What Foreign Companies Must Consider Before Operating in Pakistan
So, you’re a foreign company interested in expanding into Pakistan. Exciting! Pakistan’s growing population of over 220 million people and developing economy present lots of opportunities. But before you dive in, there are some key things you need to consider. Operating in Pakistan is not like operating in other places—there are unique challenges that come with the territory. You’ll have to navigate complex laws, cultural differences, and security issues. If you go in blind, you could face major obstacles that end up costing you a lot of time and money.
The good news is, many foreign companies have successfully launched and operated in Pakistan. With the right preparation and partnerships, you can too. This article will walk you through the most important operational, financial and legal matters to understand before setting up shop in Pakistan. Forewarned is forearmed—if you know what to expect, you’ll be in a much better position to overcome challenges and thrive in this emerging market. Pakistan awaits! Are you ready for the adventure?
Financial Regulations and Taxation
To operate legally and successfully in Pakistan, foreign companies must understand the country’s financial regulations and tax laws. Some key things to consider:
- Pakistan has a complex tax structure with federal, provincial, and local taxes. The two main taxes are income tax and sales tax. Income tax rates range from 15-35% depending on company size and industry. Sales tax is around 17% on most goods and services.
- Strict foreign exchange controls are in place. All foreign currency transactions must go through authorized dealers like banks. Foreign companies can only repatriate dividends, profits, and investments through approved banking channels.
- Double taxation treaties exist with over 60 countries to avoid double taxation. See if your country qualifies. If not, you may face taxation in both countries on the same income.
- An audited financial statement and tax return must be filed annually. Accounts must be maintained in accordance with international accounting standards. Statutory audits are required for most companies.
- All employees, including foreigners, are subject to income tax on salary and benefits. As the employer, you must deduct taxes and social security contributions before paying employees.
- Strict anti-money laundering laws require disclosing sources of
- . Suspicious transactions are monitored and may be reported.
Following Pakistan’s financial and tax regulations can be complicated, but local accounting and advisory firms like Usman Rasheed & Co. are there to help foreign companies establish and operate legally. With the right guidance, you can thrive in Pakistan’s fast-growing economy.
Legal Structures for Foreign Companies
If you’re a foreign company looking to set up shop in Pakistan, you’ll need to determine the right legal structure for your operations. There are a few options to consider:
- Private Limited Company: This is a popular choice for foreign companies. It limits the liability of shareholders and has less stringent requirements than a public limited company. You’ll need at least two shareholders and two directors to get started.
- Branch Office: This allows a foreign company to carry out business activities in Pakistan under the same name as the parent company. It’s easy to set up but the parent company is liable for all obligations and liabilities.
- Liaison Office: This is a good option if you want to explore the Pakistani market before establishing a permanent presence. A liaison office can conduct research and marketing but cannot generate revenue. It’s easy to close down if needed.
- Partnership: This structure is formed by at least two partners who share profits, risks, and liabilities. The process to register a partnership firm is straightforward but partners have unlimited liability.
- Representative Office: This allows a foreign company to establish a non-revenue generating presence to market products, provide information, and facilitate contacts. It cannot conduct direct business and is fully dependent on the parent company.
No matter which structure you choose, you’ll need to register with the Securities and Exchange Commission of Pakistan and meet their requirements. The right legal structure for your company depends on your business objectives and risk appetite. Consult an expert to determine what will work best in your unique situation.
Hiring and Managing Employees
When hiring employees in Pakistan, you’ll want to tap into the skilled, educated workforce. Advertise jobs on popular sites like Rozee.pk, LinkedIn, and company websites. Be prepared to receive many applications and shortlist candidates for interviews. Look for degrees from reputable universities, English fluency, and relevant work experience.
Navigating Local Labor Laws
Familiarize yourself with Pakistan’s labor laws to avoid legal issues. Key things to know:
- Employees are entitled to 14 days paid annual leave, 10 paid public holidays, and 12 weeks paid maternity leave.
- The workweek is 48 hours over 6 days. Employees must receive 1 weekly rest day and overtime pay.
- Terminating employees requires proper notice and severance pay. Be very careful, as labor courts typically side with employees.
Providing Competitive Compensation
Offer salaries and benefits that match or exceed local standards to attract and retain top talent. Things to consider:
- The minimum wage in Pakistan is ~$145 USD per month. Pay higher for professional roles, especially in major cities.
- Offer additional benefits like health insurance, retirement plans, and performance bonuses.
