Inter-company dividends: Govt may provide relief from multiple taxation

ISLAMABAD: The government is likely to provide relief from multiple taxes on inter-company dividends in the coming budget (2023-24).

According to the Reform and Revenue Mobilisation Commission (RRMC) recommendations, for the budget 2023-24, in order to distinguish multiple taxation of inter-company dividends with an income tax exemption, it is recommended that a new subsection to be inserted in section 59B as under:

“Distribution of dividends within companies eligible for group relief under this section shall not be deemed a taxable event, provided dividend is declared by the recipient company.”

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The relief from multiple tax on inter-company dividend was introduced via Finance Act 2008 through introduction of clause 103A in Part I of Second Schedule to the Ordinance.

Subsequently, via Finance Act 2016, this relief was abruptly removed for companies eligible under section 59B of the Ordinance.

The said relief was reinstated again in 2019 through introduction of clause 103C in Part I of Second Schedule of the Income Tax Ordinance. In 2021, via Income Tax (Second Amendment) Ordinance 2021, clause 103C of Part I of Second Schedule, it has again regretfully been removed from the statue under the mistaken interpretation that it is an exemption.

In order to distinguish multiple taxation of inter-company dividends with an income tax exemption, it is recommended that a new subsection to be inserted in section 59B as under:

“Distribution of dividends within companies eligible for group relief under this section shall not be deemed a taxable event, provided dividend is declared by the recipient company.”

The measure would encourage deployment of funds of corporate entities and allow foreign partners to enter subsidiary of a Pakistan based Holding shareholding of the parent company, RRMC added.

It has been further recommended that the distribution of dividends within companies eligible for group relief under Section 59B of the Income Tax Ordinance shall not be deemed a taxable event provided the dividend is declared by the recipient company.

Copyright Business Recorder, 2023