1. Foreign Direct Investment (FDI) and Investment Policy of PakistanThis brief overview explains, in very general terms, the investment policy of the Government of Pakistan and it is only meant to be a guidance note for those foreign investors who are interested to invest in Pakistan . Therefore, these brief notes must only be taken as an initial assistance and should not be misunderstood as a substitute for thorough and professional legal advice.Investment in Pakistan - Various Business & Services SectorsUnder the current Investment Policy of Pakistan, business and service enterprises are divided into 3 main sectors or categories which are as follows:Manufacturing or Industrial sectorNon-Manufacturing SectorOther sectorsNon-Manufacturing Sector is further categorised into the following:Service SectorInfrastructure Sector, andSocial SectorWhereas other Sectors are categorised as:TourismHousing and ConstructionInformation TechnologyThe Investment Policy of Pakistan may vary vis-à-vis these different sectors.Investment Policy of Pakistan for Manufacturing & Industrial SectorForeign investors are allowed to hold 100% equity of industrial projects without permission of the Government. No Government sanction is required for setting up any industry, in terms of field of activity, location, and size, except for the following business sectors:Arms and Ammunitions, High Explosives, Radioactive Substances, Security Printing, Currency and Mint, Alcoholic beverages or liquors. Investors are not required to obtain No Objection Certificate (NOC) from the Provincial Governments for locating the project anywhere in the country except in the areas that are notified as negative areas.Investment Policy of Pakistan for Non-Manufacturing SectorForeign investors are allowed to hold 100% equity of non-manufacturing projects on repatriation basis subject to the terms and conditions indicated against each sub-category stated herein below:Where registration of a company in Pakistan is required, for a non-manufacturing project, intimation should be given to the State Bank of Pakistan (SBP). Investment in Service Sector in PakistanForeign Direct Investment in a Service Sector is allowed in any activity subject to obtaining permission, NOC or license from the concerned agency/agencies and fulfilling the requirements of the respective sectoral policy.Foreign investors may hold 100% equity allowed on repatriation basis and the minimum amount of foreign equity investment in the project shall be 0.15 million dollars.Investment in Infrastructure Sector in PakistanForeign Direct Investment in an infrastructure sector is allowed for infrastructure projects which may include development of an Industrial Zone(s).Foreign investors may hold 100% equity allowed on repatriation basis and the minimum amount of foreign equity investment in the project shall be 0.30 million dollars.Investment in Social Sector in PakistanForeign Direct Investment in the social sector is allowed in the following fields:Education, Technical/Vocational Training, Human Resource Development (HRD), Hospitals, Medical and Diagnostic Services.Foreign investors may hold 100% equity allowed on repatriation basis and the minimum amount of foreign equity investment in the project shall be 0.30 million dollars. <br /> Investment Policy of Pakistan for Other SectorsInvestment in Tourism Sector in PakistanTourism sector is treated as an industry by virtue of Ministry of Industries and Production Circular No. 1-129/99-INV-IV dated 2nd August, 1999.In lieu of SRO No. 455(I)/2004 dated 12.06.2004 any plant, machinery or equipment, which is not manufactured locally, and is used for tourism, hotels or tourism related projects is importable at custom duty of 5% and zero rated sales tax.Investment in Pakistan in Housing and Construction Sector Housing and Construction sector is also treated as an industry by virtue of Finance Division Notification No.10 (10)/IF-II/98 dated 7-4-1999 and 4-6-1999.In lieu of SRO No. 455(I)/2004 dated 12.06.2004 any plant, machinery or equipment, which is not manufactured locally, and is used for housing and construction related projects is importable at custom duty of 5% and zero rated sales tax.Local, as well as foreign, companies involved in real estate projects will not market these projects unless the title of the property has been transferred in the name of a company incorporated in Pakistan and quot;
Commencement of Businessquot;
