Corporate sector: restoration of tax neutrality for ICDs under review
ISLAMABAD: Tax Policy Office, Ministry of Finance is reviewing a proposal of Pakistan Business Council (PBC) to restore tax neutrality for dividends distributed within corporate group structures (Inter-Corporate Dividends) to avoid excessive/multiple taxation on the corporate sector.
In this regard, the PBC has submitted a detailed proposal to the TPO, Ministry of Finance.
According to a communication of the PBC to Dr Najeeb Ahmed Memon, Director General, TPO, the PBC has highlighted restoration of tax neutrality for Inter-Corporate Dividends (ICDs).
The PBC has drawn particular attention to a structural distortion in Pakistan’s tax framework relating to the taxation of ICDs. In this regard, the PBC has requested the restoration of tax neutrality for dividends distributed within corporate group structures, in line with sound tax policy principles and international best practices.
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Under the current tax regime, profits earned by operating subsidiaries are subject to corporate income tax, super tax, and other statutory levies.
When these after-tax profits are distributed to holding companies, they are taxed again as dividends, and upon onward distribution to ultimate shareholders, taxed a third time. This results in cumulative effective taxation approaching 68 percent, leaving investors with approximately Rs32 out of every Rs100 earned at the operating level.
Such excessive multiple taxation significantly inflates the cost of capital, suppresses investment returns, discourages reinvestment of earnings, and incentivizes capital flight toward informal or less transparent structures.
The PBC opined that the current ICD treatment has far-reaching consequences. Investors must generate disproportionately high pre-tax returns merely to match low-risk alternatives, discouraging long-term productive investment.
Even minimal co-investments trigger dividend taxation, discouraging joint ventures, IPOs, and strategic partnerships. In recent instances, potential equity participation has been deferred due to ICD inefficiencies reducing foreign and domestic investment inflows, the PBC maintained.
State-owned entities (SOEs) privatisation: Additional tax layers materially depress enterprise valuations.
Estimates indicated that the Rs 5.5 trillion SOE equity base could suffer valuation discounts of approximately 25 percent, significantly outweighing the modest annual revenue collected from ICD taxation.
The ICD framework introduced in 2007-08 was developed through a structured taskforce comprising representatives from the Federal Board of Revenue (FBR), Securities and Exchange Commission of Pakistan (SECP), Institute of Chartered Accountant of Pakistan (ICAP) and industry experts. Its objective was to prevent multiple taxation of the same income within genuine group structures, in line with global best practices.
The earlier ICD regime included robust safeguards, including minimum effective shareholding thresholds (55 percent for listed groups, 75 percent for unlisted groups); mandatory holding periods to prevent short-term extraction; continuity of business requirements to ensure economic substance; SECP certification of group structures and arm’s-length requirements and exclusions for trading and foreign subsidiaries.
These guardrails ensured that ICD tax neutrality applied only to bonafide operating groups and could not be misused for tax planning.
Global Alignment and Competitiveness International benchmarking shows that developed and developing economies across Asia, Europe, North America, Africa, and Oceania do not tax inter-corporate dividends within bona fide group structures, and typically with far fewer safeguards than those previously embedded in Pakistan’s regime.
Tax neutrality for ICD is a cornerstone of competitive tax systems that encourage scale, diversification, and global competitiveness. Pakistan’s current position places organized, compliant domestic investors at a disadvantage relative to both foreign investors and informal sectors.
The council has requested restoration of tax neutrality for ICDs. for holding companies meeting substantial ownership thresholds (e.g. 55 percent plus effective shareholding), consistent with Pakistan’s earlier framework.
This reform would correct a structural anomaly rather than introduce a new tax concession; unlock domestic and foreign investment; improve SOE privatization outcomes and capital market depth; support formalization, transparency and long-term revenue growth, PBC added.
Copyright Business Recorder, 2026