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Pakistan

2. Bilateral Investment Agreements and Taxation Treaties

Though U.S.-Pakistan Bilateral Investment Treaty (BIT) negotiations began in 2004 and closed the text in 2012, the agreement has not been signed due to reservations from Pakistani stakeholders.  According to the BOI, Pakistan has signed BITs with 49 countries with only 27 entered into force.

Pakistan does not have a Free Trade Agreement (FTA) with United States.  However, both countries have Trade and Investment Framework Agreement (TIFA) in place.  Pakistan has trade agreements with China, Malaysia, Sri Lanka, Iran, Mauritius, and Indonesia.  It is also a signatory of the South Asian Free Trade Agreement (SAFTA) and the Afghanistan Pakistan Transit Trade Agreement (APTTA).  Pakistan is negotiating FTAs with Turkey and Thailand and re-negotiating its existing FTA with China.

A U.S.-Pakistan bilateral tax treaty was signed in 1959.  Pakistan has double taxation agreements with 63 other countries and a multilateral tax treaty between the SAARC countries (Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka) came into force in 2011.  The treaty provides additional provisions for the administration of taxes.  In 2018, Pakistan updated its tax treaty with Switzerland and has approached the United States government to request the same.

In 2016, Pakistan signed the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters.  The Convention will help Pakistan exchange banking details with the other 80 signatory countries to locate untaxed money in foreign banks.  Pakistan is a member of the Base Erosion and Profit Shifting (BEPS) framework and will automatically exchange country-by-country reporting as required by the BEPS package.

4. Industrial Policies

Investment Incentives

Pakistan currently does not provide any formal investment incentives such as grants, tax credits or deferrals, access to subsidized loans, or reduced cost of land to individual foreign investors.  The 2013 investment policy revolves around business facilitation and not direct incentives.  However, in 2016, the government reduced or eliminated custom duties on the imports of equipment and machinery and introduced temporary tariff concessions for the automobile manufacturing sector.  The government does not offer research and development incentives.  Nonetheless, certain technology-focused industries, including information technology and solar energy, benefit from a wide range of fiscal incentives.

In general, the government does not issue guarantees or jointly finance foreign direct investment projects.  However, the government made an exception for CPEC related projects; the Government of Pakistan provided sovereign guarantees for the investment and returns, and provided joint financing for specific projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

Providing unique fiscal and institutional incentives exclusively for export-oriented industries, the government established the first Export Processing Zone (EPZ) in Karachi in 1989.  Subsequently, EPZs were established in Risalpur, Gujranwala, Sialkot, Saindak, Gwadar, RekoDek, and Duddar; today, only Karachi, Risalpur, Sialkot, and Saindak remain operational.  EPZs offer investors tax and duty exemptions on equipment, machinery, and materials (including components, spare parts, and packing material); indefinite loss carry-forward; and access to the EPZ Authority (EPZA) “Single Window,” which facilitates import and export authorizations.  The 2012 Special Economic Zones Act allows both domestically focused and export-oriented enterprises to establish companies and public-private partnerships within SEZs.  Despite offering substantial financial, investor service, and infrastructure benefits to reduce the cost of doing business, Pakistan’s SEZs have struggled to attract investment due to lack of basic infrastructure.

Pakistan intends to establish nine SEZs under China Pakistan Economic Corridor (CPEC).  The government plans to inaugurate the first one in Rashakai, Khyber Pakhtunkhwa, in June 2019.  Most CPEC SEZs remain in nascent stages of development.

Apart from SEZ-related incentives, the government offers special incentives for Export-Oriented Units (EOU) – a stand-alone industrial entity exporting 100 percent of its production.  Export-Oriented Units incentives include duty and tax exemptions for imported machinery and raw materials, as well as the duty-free import of vehicles.  Export-Oriented Units are allowed to operate anywhere in the country.  Pakistan provides the same investment opportunities to foreign investors and local investors.

Performance and Data Localization Requirements

Foreign business officials have struggled to get business visas to Pakistan.  When permitted, business people typically received single-entry visas with a short duration validity.  Once in country, Pakistan required NOCs to visit locations outside of Islamabad, Karachi, or Lahore, making it difficult to inspect factories, supply chains, or goods outside of these three cities.  Pakistan announced updates to its visa and NOC policies to attract foreign tourists and businesspeople, but the more open polices have not been fully implemented.  New visa policies will not apply to U.S. passport holders.  Technical and managerial personnel working in sectors that are open to foreign investments are typically not required to obtain special work permits.  The new NOC policy permits travel throughout Pakistan, with exceptions for travel near Pakistan’s borders that still requires an NOC.

