It is usually seen that genius ideas takes time, energy and resources to be processed into a product. It is majorly for this reason that Start-Ups require investment to bring the business off the ground. In this article we will discuss the procedure and process through which foreign investment can be made in Startup business registered in Pakistan.
Over the years, investment in Startup businesses in Pakistan has shown great rise. It is mostly because the taxes charged on Startup businesses in Pakistan are significantly less and the profit on such investment is significantly high. Thus Startup businesses are offering lucrative incentive to foreign investors in relation to investment made in business.
Why not to pay investment in cash?
Government of Pakistan has made different polices to discourage undocumented economy and transactions. More and more reforms are being introduced in legal system to encourage individuals and business to conduct banking transactions. Even otherwise, there are major draw backs of making cash transactions. Imagine a case in which Party ‘A’ alleged of paying Party ‘B’, a certain amount in cash in relation to some contract. If party ‘B’ deny of having received any such amount, it becomes difficult for Party ‘A’ to establish in Court without extensive evidence that such amount was genuinely given. On the other hand, if payment was through banking channel, it has presumption attached to it and it becomes easy to establish a case in court in quick span of time.
How to make investment in Startup businesses?
Sub-Clause B of Clause 13 of Chapter 20 of the Foreign Exchange Manual issued by the Exchange Policy Department of the State Bank of Pakistan provide the detailed procedure through which the innovative and/or scalable businesses with potential for high growth, are permitted to raise capital from abroad i.e from Non-resident persons. The purpose of this procedure is not only to safeguard interest of foreign investors but also to document investments.
Who can make foreign investment in Pakistan?
Any non-resident person including foreign individual living outside Pakistan or an entity established outside Pakistan can make foreign investment in Startup business in Pakistan.
What are the General Requirement for making foreign investment in Startup in Pakistan?
- Startup business in Pakistan must be registered as Company under the Companies Act, 2017.
- Company must not be more than 7 years old.
- Revenue of such company must be below PKR 2 Billion since its incorporation.
- Company must have equity below PKR 300 Million as per latest audited accounts.
What is the Procedure for making foreign investment in Startup in Pakistan?
Step to Step procedure prescribed for raising investment from abroad is as follow:
- The company having above criteria is allowed to incorporate a Holding Company abroad and is allowed to make initial incorporation expenses not exceeding USD 10,000/- which can be remitted abroad.
- Existing shareholding of Resident Company are once allowed to swap their shares to mirror shareholding in Holding Company within 30 days.
- In this regard the Resident Company is required to acquire the shares issued by Holding Company against payment of funds to Resident Company in Pakistani Rupee. Accordingly, the Resident Company can issue shares of equal value in favor of Holding Company, on repatriation basis.
- Non-residents investors also subscribe shares of Holding company as per equity investment.
- Holding Company shall repatriate the funds, raised from abroad, through equity or borrowing to Pakistan, as equity based investment in Resident Company, in following manner:
- Atleast 80% of the funds raised from abroad on annual basis until USD 1 Million is remitted to Pakistan.
- Subsequently, atleast 50% of funds raised from abroad on annual basis until USD 10 Million is remitted to Pakistan on cumulative basis.
- Once the shares are subscribed, the Resident Company can make remittance of dividends to holding company and which according to shares of each non-resident director transfer payments in their respective account abroad.
Is there any Tax on Remittance of dividend to non-resident persons?
In Pakistan, Businesses for the purpose of taxation are allowed to deduct all business expenses as long as such expenses are deducted in strict compliance of the procedure described in Section 21 of the Income Tax Ordinance, 2001. Tax is charged on net income of business entities. The dividend from net income is then transferred to Holding Company for the purpose of distribution among the non-resident directors/shares holders.
Hamza and Hamza Law Associates is one of the best law firms in Lahore. We at Hamza and Hamza have great experience in offering consultancy to non-resident individuals and entities who are interested to make investment in Startups in Pakistan but are equally concerned to do things rights so their investment can be easily withdrawn as and when required. Our foreign qualified team of lawyers are simply the best in dealing with matters pertaining to Foreign Investment in Pakistan. Reach us now to secure you investment!