Pakistan

There are various Chinese companies working in Pakistan. A lot of these companies are working on infrastructure projects involving constructions of Power Projects, Dams and Highways. These companies then further contract out parts of the work involving designing and engineering of the works to other companies who are resident in China. A legal proposition arises when these companies are tasked with deducting tax from payments to Chinese resident companies under the Income Tax Ordinance 2001.  The Chinese resident companies rightfully object since they are already being taxed under China’s own tax regime and additionally being taxed under the Pakistan tax regime appears unfair to them. China and Pakistan both are signatories to the Agreement between Peoples Republic of China and the Islamic Republic of Pakistan for avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Evasion of Taxes. This tax treaty was signed in 1989 and specifically deals with the issues of double taxation. We are however surprised to find that most Chinese companies are either not aware of this treaty or have not given it the due consideration they ought to have. Even if the Chinese Companies refer to the Treaty for relief, the problem of interpretation of the articles which they are faced with leads them astray. For the purposes of this paper we have tried to demonstrate this problem of interpretation and also the mechanism which may be employed to resolve it. The Treaty Article 1 of the Treaty provides that it shall apply to persons who are residents of one or both of the Contracting States. Article 2 (2) provides that it shall apply to income tax in Pakistan and China. Article 3 defines Contracting States as meaning China or Pakistan as context so requires. Article 4 for the purposes of the Treaty defines the term Resident as a person who under the laws of that Contracting State is liable to tax therein by reason of his domicile, residence, place of head of office or effective management or any other criteria of a similar nature. The interpretation of Article 13 (2) Article 7 provides that the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State. Article 15 provides that income being derived from a resident of a Contracting State shall only be chargeable in that Contracting State unless it the beneficial owner of the fees also has a place of establishment or base in the other Contracting State. Article 13 (1) provides that Fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. Article 13 (2) provides that such fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner thereof, the tax so charged shall not exceed 12.5% of the gross amount of the fees. Article 13 (4) provides that the provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein and the contract in respect of which the fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such cases the provisions of Article 7 or Article 15, as the case may be, shall apply. Where as Articles 7 , 13 (1) and 15 in our opinion are clear that taxation on the fees being paid to a resident shall only take place in the country of which the beneficial owner of the fees is a resident, the problem arises from the interpretation of Article 13 (4). Article 13 (4) provides that the provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein and the contract in respect of which the fees for technical services are paid is effectively connected with such permanent establishment or fixed base. A plain reading of Article 13 (4) would make it clear that it nullifies the effect of Article 13 (1) if the resident of China also has a business establishment in Pakistan. But Article 13 (4) also provides that it shall nullify the effect of Article 13 (2) which provides that such fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner thereof, the tax so charged shall not exceed 12.5% of the gross amount of the fees. The Litmus Test for Article 13 (2) The legal proposition which arises then is that under the Treaty will the services be taxed in China or Pakistan? Our interpretation is that the name of the Treaty provides that it has been signed specifically to avoid the issue of double taxation. Where as Article 7, 13 (1) and 15 are clear that such fees shall only be taxed in China, the question of interpretation of Article 13 (4) read with Article 13 (2) can be resolved by the litmus test of whether the Chinese resident company also has a place of establishment in Pakistan or not. If it does it will be taxed in Pakistan too under Article 13 (2) and if it doesn’t it will be taxed only in China under articles 7, 13 (1) and 15 of the Treaty. The Relief provided by the Treaty When confronted with a problem regarding the interpretation of the Articles of the Treaty, it is important in our opinion to see the purpose for which the Treaty has been signed which is the avoidance of double taxation. Since the Treaty’s main purpose is the avoidance of double taxation, in our opinion this prime purpose is which the Treaty will try to first achieve followed secondly by exceptions where the Treaty in fairness will accord benefit to the revenue collection of Pakistan where the Chinese company is also operating a place of business in Pakistan.