Foreign investors are not required to use domestic content in goods or technology or hire Pakistani nationals, either as laborers or as representatives on the company’s board of directors.  Likewise, there are no specific performance requirements for foreign entities operating in the country, and the same investment incentives are available to both local and foreign investors.  Similarly, there are no special performance requirements on the basis of origin of the investment.

Foreign investors are allowed to sign technical agreements with local investors without disclosing proprietary information.  According to the country’s 2013 Investment Policy, manufacturers introducing new technologies that are unavailable in Pakistan receive the same incentives available to companies operating in Pakistan’s SEZs.

The embassy has not received complaints regarding encryption issues from IT companies operating in Pakistan.  Officially, accreditation from the Electronic Certification Accreditation Council (under the Ministry of Information Technology) is required for entities using encryption and cryptography services, though it is not consistently enforced.  Despite the company’s April 2016 announcement that it would employ end-to-end encryption, WhatsApp is widely used.  The Pakistan Telecommunication Authority (PTA) initially demanded unfettered access to Research in Motion’s BlackBerry customer information, but the issue was resolved when the company agreed to assist law enforcement agencies in the investigation of criminal activities.  PTA and SBP prohibit telecom and financial companies from transferring customer data overseas.  Other data, including emails, can be legally transmitted and stored outside the country.

6. Financial Sector

Capital Markets and Portfolio Investment

The Government of Pakistan does not provide any investment incentives except the incentives offered to attract new capital inflows in specialized sectors and SEZs.  These incentives for specific sector and SEZs include tax exemptions, tariffs reductions, infrastructure, and investor facilitation services in designated special economic zones.  Since 1997, Pakistan has established and maintained a largely open investment regime.  The PML-N government introduced the Investment Policy 2013 that further liberalized investment policies in most sectors.  However, in addition to expressing concern about the deteriorating law and order situation, foreign investors continue to advocate for Pakistan to improve legal protections for foreign investments, protect intellectual property rights, and an established a clear and consistent policy of upholding contractual obligations and settlement of tax disputes.

Pakistan’s three stock exchanges (Lahore, Islamabad, and Karachi) merged to form the Pakistan Stock Exchange (PSE) in January 2016.  As a member of the Federation of Euro-Asian Stock Exchanges and the South Asian Federation of Exchanges, PSE is also an affiliated member of the World Federation of Exchanges and the International Organization of Securities Commissions.  In 2016, the government imposed a capital gains tax of 10 percent on stocks held for less than six months, and eight percent on stocks held for more than six months but less than a year and no capital gains tax for holdings that exceed 12 months.  However, in 2017, the government modified the capital gain tax and imposed 15 percent on stocks held for less than 12 months, 12.5 percent on stocks held for more than 12 but less than 24 months, and 7.5 percent on stocks held for more than 24 months.  The 2012 Capital Gains Tax Ordinance appointed the National Clearing Company of Pakistan Limited to compute, determine, collect, and deposit the capital gains tax.  Per the Foreign Exchange Regulations, foreign investors can invest in shares and securities listed on the PSE and can repatriate profits, dividends, or disinvestment proceeds.  The investor must open a Special Convertible Rupee Account with any bank in Pakistan in order to make portfolio investments.

The free flow of financial resources for domestic and foreign investors is supported by financial sector policies, with the SBP and SECP providing regulatory oversight of financial and capital markets.  Interest rates depend on the reverse repo rate (also called the policy rate).  The SBP steadily lowered the policy rate from a high of 10 percent at the fourth quarter 2014 to 6 percent in November 2017, but has increased the rate to 10.75 percent in March 2019.

Pakistan has adopted and adheres to international accounting and reporting standards – including IMF Article VIII, with comprehensive disclosure requirements for companies and financial sector entities.

Foreign-controlled manufacturing, semi-manufacturing (i.e. goods that require additional processing before marketing), and non-manufacturing concerns are allowed to borrow from the domestic banking system without regulated limits.

The banks are required to ensure that total exposure to any domestic or foreign entity should not exceed 25 percent of banks’ equity with effect from December 2013.  Foreign-controlled (minimum 51 percent equity stake) semi-manufacturing concerns (i.e., those producing goods that require additional processing for consumer marketing) are permitted to borrow up to 75 percent of paid-up capital, including reserves.

For non-manufacturing concerns, local borrowing caps are set at 50 percent of paid-up capital.  While there are no restrictions on private sector access to credit instruments, few alternative instruments are available beyond commercial bank lending.  Pakistan’s domestic corporate bond, commercial paper and derivative markets remain in early stages of development.  There are a limited number of venture capitalists operating in Pakistan.

Money and Banking System

The State Bank of Pakistan (SBP) is the central bank of Pakistan.

According to the most recent statistics published by the SBP, only 23 percent of the adult population uses formal banking channels to conduct financial transactions while 24 percent are informally served by the banking sector.  The remaining 53 percent of the adult population do not use any formal financial services.

