It is common knowledge that turning brilliant ideas into products requires a lot of time, effort, and resources. Start-Ups need investment to get the business off the ground primarily because of this. In this article, we’ll go over the steps and procedures for making FDI foreign direct investments in newly Pakistan Pakistan startups.
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What is FDI
An ownership interest in a foreign company or project is known as a foreign direct investment (FDI) and is made by a foreign investor, business, or government.
Investment in Pakistan new businesses has grown significantly over time. It is primarily due to Pakistan’s significantly lower taxes and significantly higher returns on investment for business startup. As a result, startup companies are providing lucrative incentives to foreign direct investors in exchange for their financial support.
Why not to pay investment in cash?
The Pakistani government has implemented a number of policies to deter illegal commerce and exchange. To encourage people and businesses to conduct banking transactions, more and more legal reforms are being introduced. Even if everything else is okay, using cash for transactions has serious disadvantages.
Consider a situation where Party “A” claimed to have paid Party “B” a certain sum of money in exchange for a contract. It becomes challenging for Party “A” to prove in court that such amount was actually given if Party “B” denies having received any such amount. On the other hand, if payment was made through a banking channel, there is a presumption associated with it, making it simple to build a case in court quickly.
How to make investment in Pakistan Startup businesses?
The State Bank of Pakistan’s Exchange Policy Department has published the Foreign Exchange Manual, Chapter 20, Sub-Clause B of Clause 13 that outlines the detailed process for allowing innovative and/or scalable businesses with high growth potential to raise capital from non-residents abroad. This process serves the dual purposes of documenting investments and protecting foreign investors’ interests.
Who is eligible for foreign investment in Pakistan?
Any non-resident individual, including a foreigner residing outside of Pakistan, or an organization established outside of Pakistan, may invest abroad in a startup business in Pakistan.
What are the General Requirement for making foreign investment in Pakistan Startups?
- According to the Companies Act of 2017, new businesses in Pakistan must be registered as companies.
- Company cannot be older than seven years.
- Such a company’s annual revenue must be less than PKR 2 billion since incorporation.
- As of the most recent audited financial statements, the company must have equity below PKR 300 million.
What is the Procedure for making foreign investment in Startup in Pakistan?
The following is the recommended step-by-step process for attracting investment from abroad:
- If a company meets the aforementioned requirements, it may incorporate a holding company abroad and incur initial incorporation costs of up to USD 10,000 that may be sent abroad.
- Shares of the Resident Company may be exchanged once for shares of the Holding Company within 30 days of the initial grant.
- In this regard, the Resident Company is required to purchase the shares issued by the Holding Company in exchange for payments made in Pakistani Rupees to the Resident Company. As a result, on a basis of repatriation, the Resident Company may issue shares of Holding Company that are of equal value.
- As part of an equity investment, non-resident investors can also subscribe for shares of the holding company.
- In order to make an equity-based investment in the resident company, the holding company must return the money it has borrowed or raised from abroad to Pakistan in the following ways:
- As much as 80% of the money raised abroad annually up to $1 million is sent to Pakistan.
- After that, Pakistan will receive at least 50% of all funds raised abroad annually up to a total of USD 10 million.
- After the shares are purchased, the resident company can send dividend payments to the holding company, which will then transfer the funds to each non-resident director’s foreign account in accordance with their shareholdings.
Is there any Tax on Remittance of dividend to non-resident persons?
Businesses in Pakistan are permitted to deduct all business expenses for tax purposes as long as they are deducted strictly in accordance with the procedure outlined in Section 21 of the Income Tax Ordinance, 2001. The net income of business entities is subject to tax. Next, the net income dividend is transferred to the holding company for distribution to the non-resident directors and shareholders.
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