- Annual salary increases and promotions are expected. Plan to evaluate and adjust compensation regularly.
Training and Developing Your Team
Investing in employee growth and development leads to greater productivity, innovation, and loyalty.
- Provide ongoing on-the-job training and mentorship.
- Offer opportunities for career progression and leadership roles.
- Consider sending top employees for additional training, education, conferences, and exchange programs.
With the right recruiting, compensation, and training practices in place, you’ll build an exceptional team to help your company thrive in Pakistan. Treat your employees well, and they’ll become your greatest asset.
As a foreign company operating in Pakistan, you’ll need to understand the country’s import and export requirements to legally conduct business. Some key considerations include:
To import or export goods, you’ll need to provide proper documentation like commercial invoices, packing lists, certificates of origin, and more. Work with a reputable customs broker to ensure you have all necessary paperwork in order.
Duties and Taxes
Most imports into Pakistan are subject to customs duties and sales tax. The rates depend on the type of good and its harmonized code. You must pay all owed duties and taxes before your shipment is released from customs.
Restricted and Prohibited Goods
Some imports like alcohol, firearms, and agricultural products have restrictions or are banned. Check with customs officials for a full list of regulated and prohibited goods before shipping to avoid legal trouble.
Free Trade Agreements
Pakistan has free trade agreements with several countries like China, Malaysia, and Sri Lanka. If your goods originate from an FTA partner country, you may be eligible for reduced or eliminated duties. Provide proper documentation like certificates of origin to claim FTA benefits.
- Licenses and Permits: Some imported and exported goods require special licenses, permits or certifications. For example, food products, chemicals, and pharmaceuticals. Obtain all necessary permits before shipping to comply with regulations.
By understanding Pakistan’s import and export landscape, foreign companies can avoid issues when conducting cross-border trade. Work closely with legal and customs professionals to ensure your operations remain fully compliant under Pakistani law. With the proper knowledge and partnerships, foreign businesses can thrive in Pakistan’s growing market.
Cultural and Language Barriers
Operating in a foreign country often means overcoming cultural and language barriers. For companies looking to do business in Pakistan, understanding social norms and learning key phrases can help avoid misunderstandings.
While English is commonly spoken in business settings, learning basic Urdu greetings and phrases shows respect. Start with “Assalamu alaikum” (peace be upon you) for hello and “Khuda hafiz” (may God protect you) for goodbye. Know that head nods mean yes, and head shakes mean no.
Hierarchy and Relationships
Pakistani culture places high value on hierarchy and building strong relationships. Address people by proper titles like “sir” or “madam” and wait to be invited to use first names. Gift giving, especially food, is common when meeting.
Dress conservatively, especially for women. For men, slacks and button-down shirts are standard. For women, loose-fitting pants or skirts and modest tops that cover the arms are recommended.
While meetings may start later than scheduled, aim to be on time. However, avoid appearing rushed, as Pakistanis value courtesy and hospitality. Take time for greetings, introductions and small talk.
Ramadan and Religious Holidays
Be aware of and sensitive to the holy month of Ramadan and other religious holidays like Eid al-Fitr and Eid al-Adha. During Ramadan, Muslims fast from dawn until dusk, so avoid eating, drinking or smoking in public. Wish colleagues “Ramadan Mubarak” (blessed Ramadan) and “Eid Mubarak” (blessed Eid) on the appropriate holidays.
With openness to learning cultural nuances and patience in building relationships, foreign companies can thrive in Pakistan. But making the effort to understand social and religious norms, as well as pick up a few key phrases in Urdu, will go a long way in overcoming cultural and language barriers.
So there you have it, the key things to keep in mind if you’re thinking of setting up shop in Pakistan. It may seem like a lot to consider, but many foreign companies have found success in this emerging market. Do your homework, find good local partners, and make sure to follow all the rules. If you go in with realistic expectations about the challenges, stay flexible, and commit to the long game, Pakistan could end up being a very rewarding place to do business. The country certainly has a lot of potential, with a huge population, strategic location, and abundance of natural resources. While the road ahead isn’t always smooth, the payoff for those willing to navigate it can be huge. So take the plunge – you might just find your new favorite place to work!
Usman Rasheed & Co Chartered Accountants is a leading financial advisory and audit firm in Pakistan, having offices in Islamabad, Quetta, Lahore, Karachi, Peshawar & Gilgit. The firm is providing Audit, Tax, Corporate, Financial, Business, Legal & Secretarial Advisory services and other related assistance to local and foreign private, public and other organizations working in Pakistan