The overall financial sector has done well in Pakistan over the last few years.  The SBP’s December 2018 banking sector review noted improving asset quality, stable liquidity, robust solvency, and increased investment in the banking sector.  The asset base of the banking sector expanded by 7.3 percent during 2018.  The risk profile of the banking sector remained satisfactory because profitability and asset quality improved as the non-performing loans to gross loans (infection) rate declined to its lowest level in a decade, 8 percent, at the end of 2018.

The five largest banks, one of which is state owned, control 52.3 percent of all banking sector assets.  In 2018, total assets of the banking industry were USD 140.6 billion[1].  As of December 2018, net non-performing bank loans totaled approximately USD 785.7 million – 1.4 percent of net total loans.

The penetration of foreign banks in Pakistan is relatively low and do not account for a significant portion of the local banking industry and overall economy.  According to a study conducted by the World Bank Group in 2018, the share of foreign banks to GDP stands at 3.5 percent.  In the wake of the global financial crisis, foreign banks have scaled down their operations and businesses in Pakistan mainly due to policies to shrink operations in small and struggling markets.  Banks closing down or limiting their operations included the Royal Bank of Scotland and Citibank, which sold its consumer banking portfolio to Habib Bank Limited and restricted its operations to corporate banking.  Other foreign banks operating in Pakistan are Standard Chartered Bank, Deutsche Bank, Samba Bank, Industrial and Commercial Bank of China, Bank of Tokyo, and the newly established Bank of China.

International banks are involved in two major types of international activities: cross-border flows, and foreign participation in domestic banking systems through brick-and-mortar operations.

SBP requires that foreign banks hold at minimum USD 300 million in capital reserves at their Pakistan flagship location, and maintain at least an eight percent capital adequacy ratio.  In addition, foreign banks are required to maintain the following minimum capital requirements, which vary based on the number of branches they are operating:

  • 1 to 5 branches: USD 28 million in assigned capital;
  • 6 to 50 branches: USD 56 million in assigned capital;
  • Over 50 branches: USD 94 million in assigned capital.

Foreigners require proof of residency – a work visa, company sponsorship letter, and valid passport – to establish a bank account in Pakistan.  There are no further other restrictions to prevent foreigners from opening and operating a bank account.  However, most foreigners prefer to use a foreign bank to conduct their banking transactions.

Foreign Exchange and Remittances

Foreign Exchange

SBP maintains strict controls over the exchange rate and monitors foreign exchange transactions in the open market.  Banks are required to report and justify outflows of foreign currency.  Travelers leaving or entering Pakistan are allowed to physically carry a maximum of USD 10,000 in cash.  While cross-border payments of interest, profits, dividends, and royalties are allowed without submitting prior notification, banks are required to report loan information so SBP can verify remittances against repayment schedules.  Exchange companies are permitted to buy and sell foreign currency for individuals, banks, and other exchange companies, and can also sell foreign currency to incorporated companies to facilitate the remittance of royalty, franchise, and technical fees.  Exchange companies are playing an increasingly important role in facilitating remittances from Pakistanis working overseas.

There is no clear policy on convertibility of funds associated with investment to other global currencies.  SBP deals with such cases and opts for an ad-hoc approach on a case to case and situational basis.

The embassy has provided advocacy for U.S. companies that have struggled to repatriate their profits.  Although no formal policy bars profit repatriation, U.S. companies have faced delays in repatriation from the SBP.

The Ministry of Finance and the SBP jointly manage Pakistan’s exchange rate.  Even though the exchange rate is determined by the market, over the past few years the SBP has intervened to stabilize the exchange rate or manage its decline.  Falling foreign exchange reserves have constrained the SBP’s ability to directly intervene in the market by injecting dollars into it.

Remittance Policies

The 2001 Income Tax Ordinance of Pakistan exempts taxes on any amount of foreign currency remitted from outside Pakistan through normal banking channels.  Remittance of full capital, profits, and dividends over USD 5 million are permitted while dividends are tax-exempt.  No limits exist for dividends, remittance of profits, debt service, capital, capital gains, returns on intellectual property, or payment for imported equipment in Pakistani law.  However, large transactions that have the potential to influence Pakistan’s foreign exchange reserves require approval from the government’s Economic Coordination Committee.  Similarly, banks are required to account for outflows of foreign currency.  Investor remittances must be registered with the SBP within 30 days of execution and can only be made against a valid contract or agreement.

Sovereign Wealth Funds

Pakistan does not have its own sovereign wealth fund (SWF) and no specific exemptions for foreign SWFs exist in Pakistan’s tax law.  Foreign SWFs are taxed like any other non-resident person unless specific concessions have been granted under an applicable tax treaty to which Pakistan is a signatory.

