CHAP# 5

TAXATION
OF PERSON
Asad Rafaq
Share of a Member from
AOP
The share of a member in total income of AOP shall comprise on
the following amounts received by him:
• Share in the divisible income of AOP
• Profit on debt
• Brokerage
• Commission
• Salary
• Any other remuneration received or due from AOP
Company as Member of an
AOP
Where at least one member of an AOP is a company then the tax liability of the
AOP and the company/companies shall be determined as below:

• Share of the company (being member of the AOP) shall be excluded from the
total income of the AOP. The AOP shall be taxable for its residual income
• The company shall be taxed separately in respect of its share from AOP at the
rates applicable to the companies.
CHANGE IN THE
CONSTITUTION OF AN AOP
The following procedure shall be adopted if, at the time of filing of return, it is found that
during the tax year a change has occurred in the constitution of the AOP
1. The liability of filing the return shall be on the AOP as constituted at the time of
filing of return.
2. The AOP shall be assessed as constituted at the time of filing of return.
3. The share of each member of the AOP shall be determined by taking into account:

 The terms of the partnership deed,

 The income pertaining to the period prior to the change and after the change in
the constitution.
TAXATION OF FOREIGN-SOURCE
INCOME OF RESIDENTS
As a general principle the residents are liable to tax for their total
income whether it is a Pakistan-source income or a foreign-source
income. However, there are some specific provisions for taxation
of foreign-source incomes of residents, which are discussed in the
coming paragraphs.
Foreign-Source Salary Income
A foreign-source salary income of a resident individual will be
exempt from tax if he has paid foreign income tax in respect of
such income. Payment of foreign tax means that the employer has
deducted the tax at source and deposited the same to the revenue
authority of the country in which employment was exercised.
TAXATION OF COMPANIES
A company is a separate legal entity distinct from its members (i.e.,
shareholders). Thus the tax liability of a company and its members
shall be determined separately and each of them shall be liable for
their respective tax liability. The incomes of a company shall be
charged to tax in the light of the following principles.
1. Taxable income (other than the dividend income) shall be
computed and treated as per normal procedure. Income taxable
under Normal Tax Regime (NTR) shall be charged to tax at the
rate of applicable on taxable income of the company.
2. The dividend income received by the company shall be treated as
a separate block of income and tax shall be computed by applying
the rates specified in Division-Ill, Part-1 of First Schedule to the
gross amount of dividend. This income is taxable under FTR.
 DISPOSAL OF BUSINESS BY
RESIDENT INDIVIDUAL TO
WHOLLY-OWNED COMPANY
Where resident individual disposes of all the assets of his business to a resident company, no
gain or loss on disposal of assets shall be taken to arise if the following conditions are satisfied:
■ The consideration for the disposal is in the form of shares in the company.
■ The shares should not be redeemable shares.
■ The transferor must hold all the shares issued by the company immediately after the
disposal of assets.
■ The company has undertaken to discharge the liability against such assets, if any.
■ The liability in respect of such assets should not be more than the transferor's cost of assets
at the time of disposal.
■ The fair market value of the shares and the assets (net of liabilities undertaken by the
company) must be substantially the same.
■ The company must not be exempt from tax for the tax year in which disposal takes place.
Notes
■ The character of an asset acquired by the company shall remain the same as it had in the hands of the
transfer
■ The company's cost of acquisition shall be determined as per the table given below:

■ Where at the time of disposal of assets, any amount of depreciation or amortization has not been set off
against the income of transferor; the company shall be entitled to deduct the same against its incomes in the
tax year in which transfer is made. [95(2) (c)]This deduction shall be subtracted from the income of the
company after allowing all other deductions under the law
■ The total value of the shares shall be equal to the net worth (cost less liabilities) of the assets transferred to
the company.
DISPOSAL OF BUSINESS BY
RESIDENT AOP TO WHOLLY
OWNED COMPANY
Where a resident AOP disposes of its all assets to a company
which is wholly-owned by the association, then the treatment
and legal provisions applicable to the transfer, transferor and
the company shall be exactly the same as discussed in case
of an individual disposing his all assets toa company.
However, there is an additional condition, i.e., that each
member of the association must have the same interest in
shares as was vested to him immediately preceding the
disposal of assets.
DISPOSAL OF ASSETS BETWEEN
WHOLLY-OWNED COMPANIES
No gain or loss on disposal of an asset shall be taken to arise if the following conditions are
satisfied:
1. The asset is disposed of by a resident company to another resident company.

