Pakistan is one of the few emerging economies where the concept of Holding Companies has been introduced and well placed in the fiscal and corporate legislation.
Introduction of holding company regime, which is considered to be an essential element to promote documentation, corporatization, investment planning and preparing the industrial groups to compete in the international business environment was introduced on the basis of a detailed study by a Task Force constituted by the Federal Government which included representatives of the Federal Board of Revenue, Securities & Exchange Commission of Pakistan and State Bank of Pakistan.
One of the most important aspects of promotion of holding company structure is to eliminate the incidence of double taxation on inter-corporate dividend. Such double taxation incidence arises on account of the fact that an intermediary entity is necessarily placed for formation of the group structure. The ultimate incidence for the ultimate recipient of dividend remains the same as such dividend is taxed whenever received by the owners of the group. Thus there is effectively no loss of revenue of the group and accumulation of the profits in the holding company incentivizes investment. This is effectively the only feasible manner of investment promotion by any industrial group and this practice is adopted in all well managed fiscal systems.
It is our opinion that removal of exemption for inter-corporate dividend has been made inadvertently without considering and realising the underlying concept of the holding company structure, the financial and investment impact for the same. In the Finance Bill 2015 similar action was undertaken and the same was corrected by Finance Minister's intervention after a discussion with our undersigned Senior Partner. Many major industrial groups of the country, including Nishat, Dawood, Engro, Habib, Tabba, Ibrahim and IBL, have already streamlined their operations in line with the aforesaid policy and any change will adversely affect the investment strategy for the same.