How is a company's share taxed when the company is a partner in an AOP?

When a company is a partner in an association of persons (AOP), its share is carved out of the AOP’s income and taxed in the company’s own hands at the company rate. The Income Tax Ordinance, 2001 does this through the first proviso to section 92(1), added by the Finance Act, 2014. Section 168(2A) then divides tax withheld in the AOP’s name between the AOP and the company.

What does the law say?

Section 92(1), first proviso. If at least one member of an AOP is a company, the share of that company is excluded when computing the total income of the AOP. The company “shall be taxed separately, at the rate applicable to the companies, according to their share”.

Division II of Part I of the First Schedule. The company rates are:

Type of company	Rate
Banking company	44% (tax year 2025), 43% (tax year 2026), 42% (tax year 2027 and onwards)
Small company	20%
Any other company	29%

Section 168(2A). Where a company is a member of an AOP taxed under section 92, and tax has been collected from or deducted from payments to the AOP, the company gets a tax credit worked out as (A/B) x C, where:

• A is the share of profits before tax received by the company as a member from the AOP;
• B is the taxable income of the AOP; and
• C is the tax withheld in the name of the AOP.

Section 168(2B). The AOP gets no credit for any withheld tax for which the company member has been allowed credit under sub-section (2A).

Section 113(3)(d). For minimum tax, a company’s turnover includes its share of the turnover amounts of any AOP of which it is a member.

How does it work in practice?

The AOP’s return covers the income left after the company’s share is removed. The non-company members’ shares of that income are handled under the main rule of section 92(1): the AOP pays tax, and their shares are exempt in their hands, subject to the audited accounts condition for turnover of Rs. 300 million or more. The company brings its share into its own return and pays at its Division II rate. Tax withheld from the AOP’s receipts is issued in the AOP’s name, so section 168(2A) is the route by which the company claims its portion.

Worked example (illustrative figures)

Indus Build JV in Islamabad has three members: Margalla Engineering (Pvt) Ltd (not a small or banking company) with 40%, and two individuals with 30% each. For tax year 2027, the made-up figures are:

• Profit before tax, which for simplicity equals taxable income before any exclusion: Rs. 50,000,000.
• Tax withheld in the JV’s name by clients: Rs. 3,000,000.

Step 1: the company’s share. Rs. 50,000,000 × 40% = Rs. 20,000,000.

Step 2: tax on the company’s share. Rs. 20,000,000 × 29% = Rs. 5,800,000.

Step 3: income left in the AOP. Rs. 50,000,000 minus Rs. 20,000,000 = Rs. 30,000,000, taxed at the AOP rates in Division I of Part I of the First Schedule.

Step 4: the company’s credit under section 168(2A). A is Rs. 20,000,000 and C is Rs. 3,000,000. The Ordinance does not say whether B, “the taxable income of the association of persons”, means the figure before or after the company’s share is excluded. The two readings give different results:

Reading of B	A/B	Credit (A/B) x C
B = Rs. 50,000,000 (before exclusion)	0.4	Rs. 1,200,000
B = Rs. 30,000,000 (after exclusion)	0.6667	Rs. 2,000,000

Step 5: balance. On the first reading the company’s tax after credit is Rs. 5,800,000 minus Rs. 1,200,000 = Rs. 4,600,000, and the AOP keeps credit for Rs. 1,800,000. On the second, it is Rs. 5,800,000 minus Rs. 2,000,000 = Rs. 3,800,000, and the AOP keeps Rs. 1,000,000. Either way, section 168(2B) stops the AOP claiming what the company claims.

What if …?

What if there are two company members? The proviso speaks of “the share of such company or companies”. Each company’s share is excluded and taxed in its own hands, and section 168(2A) applies to each.

What if the AOP’s profit before tax differs from its taxable income? The formula uses both: A is share of profits before tax and B is taxable income. The ratio can therefore differ from the company’s profit-sharing percentage. The text does not adjust for this.

What if the company must pay minimum tax? Section 113(3)(d) counts the company’s share of the AOP’s turnover in its own turnover.

Common mistakes

• Taxing the whole profit in the AOP. The company’s share is excluded from the AOP’s total income.
• Applying the AOP rates to the company’s share. It is taxed at the company rate.
• Double-claiming withheld tax. Section 168(2B) prevents the AOP claiming the company’s portion.
• Ignoring other company-level taxes. Super tax and minimum tax can also apply and are dealt with on separate pages.

What to check in the official text

Read section 92(1) with its first proviso and section 168(2A) and (2B), where the formula appears as “(A/B) x C” in the source PDF. Check Division II of Part I of the First Schedule for the rate that fits the company, including the Ordinance’s definition of small company. Read section 113(3)(d) if minimum tax may apply.