Investment Vehicle Options for Foreign Investors

1. Liaison Office

Foreign entities seeking to establish a presence in Pakistan often opt for a Liaison Office (LO). This office’s activities are centered around promotional endeavors for products not yet introduced to the local market, fostering technical and financial collaborations between the foreign entity and Pakistani stakeholders, and providing technical assistance. LOs facilitate joint collaboration prospects and export promotion on behalf of their parent companies. It’s important to note that revenue-generating activities are prohibited for LOs, which are required to sustain operational costs through remittances from their parent companies via standard banking channels, duly converted to the local currency. Pertinent regulations include:

•  Approval requirements sanctioned by the Board of Investment (BOI).
• Mandatory filing of prescribed returns and documents with the Registrar of Companies, in accordance with the Companies Act of 2017, subsequent to BOI authorization.
• Adherence to accounting, audit, and submission obligations to the Registrar of Companies.
• Compulsory registration with local tax authorities.

2. Branch Office

Foreign entities can establish a Branch Office (BO) to operate in Pakistan, typically for executing contracts awarded to the foreign entity. The BO’s scope is confined to the terms specified in the relevant agreements or contracts and does not extend to commercial or trading activities. Key considerations encompass:

• Repatriation of revenue and profits from BO activities (excluding banking operations) to the Head Office, contingent upon tax deductions and compliance with Foreign Exchange Regulations of the State Bank of Pakistan.
• Funding of BO expenses through transfers from abroad, following prescribed banking channels and conversion to local currency, or through contract-related income.
• Application submission to the BOI, along with necessary documentation, for BO establishment.
• Authorization for opening branches of foreign banks granted by the State Bank of Pakistan.
• Fulfillment of returns and documentation obligations, in line with the Companies Act of 2017, subsequent to BOI approval.
• Adherence to accounting, audit, and submission mandates to the Registrar of Companies.

3. Pakistan Subsidiary / Joint Ventures

Foreign entities have the option to establish wholly owned subsidiaries or joint ventures with Pakistani or foreign partners in Pakistan. This avenue aligns with Foreign Direct Investment (FDI) policies and the stipulations of the Companies Act of 2017. These ventures can take the form of private or public companies, offering diverse pathways for market engagement.

4.Permanent Establishment: Establishing Business Presence

A Permanent Establishment (PE) refers to a designated place of business through which the activities of a non-resident entity are either fully or partially carried out. This encompasses various scenarios, including:

Physical Locations: A PE comprises distinct physical spaces such as management offices, branches, factories, warehouses, and more. Certain exceptions, like liaison offices primarily engaged in non-contractual negotiations, exist.

Resource Extraction: Properties related to agriculture, pastoral activities, forestry, mining, oil/gas wells, quarries, and other natural resource extraction sites.

Construction Projects: Encompasses building sites, construction, assembly, installation projects, and supervisory roles linked to such endeavors, exceeding 90 days within a 12-month timeframe.

Service Provision: The rendering of services, including consultancies, by individuals, personnel, or entities engaged by the concerned party.

Agency Activities: A person operating on behalf of another, typically in an ongoing authority to conclude contracts, plays a significant role in contract execution, and involves ownership transfer or service provisions.

Equipment Presence: Incorporating substantial equipment, assets, or properties capable of generating income.

Complementary Functions: When a place of business is maintained by an entity or its associate, and both the original and additional business operations constitute cohesive, complementary functions.

Virtual Business Presence:  The scope of a PE extends to virtual business models conducted over the internet or electronic mediums, irrespective of physical presence.

In cases involving a Double Taxation Treaty (DTT), the PE definition within the treaty takes precedence when executed between Pakistan and the relevant origin country of the PE.