-4 months to complete after the filing of the application with the SECP. This ended up delaying and complicating the incorporation process which discouraged a whole range of foreign investors. This issue was brought to the attention of the Pakistan Board of Investment who, considering the interests of the foreign investors, have had the rule altered.
The revision now allows that companies incorporated with foreign shareholders and foreign directors are issued a ‘Certificate of Incorporation’ to commence with their business activities in Pakistan before the security clearance is issued by Pakistan Ministry of Interior. The only pre-requisite is that the foreign directors/shareholders submit an undertaking that they have subscribed shares and/or agreed to be directors and will immediately set aside in place of others if their security clearances are refused. The security clearance which still takes up to 3-4 months to complete after the filing of the application with the SECP, processes separately. However a formal Incorporation Certificate is issued within a few days of filing of the application for incorporation.
Foreign entities are now able to commence business within a few days of filing their application for incorporation. Foreign investors are no longer frustrated and can access the Pakistan market without unnecessary delay. This is a positive development and should play its role in facilitating foreign investors to work in Pakistan.
The views expressed in this article are those of the author and do not necessarily represent the views of CourtingTheLaw.com or any organization with which he might be associated.
I am interested in knowing that is the condition for getting ‘clearance from Ministry of Interior’ also incorporated in the companies ordinance 1984? Ref to sec, if yes.
Why are we going to treat foreign loan at LIBOR. The functional currency is Rupees, the company is operating in Pakistan. It should be KIBOR.
The clearance from Ministry of Interior is not incorporated in the Companies Ordinance 1984. This originates from SECP Instruction No.4 of 2011.
Since the loan in question is a foreign shareholders loan originating from abroad the interest payable is calculated under LIBOR as opposed to KIBOR. This is to ensure a fair return to the foreign shareholder extending the loan.
In the books of foreign shareholder it will appear at LIBOR but why would it appear at LIBOR in the accounts being submitted to SECP. Kindly Send me the reference for this section as well.
The LIBOR originates from Paragraph 15 of Chapter 19 of State Bank of Pakistan’s Foreign Exchange Manual.