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Foreign Direct Investments

Foreign direct investment refers to direct investment equity flows in an economy. It is the sum of equity capital, reinvestment of earnings, and other capital. Direct investment is a category of cross-border investment associated with a resident in one economy having control or a significant degree of influence on the management of an enterprise that is resident in another economy. Ownership of 10 percent or more of the ordinary shares of voting stock is the criterion for determining the existence of a direct investment relationship. This series shows net outflows of investment from the reporting economy to the rest of the world. Data are in current U.S. dollars.

The first Investment Policy by Board of Investment (BOI) was given in 1997 which opened services, social, infrastructure and agriculture sectors for foreign and local investors. It was a major step forward for integration of Pakistan’s economy into international markets as prior to this policy; foreign investment was restricted to manufacturing sector only. The 1997 Policy laid a solid foundation for the gains in FDI inflows experienced over the subsequent decade.

Foreign Direct Investment in Pakistan increased by 2761.10 USD Million in 2016. Foreign Direct Investment in Pakistan averaged 2651.26 USD Million from 2010 until 2016, reaching an all time high of 3184.30 USD Million in 2010 and a record low of 2099.10 USD Million in 2012.
Investment in Pakistan

Foreign Direct Investment (FDI) And Investment Policy Of Pakistan

Investment in Pakistan – Various Business & Services Sectors
Under the current Investment Policy of Pakistan, siness and service enterprises are divided into 3 main sectors or categories which are as follows:

  • Manufacturing or Industrial sector
  • Non-Manufacturing Sector
  • Other sectors

Non-Manufacturing Sector Is Further Categorized Into The Following:

  • Service Sector
  • Infrastructure Sector, and
  • Social Sector

Whereas Other Sectors Are Categorized As:

  • Tourism
  • Housing and Construction
  • Information Technology

The Investment Policy of Pakistan may vary vis-à-vis these different sectors.

Investment Policy Of Pakistan For Manufacturing & Industrial Sector

Foreign 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 Sector
Foreign 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 Pakistan
Foreign 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 sectorial 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 Pakistan
Foreign 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 Pakistan
Foreign 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.

Investment Policy Of Pakistan For Other Sectors

Investment In Tourism Sector In Pakistan
Tourism 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 “Commencement of Business” certificate has been issued by the Securities & Exchange Commission of Pakistan (SECP).

Investment In Information Technology Sector In Pakistan
Computer 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:
“Telecommunication i.e. e-mail/internet/electronic information services, cellular mobile telephone services, audio-fax services, voice mail services, card pay phone services, etc.”

In addition, the following incentives are also available to foreign direct investors:

Exchange Control
Full 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.

Royalty / Technical Fee

Royalty/Technical Fee Vis-A-Vis Manufacturing Sector
There 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-A-Vis Non-Manufacturing Sector
Payment 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 Taxation
The Government of Pakistan has signed agreements on Avoidance of Double Taxation with 52 countries.

Investment Agreements
Pakistan 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 Parties
  • Non-discrimination between local investors and foreign investors
  • Equal/non-discriminatory treatment in case of compensation for losses owing to war, other armed conflicts or a state of national emergency
  • Free 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 country
  • Protection of Foreign Investment in Pakistan
  • Foreign 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.

Limits On Foreign Control And Right To Private Ownership And Establishment
The 2013 Investment Policy eliminated the minimum initial capital investment requirements for all sectors. Currently, there is no minimum investment requirement or upper limit on the share of foreign equity allowed, with the exception of the airline, banking, agriculture, and media sectors. Foreign investors in the services sector may retain 100 percent equity for the life of the investment, as well as the ability to repatriate 100 percent of profits. In the education, health, and infrastructure sectors, 100 percent foreign ownership is allowed, while in the agricultural sector, the threshold is 60 percent. There are no restrictions on payments of royalties and technical fees for the manufacturing sector, but there are restrictions on other sectors, including a $100,000 limit on initial franchise investments and a cap on subsequent royalty payments of five percent of net sales for five years. Royalties and technical payments are subject to a 15 percent income tax. The tourism, housing, construction, and ICT sectors have been granted “industry status,” which makes them eligible for lower tax and utility rates compared with businesses categorized as “commercial sector” enterprises, including banks and insurance companies. Small-scale mining valued less than Rs. 300 million (roughly $3 million) is restricted to Pakistani investors.