By Pir Abdul Wahid
Our Investment Policy
The Board of Investment is a statutory agency that assists in promoting, encouraging and facilitating local and foreign investment within Pakistan. It acts as the central source that provides contact between potential investors and all those concerned with the proposal, be it Federal or Provincial agencies. The Government of Pakistan (“GOP”) has an Investment Policy (“Investment Policy”), which is aimed at encouraging and facilitating local and foreign investment in Pakistan; this is facilitated by the BOI. Also, in Pakistan, a policy demands a high level of importance and carries weightage if it has been announced and approved by the GOP. Such policies have been upheld in the past.It should be noted that the Investment Policy now extends to foreign investments in the manufacturing/ industrial sector and in the “services or non-manufacturing sector”, where as before it was only applicable to the manufacturing sector.
Foreign investment on repatriable basis is allowed in the Service, Infrastructure, Social and Agriculture Sectors, subject to the respective conditions set out in the Investment Policy.The Policy further states that the foreign investor “will have to simply register their company with the Securities and Exchange Commission of Pakistan (“SECP”) under the Companies Ordinance 1984, and to inform the State Bank of Pakistan (“SBP”), provided the relevant conditionalities are fulfilled”. Any Pakistani company that makes a foreign investment is required to inform the SECP and the SBP.
Foreign direct investment is allowed in any activity, subject to the following conditions:
- Services that require prior permission, or filing of an NOC or licence from certain GOP agencies will get the same treatment unless they deregulate from these activities. Also, such investment is subject to the provisions of the respective sectoral policies, as applicable.
- Foreign investors are allowed to hold 100% of the equity in Newco.
- The amount of foreign equity investment in the company/project is required to be at least US $ 0.3 million.
Note that non-manufacturing sectors do not specifically include educational services.
The Investment Policy provides for:
- Full repatriation of capital, capital gains, dividends and profits, is allowed.
- Facility for contracting foreign private loans (which does not involve any sovereign guarantee by GOP) is available to all those foreign investors investing in sectors open to foreign investment generally in the manufacturing Sector.
Transfer of Technology:
The manufacturing sector does not require payment of royalty and/or technical services fees. However, such agreements are required to be registered with the SBP. The SBP has, however, placed limits in the terms and amounts of royalty/technical services fee if payment is to be remitted from Pakistan in foreign currency.
Vehicles Recognized for undertaking business activity in Pakistan
Potential vehicles for structuring investments in Pakistan are the following:
(i) Sole Proprietorship:
In a sole proprietorship, as the name suggests, an individual carries out a business on his own account in Pakistan. No formal procedure or formality is required for setting up a sole proprietorship concern. Some registration/filing requirements however, may apply under specific tax laws and other applicable laws related to the particular business. This is not the usual form of incorporation for foreign private investment.
(ii) Liaison Office:
A foreign company is allowed to set up a liaison office to promote its products and services in Pakistan with the approval of the BOI. Currently the BOI Investment Policy, allows for opening a liaison office for a period of 3 to 5 years. Further extensions may be granted by the BOI after reviewing and examining the past performance of the foreign company.
Generally, a liaison office is allowed to operate as a representative office in Pakistan and is usually set up for a particular purpose. Significantly, a liaison office: –
- is not permitted to undertake business activity or profit/income generating activity in Pakistan e.g. it cannot itself directly trade or deal in goods and services or undertake business.
- can undertake limited business activity essential to its operations (e.g. rental, employment agreements). All other contracts for business purposes are entered into by the foreign principal outside Pakistan.
- must be funded entirely by its parent company as far as foreign currency remittances into Pakistan through normal banking channels. Are concerned. This includes remittances for all salaries of both local and foreign personnel and all costs and expenses incurred locally.
There are certain advantages to setting up a liaison office. A liason office is easier to set up as compared to incorporation of a company. Hence, the time spent and the costs borne are reduced. Further, the statutory filing requirements for a liaison office are far less than those for a company incorporated under the Companies Ordinance, although, some filings are still required. The winding up procedure for a liaison office is simpler than that of a limited company. However, as stated above, a Liaison Office is not permitted to undertake business in Pakistan or remit funds from Pakistan in foreign exchange. In addition to the foregoing, a liaison office is also required to register its particulars with the SECP.
