Foreign investment in Pakistani startup businesses

Foreign investment in Pakistani startup businesses

Investment in Pakistani start-ups has increased significantly over the years. This is mainly due to the significantly lower taxes imposed on Pakistani start-ups and the significantly higher returns from such investments. Start-ups, therefore, offer favourable incentives to foreign investors for investing in companies.

Turning great ideas into products takes time, energy, and resources. Primarily for this reason, startups need investment to get their business off the ground. This article will guide you through the procedures and processes for making foreign investments in Pakistan-registered start-ups.

How to invest in a startup company?

Subpart B of Section 13 of Chapter 20 of the Foreign Exchange Manual issued by the Exchange Policy Department of the National Bank of Pakistan states that innovative and/or scalable enterprises with high growth by residents. The purpose of this procedure is not only to protect the interests of foreign investors but also to document the investment.

Who Can Make Foreign Investments in Pakistan? Non-residents, including foreign nationals residing outside Pakistan, or corporations incorporated outside Pakistan can invest in Pakistani start-ups from abroad.

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What are the general requirements for foreign investment in Pakistani start-ups?

Pakistani start-ups must be registered as legal entities under the Companies Act 2017. The company must not have him more than 7 years old. The turnover of such a company must be less than 2 billion PKR since its inception. According to the latest audited accounts, the company’s capital must be less than PKR 300 million.

 What is the procedure for foreign investment in Pakistani startups?

 Here are the step-by-step steps to attract foreign investment:

1. A company meeting the above criteria is allowed to set up a holding company abroad, and the initial set-up costs he can remit overseas may not exceed US$10,000.
2. Existing holdings in a resident company can be exchanged for shares in a holding company within 30 days.
3. In this regard, the resident company is required to acquire the shares issued by the holding company against the payment of money in Pakistani rupees to the resident company. Therefore, a resident company can issue equivalent shares in favor of the holding company on a repatriated basis.
4. Non-resident investors will also subscribe to shares in the holding company according to their investment.
5. A holding company remits funds raised from abroad through equity or borrowing to Pakistan as an equity-based investment in a resident company in the following ways:
6. At least 80% of foreign-sourced funds up to US$1 million annually are remitted to Pakistan.
7. At least 50% of the funds raised from abroad each year will be remitted to Pakistan up to a total of $10 million.
8. Once the shares have been subscribed, the resident company can remit dividends to the holding company and remit payments corresponding to each non-resident director’s shares to their respective offshore accounts.

Is the remittance of dividends to non-residents taxed?

 For tax purposes, Pakistan allows companies to deduct business expenses as long as they deduct the expenses in strict accordance with the procedures set out in Article 21 of the Income Tax Regulations, 2001. Taxes are levied on a company’s net profit. Dividends from net income are transferred to the holding company and distributed to non-resident directors/shareholders.