[1] Even though the value of total assets has increased in PKR, due to devaluation of the rupee, the converted number in USD has decreased from 2017.

7. State-Owned Enterprises

The second round of the Government of Pakistan’s extensive 15-year privatization campaign came to an abrupt halt after 2006 when the Supreme Court reversed a proposed deal for the privatization of Pakistan Steel Mills, setting a precedent for future offerings.  As a result, large and inefficient state-owned enterprises (SOEs) retain monopolistic powers in a few key sectors, requiring the government to provide annual subsidies to cover SOE losses.  Three of the country’s largest SOEs include Pakistan Railways (PR), Pakistan International Airlines (PIA), and Pakistan Steel Mills (PSM).  According to the IMF, the total debt of SOEs now amounts to 3.6 percent of GDP (almost USD 10 billion) in 2018.

There are 197 SOEs in the power, oil and gas, banking and finance, insurance, and transportation sectors.  Some are profitable; others suffer losses.  They provide stable employment and other benefits for more than 420,000 workers.  According to the IMF, in 2018, Pakistan’s total debts and liabilities for SOEs exceeded PKR 1.2 trillion (USD 10 billion), or 3.6 percent of GDP – a 22 percent increase since 2016, but roughly the same since 2017.  Some SOEs have governing boards, but they are not effective.

The following links provides details of the Government of Pakistan’s privatized transactions over the past 18 years since 1991.  http://privatisation.gov.pk/?page_id=125 

SOEs competing in the domestic market receive non-market based advantages from the host government.  Two examples include PIA and PSM, which are operating at loss, but the Government of Pakistan continues to provide them with financial bailout packages.  The embassy is not aware of any negative impact to the U.S firms in this regard.

PR is the only provider of rail services in Pakistan and the largest public sector employer, with approximately 90,000 employees.  PR’s freight traffic has declined by over 75 percent since 1970 and only about 250 of PR’s 458 locomotives are serviceable.  PR has attempted to recapture the market share previously ceded to the trucking industry, and in 2016, the company purchased 55 new locomotives from GE for its freight operations.  PR has received commitments for USD 8.2 billion in CPEC loans and grants to modernize its mail rail lines.  PR relies on monthly government subsidies of approximately USD 2.8 million to cover its ongoing obligations.  In FY2018, government payments to PR totaled approximately USD 321 million.  Pakistan no longer intends to privatize PR, and the Privatization Commission has removed it from the list of SOEs identified for privatization.

Even though the government is still publicly committed to privatizing its national airline, the process has been stalled since early 2016 when three labor union members were killed during a violent protest of the government’s decision to convert PIA into a limited company.  The move would have allowed shares to be transferred to a non-government entity and pave the way for privatization.  The legislature eventually passed a bill, but it requires that the Pakistan government retain 51 percent equity in the airline in the event it is privatized, reducing the attractiveness of the company to potential investors.  In 2018, the Government of Pakistan extended bailout packages worth USD 300 million to PIA.

Established to avoid importing foreign steel, PSM has accumulated losses of approximately USD 3.77 billion per annum.  The company loses USD 5 million a week, and has not produced steel since June 2015, when the national gas company cut power supplies due to over USD 340 million in outstanding bills.  Like PIA, the government attempted to privatize PSM under the IMF program but was stymied by domestic and political opposition.  The government is reportedly considering leasing or selling a portion of PSM’s 19,000 acres, coupled with a basket of incentives that would provide for a 10-year tax holiday and duty-free import of any machinery and equipment upgrades to potential leases.

The Securities and Exchange Commission of Pakistan (SECP) introduced corporate social responsibility (CSR) voluntary guidelines in 2013, though adherence to the OECD guidelines is not known.

Privatization Program

Terms to purchase public shares of SOEs and financial institutions for both foreign and local investors are the same.  Under the 2013 IMF EFF program, the government identified 31 SOEs for either partial or total privatization.  In 2015, the government successfully offloaded stakes in several banks and publicly traded firms, and in 2016 sold its 40 percent stakes in PSE.  However, due to significant political resistance, the government postponed plans to privatize its largest and most inefficient SOEs, namely PIA, PSM, and several power generation and distribution companies.

Eight SOEs from the banking, energy, mining, and hospitality sectors are scheduled to be privatized by the end of 2019.  Foreign investors can participate after following guidelines established by the Privatization Commission.

The Privatization Commission (PC) claims the privatization process to be a transparent, easy to understand, and non-discriminatory 17 step process, available on its website: http://privatisation.gov.pk/?page_id=88 

14. Contact for More Information

Christopher Elms
Economic Officer
U.S. Embassy Islamabad
Diplomatic Enclave, Ramna 5
Islamabad, Pakistan
Phone: (+92) 051-201-4000
Email: ElmsC@state.gov

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