This blog is written by Mr. Atif Jan, Associate Taxation and Corporate Services. Please read this blog and provide your valued comments.
Group Taxation & Group Relief
A locally incorporated holding company and subsidiary of a 100% owned group may be taxed as one group by giving an irrevocable option for taxation as one fiscal unit.
The option of group taxation shall be available to those group companies which comply with such corporate governance requirements as may be specified by the Securities and Exchange Commission of Pakistan from time to time and are designated as companies entitled to avail group taxation.
Any company, being a subsidiary of a public company listed on a registered stock exchange in Pakistan owning and managing an industrial undertaking or an undertaking engaged in providing services may surrender its assessed loss for the tax year other than brought forward losses in favour of its holding company provided such holding company owns or acquires seventy-five per cent or more of the share capital of the subsidiary company.
The loss surrendered by the subsidiary company may be claimed by the holding company for set off against its income under the head income from Business in the tax year and the following two tax years subject to the following conditions.
- There is continued ownership of business of the subsidiary company to the extent of seventy-five per cent or more for five years.
- A company within the group engaged in the business of trading shall not be entitled to avail group relief.
- The holding company being a private limited company with seventy-five per cent of ownership of share capital gets itself listed within three years from the year in which loss is claimed.
- The group companies are locally incorporated companies under the Companies Ordinance, 1984.
- The loss surrendered and loss claimed under this section shall have approval of the Board of Directors of the respective companies.
- The subsidiary company continues the same business during the said period of three years.
- All the companies in the group shall comply with such corporate governance requirements as may be specified by SECP from time to time.
- Any other condition as may be prescribed.
The relief under group taxation will not be available to losses prior to the formation of the group. Any company that is the subsidiary of a holding company may surrender its assessed loss for the year to its holding company or its subsidiary (in the proportion of the shareholding held by the holding company in the subsidiary) or between another subsidiary of the holding company, provided that the holding company directly holds 55% or more capital of the subsidiary if one of the companies is a listed company. However if none of the companies is a listed company, the holding requirement is 75% or more. The loss can be surrendered for a maximum of three years, and the required holding is for at least five years. Where the losses surrendered by a subsidiary company are not adjusted against income of the holding company in the said three tax years, the subsidiary company shall carry forward the unadjusted losses in accordance with the provision of section 57 (Carry forward of business losses) of the Income Tax Ordinance.
The transfer of shares between companies and the shareholders of the group would not be taken as a taxable event provided the transfer is to acquire share capital for formation of the group and approval of the Security and Exchange Commission of Pakistan or State Bank of Pakistan as the case may be has been obtained in this effect.
Also Inter-corporate dividends are exempt from levy of tax in case of entities availing group taxation and filing consolidated group returns.