The Central Board of Revenue (CBR) has issued details of documents required for providing group relief to holding companies under income tax law. According to a CBR circular, Section 59B was added through Finance Act 2004, giving a holding company some group concessions to set off losses incurred by its subsidiary.
The existing regime has been substituted through Finance Act 2007. The salient features of the scheme are: A subsidiary company may surrender its assessed losses (excluding capital loss or brought forward losses) for the tax year in favour of its holding company, or distribute it among the subsidiaries of the holding company.
The holding company shall be a public company listed on a registered stock exchange in Pakistan or a private limited company. The holding company, being a public company, should directly hold 55 percent or more of the share capital of the subsidiary company. Where none of the companies in the group is a listed company, the holding company shall hold directly 75 percent or more of the share capital of the subsidiary company.
The losses surrendered by the subsidiary company can be claimed by the holding company, or its other subsidiary, for setting them off from its 'income from business' in the tax years in which losses have been surrendered including the two following years.
There should be a continued ownership of prescribed shareholding for five years. In case of disposal of shares in a year bringing the ownership below the prescribed threshold, the holding company shall be required to offer for tax the amount of profit on which taxes have not been paid.
A company within the group engaged in the business of trading shall not be entitled to avail group relief and a private limited company, being a holding company, should get listed within 3 years from the year in which loss is claimed.
Group companies should be locally incorporated companies under the Companies Ordinance, 1984 and loss surrendered and claimed should have approval from the Board of Directors of the respective companies.
The circular has specified that the subsidiary company should continue the same business during the period of 3 years and all the companies in the group shall comply with such corporate governance requirements as may be specified by the SECP from time to time and are designated as companies entitled to avail group relief.
The subsidiary company shall not be allowed to surrender its assessed loss for set-off against income of the holding company for more than (consecutive) 3 tax years and any unadjusted surrendered loss after the period of 3 years, shall be available to the surrendering subsidiary company to carry forward according to statute of limitation.
The loss claiming company, with the approval of Board of Directors, shall transfer cash to the loss surrendering company equal to the amount of applicable tax rate on the profits to be set off against the acquired loss. The transfer of cash would not be taken as a taxable event in the case of either of the 2 companies.
Transfer of shares between companies and shareholders in one direction, would not be taken as a taxable event if the purpose is to hold share capital for formation of group and approval of Securities and Exchange Commission of Pakistan (SECP) or State Bank of Pakistan (SBP), whichever applicable, has been obtained.
However, sale and purchase from third party would be taken as taxable event and after acquiring shares for purpose of group formation, if sold in the open market or to a third party, shall attract tax on the capital gains, if any, arising from such sale, the circular said.
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