How is Foreign Investment administered in Pakistan?

Foreign direct investment (FDI) refers to long term participation by  a country A into country B (in this case Pakistan) . It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI:

•  Inward foreign direct investment and;
•  Outward foreign direct investment

resulting in a net FDI inflow (positive or negative).

Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization.  

WHO CAN BE A FOREIGN INVESTOR?

A foreign direct investor may be classified in any sector of the economy and could be any one of the following:

• An individual;
• A group of related individuals;
• An incorporated or unincorporated entity;
• A public company or private company;
• A group of related enterprises;
• A government body;
• An estate (law), trust or other societal organisation; or
• Any combination of the above.

HOW CAN A FOREIGN INVESTOR INVEST HIS FUNDS?

The foreign direct investor may invest in by any of the following methods in Pakistan:

• by incorporating a wholly owned subsidiary or company, by acquiring shares in an associated enterprise
• through a merger or an acquisition of an unrelated enterprise
• participating in an equity joint venture with another investor or enterprise

WHAT WOULD BE SOME OF THE BASIC REQUIREMENTS FOR COMPANIES CONSIDERING A FOREIGN INVESTMENT?

Depending on the industry sector and type of business, a foreign direct investment may be an attractive and viable option. With rapid globalization of many industries and vertical integration rapidly taking place on a global level, at a minimum a firm needs to keep abreast of global trends in their industry. From a competitive standpoint, it is important to be aware of whether a company’s competitors are expanding into a foreign market and how they are doing that. At the same time, it also becomes important to monitor how globalization is affecting domestic clients. Often, it becomes imperative to follow the expansion of key clients overseas if an active business relationship is to be maintained.

New market access is also another major reason to invest in a foreign country. At some stage, export of product or service reaches a critical mass of amount and cost where foreign production or location begins to be more cost effective. Any decision on investing is thus a combination of a number of key factors including:

• assessment of internal resources, 
• competitiveness, 
• market analysis 
• market expectations. 

WHY INVEST IN PAKISTAN?

Pakistan over the last few years has developed itself as a potential market for foreign investors with its liberal investment policy, cheap labour, tax incentives and good return on investments. Following table demonstrates the FDI in Pakistan over the last decade.

Year  Greenfield Investment Privatisation Proceeds Total FDI  Private Portfolio Investment 2001-02  357 128 485 -10 2002-03  622 176 798 22 2003-04  750 199 949 -28 2004-05  1,161 363 1,524.00 153 2005-06  1,981 1,540 3,521.00 351 2006-07  4,873.20 266 5,139.60 1,820 2007-08 5,019.60 133.2 5,152.80 19.3 2008-09 3,719.90 – 3,179.90 -510.3 Jul-Mar-10 1,553.9 – 1,553.9 378.6 Total  20,037.60 2,805.20 22,303.2 2,195.60

Note: Pakistan’s Fiscal Year runs from 1st July till 30th June.

WHAT ARE THE FOREIGN DIRECT INVESTMENT INCENTIVES IN PAKISTAN?

The simple answer is that making a direct foreign investment allows companies to accomplish several tasks:

• Avoiding foreign government pressure for local production. 
• Circumventing trade barriers, hidden and otherwise. 
• Making the move from domestic export sales to a locally-based national sales office. 
• Capability to increase total production capacity. 
• Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc;   
• low corporate tax and income tax rates in Pakistan
• tax concessions/exemptions to particular businesses
• special economic zones developed by the government of pakistan
• cheap labour in Pakistan
• Job training & employment subsidies
• Infrastructure subsidies
• Research and Development support
• Early Entry Advantage. 

Pakistan has a very liberal policy on repatriation for foreign direct investors, therefore, investing in Pakistan may give a foreign direct investors the following added advantages.

