Pakistan’s corporate sector may see some relief as the government reviews a proposal to ease the heavy tax burden placed on dividends exchanged within corporate groups. The Tax Policy Office (TPO) of the Ministry of Finance is examining recommendations from the Pakistan Business Council (PBC) that call for ending repeated taxation on inter-corporate dividends (ICDs).
ICDs arise when one company distributes profits to another company within the same business group, such as a subsidiary paying dividends to its parent company. According to the PBC, Pakistan’s current tax framework treats these internal dividend flows as fresh income at each stage, resulting in the same earnings being taxed multiple times.
In its submission to the TPO, the council explained how this layered taxation significantly erodes corporate profits. A subsidiary’s income is first reduced through corporate income tax, super tax, and related levies. When the remaining profits are transferred to the holding company, dividend tax is applied once again. If the holding company later distributes the same amount to its shareholders, the income is taxed for a third time.
This structure pushes the effective tax rate on corporate profits to nearly 68 percent. In practical terms, shareholders end up receiving only about one-third of the income originally generated by the business. The PBC argues that such an outcome makes investment in the formal corporate sector far less attractive.
The council cautioned that excessive dividend taxation raises the cost of doing business and limits companies’ ability to reinvest earnings. It also discourages joint ventures, strategic alliances, and equity partnerships, as even minor shareholdings can trigger additional tax liabilities. In some cases, potential investors—both local and foreign—have reportedly delayed or abandoned investment plans due to these inefficiencies.
The issue also has implications for the government’s privatization agenda. According to the PBC, taxing inter-corporate dividends reduces company valuations, making state-owned enterprises (SOEs) less appealing to buyers. Estimates suggest that Pakistan’s SOE equity base, valued at roughly Rs5.5 trillion, could lose up to 25 percent of its worth because of ICD-related taxation—an impact far greater than the revenue the tax generates.
The PBC noted that Pakistan had previously addressed this problem. A tax-neutral approach to ICDs was introduced in 2007–08 after consultations involving the Federal Board of Revenue, the Securities and Exchange Commission of Pakistan, accounting professionals, and industry stakeholders. That system was designed to prevent the same income from being taxed repeatedly within legitimate corporate groups.
To prevent abuse, the earlier framework included strict conditions such as minimum ownership requirements, mandatory holding periods, continuity of business operations, regulatory certification, and controls on related-party transactions. These safeguards ensured that tax neutrality applied only to genuine business structures.
Globally, exempting inter-corporate dividends from additional taxation is a common practice. Many countries view such neutrality as essential for promoting investment, improving competitiveness, and supporting healthy capital markets.
The PBC argues that Pakistan’s current policy places compliant domestic businesses at a disadvantage while encouraging informal arrangements. It has urged the government to restore tax neutrality for ICDs where holding companies meet substantial ownership thresholds, following international norms.
According to the council, this reform should not be seen as a concession but as a necessary correction. By removing multiple layers of tax on the same income, Pakistan could improve investor confidence, strengthen capital markets, support successful privatization, and create a more sustainable foundation for long-term economic growth.