At the intersection of time-honoured tradition and modern legal solutions, Hafeez Pirzada Law Associates (HPLA) and Farooq, Khan & Mirza (FKM), two names synonymous with excellence and distinction in Pakistan’s legal field, have merged to create a powerhouse: HP | FKM - Hafeez Pirzada | Farooq, Khan & Mirza - Corporate Counsel | Barristers | Advocates. With deep roots in the country’s legal history, the duo unite decades of experience in legal practice, blending an unparalleled legacy with cutting-edge expertise. HPLA was founded by the late Abdul Hafeez Pirzada, BSc. LLD, Barrister and Senior Advocate of the Supreme Court of Pakistan, in 1959. A towering figure in Pakistan’s legal and political history, Pirzada played a critical role in the drafting of Pakistan’s 1973 Constitution and in shaping the country’s legal framework. FKM, founded in 2009, brought together a fresh, innovative approach to legal services. Established by Barristers Omer Farooq and Babbar A. Khan, FKM quickly distinguished itself as a trailblazer in corporate law, commercial law, arbitration, and construction law. Both Farooq and Khan, known for their meticulous attention to detail and strategic acumen, built a reputation for providing pragmatic, solution-oriented advice to clients navigating the complexities of modern business and governance.   Commenting on the merger, Abdul Sattar Pirzada, Founding Partner, stated: ‘The merger allows us to scale our capabilities and diversify our practice areas. Where one firm brings a legacy of expertise in litigation, the other brings profound transactional experience’. Announcing the move, Omer Farooq, Founding Partner, stated: ‘This merger represents a pivotal step in the firm’s revolution. The merger positions us for long-term growth and resilience in a competitive legal market. Our clients will benefit from expanded services and a broader perspective - without sacrificing the efficiency and responsiveness they expect from us’. Babbar Ali Khan, Founding Partner, added: ‘There was no question about it. Hafeez Pirzada Law Associates shares our vision for delivering exceptional services and expanding support for our global clientele. We are proud to join forces with a firm whose values so closely mirror our own’. ‘Joining with Farooq, Khan & Mirza, a firm that values integrity, collaboration and services as deeply as we do, we envision that the combination shall lead to providing our clients with a wide range of services leading to us becoming the go-to firm for all their legal issues’ remarked Qazi Umair Ali, Founding Partner. Mamoon N. Chaudhry, Founding Partner views the merger as ‘a combination of legacy and innovation - integrating cutting-edge technologies, forward-thinking leadership, and a culture that embraces change’. The merger of HPLA and FKM represents a convergence of two distinguished legacies: one rooted in the foundational legal history of Pakistan and the other built upon the modern-day demands of global commerce. HPLA’s enduring strength in constitutional law, litigation, and public service is complemented by FKM’s innovative approach to corporate law, construction law and arbitration. This unique combination of legal disciplines empowers the firm to provide a full spectrum of legal solutions, from landmark constitutional cases to complex commercial transactions.

The Prevention of Electronic Crimes Act 2016 (PECA) as it is more commonly known was Pakistan’s first attempt at curbing electronic crimes and cyber-crimes. The also contains provisions on data protection. Predominantly the PECA provides for criminal penalties for anyone found guilty of indulging in cyber-crimes.  In the past 5 years Pakistan has seen a surge in the use of social media platforms specially by the younger generation. It was inevitable that this use of social media would sooner rather than later be used for political reasons. Change in the government has seen a strong desire and infact also the implementation of a crackdown by the new government and security agencies in Pakistan on the abuse of social media. This crackdown has bene so strong that it has bordered on the banning of free speech. Banning of X in Pakistan, Meta being down, VPN use being restricted and generally social media being painted as negative tool are some of the effects of this crackdown. The Government and the security agencies in Pakistan has also repeatedly accused the wrongful use of social media platforms for being he reason for the spreading of fake and defamatory news. To further regulate the use of social media changes have now been made to the PECA. These changes which have been made into law by the passage of the Prevention of electronic Crimes Amendment Act 2025 have provided for more severe punishments for anyone found guilty of spreading fake news via the use of electronic means and by using a social media platform. For the first time the Government has created a social media protection and regulatory authority. This authority shall have the power to block any content or bring action against any social media platform which is found guilty of spreading news which causes religious or political resentment in Pakistan. A national cyber crimes investigations agency has also been established under the Act which is tasked with investigations pertaining to spreading of news causing political and religious unrest by the use of information systems. This agency has vast powers including the power to enter into a premises and seize information system(s), data, hard drive which may have been involved in the mis use of  electronic means. The promulgation of this law is unlike routine legislation which is enacted for the protections of rights of citizens. This law has been specifically drafted to counter unrest which the Government and the security agencies have been facing by the misuse of social media particularly by the younger generation and professionals well versed in the use of software and malware. Because this law has the backing of the Government and security agencies in Pakistan hence it can be stated that with certainty that the same will be enforced unequivocally. Workplaces which have not clearly provided for policies around the misuse of social media and electronic systems specifically with regard to the PECA and its changes  can become victims to an act of search and seizure by the national cyber crimes investigations agency.  Since the PECA is a law which entails criminal liability thus in such instances it may also be the case that the employer who is deemed to be the owner of the workplace from where the misuse of the electronic system originated be held personally liable. Clearly defined internet usage policies should be made as part of the employment contract. undertakings and indemnities need to be signed  need to be signed by the employees at the time of their employment which provide that they have been given detailed trainings on the use of office electronic equipment particularly on the use of the internet which is to be used for office use only  and that they shall not mis use any office equipment provided to them for their work and that they shall indemnify their employer in case any action is brought against the workplace as a result of their misuse of an electronic system. Blocking certain online sites within the office which are not required for office work would also be a good idea. In conclusion this may be one of the areas for regulations which is being ignored by companies working in Pakistan. Regulating the use of the internet at the workplace by way of clear policies and training and clearly separating the liability of the employer is important and companies should be doing this.   About the Author Mr. Yousaf Amanat is ranked for employment law and data protection by Legal 500, Chambers and Partners and GDR 100. www.yaa.com.pk  

The Firm recently advised he online DSP advertising platform. Quanticast combines cutting edge machine learning with human intellect to come up with unique online advertising solutions. Most Fortune 500 companies utilize Quanticast. In November 2024 the Firm was contacted by Dentons UK to advise Quanticast on its online marketing campaign of which Pakistan was also destined to be a part. The advise focused on the law surrounding data protection and advertising in Pakistan. Particularly with regard to data protection the advise also encompassed the role of GDPR-UK in the context of Pakistan’s data protection laws. The advise also included drafting of documents on permission for use of data by the end user.