• Remittance of royalty, technology and franchise fee is allowed to projects in social, service, infrastructure, agriculture and international chains food franchise.
• Minimum share of the local (Pakistani) partner in a joint venture will be 60:40 for the service sector. However, 100% foreign equity can be owned for first 5 years.
• The FBR (Federal Board of Revenue) will not question as to the source of investment; however, the FBR will only want to know whether the investor has paid requisite Income Tax on that specific investment. The FBR will not inquire into the source of the funds.
• Foreign investors are allowed to invest in industrial project on 100% equity basis without any permission from the government.
• There is no requirement for a No Objection Certificate from the Provincial Government.
• In addition to manufacturing sector foreign investment on a repatriate-able basis is allowed in services, infrastructure and social sectors.
• Full repatriation of capital gains, dividends and profits.
• The facility for contracting foreign private loans is available to all those foreign investors who make investment in the approved sectors.
• Foreign controlled manufacturing concerns are allowed to borrow on the domestic market according to their requirements.
• Foreign controlled semi-manufacturing and non-manufacturing concerns can access loans equal to @ 75% & 50%, respectively, of their paid up capital including reserves.
• BOI’s (Board of Investment) approval is not required for foreign companies to open a bank account.

 INVESTMENT POLICY OF GOVERNMENT OF PAKISTAN

For the purposes of foreign investment in Pakistan, the Investment Policy of Pakistan has formed two broad groupings i.e. manufacturing and non-manufacturing/ service sector. Salient features of the Pakistan Investment Policy relating to the manufacturing and services sectors are as follows:

 

MANUFACTURING SECTOR

• The entity must be a company incorporated under the Companies Ordinance, 1984.
• 100% foreign equity is permissible on the basis of repatriation of capital and profits (dividend).
• The amount of foreign equity investment must not be less than US $ 0.3 million.

SERVICE SECTOR:

• The entity must be a company incorporated under the Companies Ordinance, 1984.
• The amount of foreign equity investment must not be less than US $ 0.15 million.
• 100% foreign equity is permissible on the basis of repatriation of capital and profits (dividend).

 NO GO AREAS (PROHIBITED AREAS)

Government of Pakistan prohibit the following areas for investment:

• Arms and ammunition
• High explosives
• Radioactive substances
• Security printing, currency and mint
• Alcoholic beverages or liquor

 

CORPORATE STRUCTURES

Various Corporate structures are available for setting up a place of business in Pakistan for which Masood and Masood, Corporate and Legal Consultants can give you the optimum advice putting into prospective the current Pakistan Legislation and the individual person/companies position.

In terms of the Investment Policy of the Government of Pakistan, there are three (03) ways, whereby, a foreign company may have its presence in Pakistan.

• Liaison Office;
• Branch Office; and
• Locally incorporated subsidiary

HOW WILL MY FUNDS GET INTO PAKISTAN AND WHAT WILL BE THE EXIT STRATEGY.

State Bank of Pakistan (SBP) regulates remittances in and out of Pakistan under legislature. There is no restriction on inward remittances by State Bank of Pakistan (SBP) but any outward remittances whether be royalty, technical fee and dividend have to have a prior approval from SBP, which the authorising bank/agent would do on the company’s behalf.  Similarly any contract for any such remittance needs prior approval of SBP. In case you require any assistance with the approval from State Bank of Pakistan do let Masood and Masood know and we will  happily complete all the legal paper work and technical formalities. 

WILL A FOREIGN INVESTOR BE TREATED LESS FAVOURABLY ON 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.

Furthermore, since Pakistan has entered into Bilateral Agreements on Promotion and Protection of Investment with more than 46 countries. These Agreements provide the following:

• 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

DOES MASOOD AND MASOOD HAVE EXPERIENCE IN HANDLING FOREIGN CLIENTS?

Yes, we have successfully managed to assist many multinationals and foreign individuals to invest in Pakistan and form a place of business to that effect.  Masood and Masood is currently dealing with various foreign direct investment projects in Pakistan including, but not limited to, the following:

• Real estate projects
• Power projects
• Oil and gas related projects
• Development projects
• Construction projects
• IT related projects
• Various manufacturing projects
• Service related projects
• Non-manufacturing projects
• Health related projects
• Cosmetics & toiletries related projects 

 

DECISION TIME

You are confident that you want to invest in Pakistan or you want a pre investment feasibility report, you know Masood and Masood, Corporate and Legal Consultants are the people to be called over.