2. At the time of disposal both resident companies belong to a wholly owned group of
companies.
3. Transferee has undertaken to discharge any liability in respect of the asset acquired.
4. The liability against the asset must not be more than the transferor's cost of the asset at the
time of disposal.
5. The transferee is not exempt from tax for the tax year in which disposal takes place.
 DISPOSAL OF ASSET UNDER SCHEME OF
ARRANGEMENT AND RECONSTRUCTION
No gain or loss shall be taken to arise on disposal of asset from one company to another company if
following conditions are satisfied:
1. The disposal of asset is by virtue of a Scheme of Arrangement and Reconstruction undersection
282L of the Companies Ordinance, 1984, sections 279 to 282 of the Companies Act,2017 or
section 48 of the Banking Companies Ordinance, 1962
2. The transferee must undertake to discharge any liability in respect of the asset acquired
3. The liability in respect of such asset must not exceed the transferor's cost of the asset at the time
of disposal
4. The transferee must not be exempt from tax for the tax year in which the disposal takes place
5. The Scheme of Arrangement and Reconstruction is approved by the High Court, SBP or SEC, as
is applicable
6. 6The Scheme is approved on or after 01-07-2007
 Continue.
In case of disposal of asset under above-referred scheme, the asset acquired by the transferee shall be
treated as having the same character as it had in the hands of the transferor. The transferee's cost in respect
of acquisition of the asset shall be determined as below:
1. Depreciable Asset or Intangible: The written down value of the asset or intangible immediately
before its disposal.
2. Stock-in-Trade: The lower of cost or net realizable value of the stock-in-trade.
3. Any Other Asset: The transferor's cost at the time of disposal.
Where the transferor has any unabsorbed depreciation immediately before the disposal of asset, such
amount shall be allowed as deduction (under sections 22, 23 and 24) to the transferee in the tax year in
which transfer is made. These deductions shall be taken into account last. No gain or loss shall be taken to
arise on issue, cancellation, exchange or receipt of shares as in result of scheme of arrangement and
reconstruction approved by the High Court, SBP or SECP, as the case may be, on or after 01-07-
2007.Where the shares issued vested by virtue of the Scheme of Arrangement and Reconstruction, are
disposed of, the cost of shares shall be the cost prior to the operation of such scheme
 CHANGE IN CONTROL OF AN
ENTITY
Where there is a change of fifty percent (50%) or more in the underlying ownership of an entity. Then any loss
incurred for a tax year before the change shall not be allowed as deduction in the tax year after change.
However, this provision shall not apply if the following conditions are fulfilled:
1. The entity continues to conduct the same business until the loss has been fully set off
2. The entity does not engage in any new business or investment after the change until the loss has been fully
set off.
From the above it is evident that an entity may set off it losses incurred prior to the change in under lying
ownership if it continues to conduct the same business and if it does not engage in any new business or
investment.
Entity means a company or an association of persons. [98(2)]
Underlying Ownership means an 'ownership interest' in the entity held, directly or indirectly through an
interposed entity or entities, by an individual or by a person not ultimately owned by individuals. [98(2)]
Ownership Interest means a share in a company or the interest of a member in an Association of Persons.
[98(2)]
 GAIN ON DISPOSAL OF ASSETS
OUTSIDE PAKISTAN
Any gain on disposal or alienation outside Pakistan of an asset located in Pakistan of a non-resident company is treated separately and charged to tax
as per the special provisions applicable to such gain. The relevant provisions are discussed below.
 Gain on disposal of such asset shall be treated as 'Pakistan-source income’.
 Where the asset is any share or interest in a non-resident company, the asset shall be treated to be located in Pakistan if: i)Such asset derives,
directly or indirectly, its value wholly or principally from the assets located in Pakistan.The assets (i.e., shares or interest) disposed or alienated
are 10% or more of the share capital of the non-resident company.
 The share or interest shall be treated to derive its value principally from the assets located in Pakistan if the value of such assets exceeds Rs.
100,000,000 and represents at least 50% of the value of all the assets owned by the non-resident company. The valuation date for this purpose
shall be the last day of the tax year preceding the date of transfer of a share or an interest in the company.
 For the purpose of this section, the value of the asset shall be the prescribed fair market value without reduction of liabilities.
 Where the entire assets of the non-resident company are not located in Pakistan and the share of or interest in such company are disposed or
alienated outside Pakistan, the income of the non-resident company shall be treated to be located in Pakistan only to the extent it is reasonably
attributable to assets located in Pakistan.
 That income shall be determined as per the rules prescribed by the FBR.A resident company, for the purpose of determination of gain and tax on
disposal or alienation of asset, shall furnish to the CIR the prescribed information or document within 60days of the transaction in a case where,
1: The asset of a non-resident company derives, directly or indirectly, its value wholly or principally from the assets located in
Pakistan; and
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2)The non-resident company holds, directly or indirectly, such assets through a resident7.8company.The information, etc., shall be
submitted to the CIR in a prescribed statement. The CIR may, by a written notice, require a resident company to furnish information,
documents and statement within a period of less than 60 days.
 The above-referred resident company shall collect advance tax from is non-resident company within 30 days of the transaction. The
tax to be collected shall be higher or
1)20% of fair market value less cost of acquisition of the asset;
2)10% of the fair market value of the asset.
 The person acquiring the asset from the non-resident person shall:
1)Deduct tax from the gross amount paid as consideration @ 10% on the fair market value of the asset;
2)Deposit the tax deducted to the Federal Government within 15 days of the payment to the non-resident.
 Where tax has been deducted in the manner as desired under point No. 8 above in a case discussed in point No. 7 above, the tax so
deducted shall be adjusted against the amount of tax payable under: point No. 7 above.10.
 Where tax has been paid as per the above discussed procedure, the non-resident company shall have no tax liability in respect of gain
on disposal of depreciable asset u/s 22(8) or capital gains u/s 37 or 37A.Note: Where any gain is taxable u/s 101A and also under any
other provision of the Income Tax Ordinance, the said gain shall not be taxable u/s 101A; rather, shall be taxable under that other
provision
 CONTROLLED FOREIGN
COMPANY
'Controlled foreign company' (CFC) means a non-resident company (NRC), if
■ The share capital or voting rights of the NRC are directly or indirectly held:
i)More than 50% by one or more persons resident in Pakistan
Il)More than 40% by a single person resident in Pakistan
■ Tax paid (after all foreign tax credits) by NRC to any foreign tax authority on its income derived or
accrued during a 'foreign tax year is less than 60% of the tax payable on that income under the
Income Tax Ordinance
■ The NRC does not derive 'active business income', and
■ The shares are not traded on any stock exchange recognized by law of the country or jurisdiction of
which the NRC is resident for tax purpose.