How much tax must a company deduct when it pays a dividend, and why is it 25% when the company paid no tax?

A company that pays a dividend in Pakistan is a withholding agent for the tax on it. It deducts the tax from the gross dividend before paying the shareholder, and for most shareholders that deduction is the whole of their tax on the dividend. The rates below are from the Income Tax Ordinance, 2001 as amended to 30 June 2026, and apply to dividends paid in tax year 2027.

What does the law say?

Section 150 says every person paying a dividend “shall deduct tax from the gross amount of the dividend paid”, or collect tax from the amount of a dividend in specie, at the rate in Division I of Part III of the First Schedule. That Division sets these rates:

Clause	Dividend	Rate
(a)	Paid by an Independent Power Producer, where the dividend is a pass through item under an Implementation, Power Purchase or Energy Purchase Agreement and is reimbursed by CPPA-G	7.5%
(b)	Real Estate Investment Trust, and all cases not covered by (a), (ba), (c) and (d)	15%
(ba)	Mutual funds, depending on income from debt securities and equities	25% and 15%
(c)	From a Special Purpose Vehicle under the REIT Regulations, 2015	0% to a REIT scheme, 35% to others
(d)	From a company with no tax payable because of exempt income, carried-forward business losses or tax credits	25%

Section 5 separately charges the shareholder at the rate in Division III of Part I of the First Schedule, computed “to the gross amount of the dividend”. Division III uses the same clauses and rates, so what the company deducts under section 150 matches the shareholder’s charge under section 5.

Why is it 25% when the company paid no tax?

Clause (d) reads: “25% in case of a person receiving dividend from a company where no tax is payable by such company, due to exemption of income or carry forward of business losses under Part VIII Chapter III or claim of tax credits under Part X of Chapter III.”

The trigger is the paying company’s own tax position. A dividend normally comes out of profit that has already borne company tax, and the shareholder pays 15% on top. Where the company’s profit was covered by an exemption, by set-off of losses brought forward, or by tax credits so that no tax was payable, the shareholder rate rises to 25%. The wording is “no tax payable”. The clause does not say how to treat a company that paid some tax but less than the full rate because of partial loss set-off or credits, and this page does not settle that point.

How does it work in practice?

The company deducts at the time the dividend is paid, on the gross amount, not on the net amount after deduction. Section 8(1) then makes the section 5 tax “a final tax on the amount in respect of which the tax is imposed”, which means:

• the dividend is not added to the shareholder’s other income;
• no expense is deductible against it;
• no loss can be set off against it and no tax credit reduces the tax; and
• under section 8(1)(e)(ii), the shareholder’s liability is discharged to the extent the tax was deducted at source.

For a shareholder who does not appear in the active taxpayers’ list, rule 1 of the Tenth Schedule says the rate to be deducted “shall be increased by hundred percent of the rate specified” in the Ordinance.

Worked example (illustrative figures)

A Karachi cement company declares a total cash dividend of Rs. 10,000,000 in tax year 2027. Two shareholders each receive Rs. 2,000,000.

Case 1: the company paid tax on its income. Clause (b) applies.

• Rs. 2,000,000 x 15% = Rs. 300,000 deducted. Shareholder receives Rs. 1,700,000.

Case 2: the company had no tax payable because brought-forward business losses absorbed its income. Clause (d) applies.

• Rs. 2,000,000 x 25% = Rs. 500,000 deducted. Shareholder receives Rs. 1,500,000.

Case 3: as Case 1, but the shareholder is not in the active taxpayers’ list. The 15% rate is increased by 100% of itself: 15% + 15% = 30%.

• Rs. 2,000,000 x 30% = Rs. 600,000 deducted. Shareholder receives Rs. 1,400,000.

What if the dividend is paid in shares or kind?

Section 150 covers a “dividend in specie” by requiring the payer to “collect tax from the amount of dividend in specie” at the same Division I rates. Bonus shares are no longer caught: the words “or collect tax from the shareholder in the case of bonus shares” were omitted by the Finance Act, 2002.

What if the shareholder is another company?

The same deduction applies. A footnote to section 8 records that a proviso reading “the provision of this section shall not apply to dividend received by a company” was omitted by the Finance Act, 2013, so the final tax rule now covers corporate shareholders too. Dividends within a group taxed as one fiscal unit can be exempt, which is covered on the intercorporate dividend page.

Common mistakes

• Deducting on the net amount. Section 150 and section 5(2) both work on the gross dividend.
• Using 15% when the company’s income was covered by losses or exemption. Clause (d) sets 25% where no tax is payable for those reasons.
• Forgetting the non-active taxpayer increase. Rule 1 of the Tenth Schedule increases the deduction rate by 100% for persons not in the active taxpayers’ list.
• Adding the dividend to the shareholder’s taxable income. Section 8 excludes it from every head of income.

What to check in the official text

Read section 150, sections 5 and 8, Division I of Part III and Division III of Part I of the First Schedule, and rule 1 of the Tenth Schedule in the official PDF. Check whether the paying company had tax payable for the relevant year before choosing between clause (b) and clause (d), and check a mutual fund’s income mix before applying clause (ba).