(iii) Branch Office:
Establishing a branch office of a foreign company in Pakistan is in cases where the company is doing business in Pakistan i.e. selling goods and services in Pakistan or performing a contract. Permission to set up a branch office requires the approval of the BOI and the filing of certain documents with SECP. Under the current BOI Investment Policy, permission for opening a branch office may be granted by the BOI for a period of 3 to 5 years. Further extensions may be granted by the BOI after reviewing and examining the foreign company’s performance. As a matter of policy, BOI approval for the establishment of new branch offices is usually restricted to cases where there is some form of reciprocal arrangement, as in the case of shipping companies, airlines and foreign banks or where there is a contract to undertake a project in Pakistan.
A branch office does not have its own distinct legal personality and is treated as an extension of the foreign company, separate from its foreign parent. Permission for the establishment of a branch office usually restricts the activities, which such an office may undertake. Furthermore, as the branch office is doing business in Pakistan, it will be subject to taxation under Pakistan tax laws. It is generally more difficult to set up a branch office as compared with the establishment of a Pakistan company.
A partnership is a business relationship entered into by a formal agreement between two or more persons or corporations carrying on business in common. A partnership is governed by the provisions of the Partnership Act, 1932. The capital for a partnership is provided by the partners who are liable for the total debts of the firms and who share profits and losses of the business concern according to the terms of the partnership agreement. The interest of a partner is transferable only with prior consent of the other partner(s). A partnership firm is not the usual form of incorporation for foreign private investment in Pakistan.
An agency is governed by the provisions of the Contract Act, 1872 (“the Contract Act”). The Contract Act defines an “agent” as a person employed to do any act for another or to represent another (called the “principal”) in dealings with third persons.
An agent’s authority may be express or implied and his/her act in the course of his/her employment on behalf of the principal and within the scope of his/her authority, binds the principal.
The appointment of an agent in Pakistan to conduct business on behalf of a foreign principal would not in itself result in a direct business presence of the principal in Pakistan.
In practice, the agency route is usually established as an alternative to the liaison office (discussed above) in terms of which the agent procures business for the foreign principal. Contracts though are entered into directly between the foreign principal and the Pakistan entity/recipient. An agency is usually not employed where there is significant foreign private investment, which is directly handled by the foreign private investor.
(vi) Joint Ventures:
Under the Pakistan legal system, joint ventures are not recognised as separate legal entities. They are in fact regulated and governed by contractual arrangements. A foreign investor may enter into a contractual arrangement with a partner in Pakistan for structuring a foreign investment. Such agreements, as a matter of practice, provide elaborate procedures to be adopted by each party to the agreement in order to exercise control over the Pakistan company, e.g. shareholders’ agreement providing for composition of Board of Directors, pre-emptive rights, etc.
In Pakistan, companies are incorporated under the provisions of the Companies Ordinance, 1984 (The “Companies Ordinance”). A company is a legal entity, which may or may not have a share capital. There are two types of companies that can be incorporated with or without share capital:
(a) Company limited by guarantee: a company having the liability of its member limited by memorandum to such amounts as the members may respectively undertake to contribute to the capital of the company in the event of its winding up. A company limited by guarantee is usually formed on a non-profit basis. Companies limited by guarantee use the words “(Guarantee) Limited” after their name. It is not unususal for educational, cultural and charitable institutions to be set up as companies limited by guarantee, where there is no profit making activity envisaged or where profits made are intended to be ploughed back into the company and are not required to be remitted to shareholders and members. Under a separate provision of the Companies Ordinance, a company may dispense with the word “Limited” in its corporate name in certain circumstances which are prescribed by law.
(b) Unlimited company: a company having unlimited liability of its members.
Such companies are unusual for commercial private investment in Pakistan.