Doing Business In… 2023

We contributed to the Pakistan chapter of the Chambers Global Practice Guide for Doing Business In… The chapter serves as a point of reference for businesses and investors seeking to understand the legal framework for doing business in Pakistan. The Pakistan chapter covers the judicial system and laws relating to foreign investment, companies, employment, tax, competition, intellectual property and data protection. It also highlights recent policies and reforms impacting the business environment.

Legal System

Pakistan is a common law jurisdiction with largely codified laws. It has an independent judiciary with a hierarchy of courts. Courts follow an adversarial system, and precedent is binding. The independent judiciary consists of civil and criminal courts, with the High Courts generally exercising appellate jurisdiction. The High Courts also exercise constitutional jurisdiction, under which they can adjudicate challenges to the legality of actions of government authorities. Specialized courts and tribunals decide disputes related to areas such as tax, intellectual property, banking and insurance. The Supreme Court of Pakistan is the highest court of appeal and also decides matters of public importance involving the enforcement of fundamental rights guaranteed under the Constitution.

Foreign Investment

Foreign investment is open in most sectors, with some limits in media and aviation. Generally, foreign investment does not require specific approvals other than those required by similar domestic investments.

Recent policies include the Investment Policy 2023 (PIP 2023), which reaffirms Pakistan’s open-admission policy for foreign investment. PIP 2023 coincided with the creation of the high-powered Special Investment Facilitation Council (SIFC), which aims to streamline approval processes and policy reforms. The SIFC targets USD 100 billion in investments in key sectors, including IT, agriculture, mines and minerals, energy and defence production.

The recently enacted Foreign Investment (Promotion and Protection) Act 2022 allows incentives, including regulatory and tax exemptions, to be given to “qualified investments” of at least USD 500 million.

The Inter-Governmental Commercial Transactions Act 2022 allows the federal government to give exemptions from regulatory compliance to commercial transactions in pursuance of inter-governmental agreements.

Corporate Vehicles

The Companies Act 2017 allows for the creation of single-member companies, private limited companies and public companies.

Companies are required to have directors, although the minimum number varies between the type of company. Only natural persons can be directors. Every company is required to have a chief executive officer.

Directors owe fiduciary duties and can also face liability for ultra vires actions. The Companies Act protects independent and non-executive directors of listed companies and public sector companies. Shareholders’ liability is generally limited.

Employment

Legislation on labour and employment in Pakistan distinguishes between workers (also referred to as “workmen” under some laws) and other employees. An employee performing primarily skilled or unskilled, manual or clerical work is treated as a worker. Laws relating to labour and employment afford greater protection to workers.

The main statutes are the Shops and Establishments, Standings Orders and Terms of Employment Ordinances and Acts, Factories Acts and Industrial Relations Acts.

There are no laws specifically regulating the employment of persons engaged as managers, supervisors or similar roles; their employment relationship is governed largely by their contracts of employment.

Taxation

Corporate income is taxed up to 29% of their taxable income. High-earning persons, including companies, must also pay super tax at rates ranging from 1% to 10% of total income. Certain incomes, such as dividends and interest, are subject to income tax at lower rates. Further, companies are subject to withholding obligations on various kinds of payments.

General sales tax on goods at 18% is levied under the federal Sales Tax Act 1990, while sales tax on services is levied at 13-16% under provincial legislation. Both are forms of value-added tax.

Tax incentives exist for investments in greenfield manufacturing, startups, and businesses up in Special Economic Zones, Special Technology Zones and Export Processing Zones.

Thin capitalization and transfer pricing rules apply. Anti-avoidance provisions deter tax evasion.

Competition Law

Mergers meeting local nexus and size tests require competition clearance from the Competition Commission under the Competition Act 2010. Anti-competitive agreements are prohibited unless exempted. Abuse of a dominant position is prohibited.

Intellectual Property

IP laws protect patents, trademarks, industrial designs and copyrights. Pakistan also recognises other intellectual property, such as layout designs of integrated circuits and plant breeders’ rights. Specialized IP tribunals adjudicate infringement disputes. However, trade secrets and other confidential information do not have statutory protection and may be protected by contract.

Data Protection

There is currently no generally applicable data protection legislation in Pakistan.

The Prevention of Electronic Crimes Act 2016 criminalises the unauthorised access, sale, use and transmission of data but does not specifically regulate the rights and obligations of controllers and processors of data in Pakistan.

Current Trends

Legal reforms in progress include unified sales tax returns between federal and provincial authorities, Madrid Protocol trademark rules through the Trade Marks (Amendment) Bill 2023, and incentives for agriculture FDI under the Green Pakistan Initiative related to agriculture.

For a comprehensive overview of the laws and regulations applicable to business and investments in Pakistan, read the Pakistan Chapter of the 2023 edition of the Chamber Global Practice Guide to Doing Business In…

For more information, contact one of our partners: Mayhar Kazi, Nadir Altaf, Shafaq Rehman and Mazhar Bangash.