certificate has been issued by the Securities & Exchange Commission of Pakistan (SECP).Investment in Information Technology Sector in PakistanComputer Software and Information Technology is also treated as an industry by virtue of Government notification No. 3 (2)/97-INV-IV dated 05/03/1997.In lieu of SRO 457(I)/2004 dated 12.06.2004 any plant, machinery or equipment of IT, which is not manufactured locally and as certified through CBR by the facilitation Committee of BOI from time to time is importable at custom duty of 5% and zero rated sales tax.Details of machinery are:quot;
Telecommunication i.e. e-mail/internet/electronic information services, cellular mobile telephone services, audio-fax services, voice mail services, card pay phone services, etc.quot;
In addition, the following incentives are also available to foreign direct investors:Exchange ControlFull repatriation of capital, capital gains, dividends and profits, is allowed.Facility for contracting foreign private loans (which does not involve any Guarantee by the Government of Pakistan) is available to all those foreign investors, who make investment in sectors open to foreign investment, for financing the cost of imported plant and machinery required for setting up the project. However, loan agreements should be registered/cleared by the State Bank of Pakistan.Foreign controlled manufacturing concerns will be allowed unlimited domestic borrowing according to their requirements for working capital.Authorized dealers may grant rupee loans and credits to foreign controlled companies for meeting their working capital requirements subject to observance of Prudential Regulations. <br /> Royalty / Technical FeeRoyalty/Technical Fee vis-à-vis Manufacturing SectorThere is no restriction on payment of royalty or technical fees for the manufacturing sector. However, such agreements shall be registered with the State Bank of Pakistan. The payments of royalties and technical service fees to foreign companies will be taxed at 15%. However, reduced rates under treaties with different countries remain applicable.Royalty/Technical Fee vis-à-vis Non-Manufacturing SectorPayment of royalty or technical fee in case of non-manufacturing sectors is allowed subject to following conditions:In case of foreign investment in non-manufacturing sectors including food sector, the initial fee should not exceed US$ 100,000 irrespective of number of outlets under one franchise.A maximum of 5% of net sales (excluding 15% Sales Tax) in food sector may be allowed as franchise fee only for those items, which are core items of the franchise and are the specialties of the trade name. Payment of such fees shall be allowed on monthly basis. No item will be eligible for payment of royalty/franchise fee twice.Percentage/amount of fees, etc., for other non-manufacturing projects is also a maximum of 5% of net sales (excluding 15% Sales Tax).Initial period for which such fees may be allowed to projects in non-manufacturing sectors should not exceed 5 years. Subsequent extension in time period may be considered provided these projects also make investment in allied upstream projects.Agreements conforming to the above guidelines shall be sent by the sponsors to the State Bank of Pakistan for its information. However, any relaxation or deviation from the guidelines will require prior approval of the Cabinet Committee on Investment (CCOI).Agreements on Avoidance of Double TaxationThe Government of Pakistan has signed agreements on Avoidance of Double Taxation with 52 countries.Investment AgreementsPakistan has entered into Bilateral Agreements on Promotion and Protection of Investment with 46 countries. These Agreements provide that:The Contracting Parties shall encourage investments in their respective territories by investors of the other Contracting PartiesNon-discrimination between local investors and foreign investorsEqual/non-discriminatory treatment in case of compensation for losses owing to war, other armed conflicts or a state of national emergencyFree transfer of investments, and income deriving therefrom including profits, dividends, interest income, proceeds of sales or liquidation, repayments of loans, salaries, wages and other compensation, etc.A dispute settlement mechanism to settle any dispute between the countries with respect to the interpretation of the respective agreement and a dispute settlement procedure to settle any dispute between a host country and an investor of the other countryProtection of Foreign Investment in PakistanForeign Private Investment (Promotion and Protection) Act, 1976 and the Furtherance and Protection of Economic Reforms Act, 1992 provide legal cover for protection of foreign investors/investment in Pakistan.<br />