Property Taxation

Pakistan

General
Foreign nationals (resident or non-resident) cannot invest in real estate and property without special permission from the Government. However, a foreign investor may purchase or sell property through a company registered in Pakistan. Pakistani individuals holding dual nationalities are permitted to invest in Pakistani property.

Rental Income

In computing rental income the following allowances and deductions are permitted:

• for repairs, an allowance equal to one-fifth of the annual value;

• insurance premiums;

• any local tax or charge (other than income tax) against property or income therefrom;

• ground rent;

• interest on borrowed capital for renovation or reconstruction;

• rental income shared by some other institution under a special scheme.

Rental income is taxed as part of the total annual income of the individual or company. The current tax rates applicable to companies, non-resident or resident, range from 33% to 58% depending upon the business category they fall into. Income Tax on non-resident individuals is 20% or the regular Income Tax, whichever is greater.

Depreciation

Depreciation recorded in the financial statements is not allowed for tax purposes. Instead,

depreciation allowances are given on assets owned by the assessee and used for business purposes. Depreciation is calculated on the declining-balance method at the following rates:

Building 5%

Residential quarters for labour 10%

Plant and Machinery 10%

Furniture and Fixtures 10%

There are several types of plant and machinery for which different rates apply. Depreciation is also available on plant and machinery given on lease by a scheduled bank, a financial institution or a leasing company approved by the Central Board of Revenue (CBR) but limited to its lease income.

No depreciation is applied on land.

Initial Depreciation

In addition to the above depreciation allowance, Initial Depreciation is also allowed in the first year at the following rates:

Type of Building Rates

(i) Residential quarters for labour 25%

(ii) Building given on lease by a scheduled bank, a financial institution or a leasing company approved by the CBR 10%

(iii) Building owned and used by an educational institution 25%

(iv) Other building 10%

Disposal of Property

Capital Value Tax (CVT) has been abolished on immovable properties.

Withholding Tax
The paying authorities are required to withhold taxes at the time of payment to non-residents, at the following rates:

• Companies 43%

• Others 20% or rates applicable to a resident, whichever is greater

• Or a rate particularly specified in the Income Tax Ordinance / the relevant Double Tax Treaty Any person responsible for making a payment on account of rent, on behalf of Government, a local authority, a company or a foreign diplomatic mission shall, where the annual rent of property exceeds PKR 100,000, deduct tax at source, at the rate of 7.5%.

Dividends
At the time of remitting dividends to a non-resident company, tax is withheld at the rate of 15% of the gross dividend, unless a different rate is specified in the Double Tax Treaty. No tax is withheld from post tax profits remitted by branches of a foreign company.

Wealth Tax

Wealth tax has been abolished from assessment year 2001-2002. Consequently, no wealth tax will be payable on assets held at June 30, 2001 and thereafter. However, wealth tax will be chargeable on net assets held at June 30, 2000 (assessment year 2000-2001).

Consequential amendments have, therefore, been made whereby collection of wealth tax on motor vehicles, advance payment of tax and payment of minimum tax have been withdrawn from July 1, 2000.

Loss Carryforward

If a company incurs a loss on transfer of real estate property, but buying or selling property is not pursued as a business, then the loss on sale of land and partially on sale of building cannot be set off against income during the year nor can it be carried forward. However, if the individual/company trades in real estate as a business, then the total loss can be carried forward up to six years.

Transaction Costs

Transaction costs, which have recently seen a rapid increase, include such expenses as Stamp Duty, Zila Tax, Registration fees etc., Presently, the aggregate of these costs ranges from 5% to 13% of the property's declared value at the time of registration.

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