Tax planning is an essential aspect of any business, and choosing the right business registration can have a significant impact on your tax obligations. In Pakistan, deciding between a company and an association of persons (AOP) can be challenging. This article will provide a detailed comparison between the two and help you decide which option is more suitable for your business.
To register a company in Pakistan, you need to submit an application to the Securities and Exchange Commission of Pakistan (SECP) under the Companies Act 2017. On the other hand, AOPs are registered with the Registrar of Firms under the Partnership Act 1932.
Type of Business:
The type of business you plan to carry out plays a crucial role in determining the registration you need. If your business involves international trading or service providing, establishing a corporate entity is a requirement. In contrast, some businesses don’t require company registration.
Annual Filing Obligations:
Companies other than single-member companies (SMC) are required to file annual returns (Form A/29). In contrast, no annual filing is required for AOPs.
From day one of incorporation, a company is a withholding agent. However, AOPs are not withholding agents up to a turnover of 100 million in a preceding tax year.
Rate of Withholding:
The rate of withholding tax for a company is lesser than that of an AOP. For instance, goods are withheld at 4% for companies and 4.5% for AOPs, while services are withheld at 8% for companies and 10% for AOPs.
Minimum Tax Threshold:
A minimum tax is applicable without any threshold for companies, while for AOPs, the minimum tax threshold is Rs. 100 million in turnover.
Alternate Corporate Tax:
Companies are subject to alternate corporate tax at the rate of 17%, while AOPs are not subject to it.
Audit of Annual Accounts:
Companies with a turnover of more than three million require an annual audit of accounts, while AOPs are not legally required to have an audit.
The liability of company members is limited to the amount of share capital, while AOPs have unlimited liability.
In companies, member’s remuneration is drawn via salary or dividend, resulting in double taxation. In contrast, in AOPs, member’s remuneration is drawn via profit withdrawal or drawings, resulting in one-time tax on profit and no tax on drawings.
Companies are taxed at a flat rate of 29% (may vary for each tax year), while AOPs are taxed at different slab rates. The higher the income, the higher the tax rate. Above 6 million, AOPs are taxed at 35% (may vary for each tax year).
Income Tax Return Due Date:
The income tax return due date for companies falls on December 31 each year unless the company has a special tax year. For AOPs, the income tax return due date falls on September 30 each year unless extended by notification by the Board.
In conclusion, choosing the right business registration is crucial for tax planning in Pakistan. While companies have certain advantages, such as limited liability and lower withholding tax rates, AOPs have advantages such as no annual filing obligations and no double taxation. You should consider the type of business you plan to carry out, the annual filing obligations, tax rates, and remuneration structure when deciding which registration option is more suitable for your business. It’s always advisable to seek the guidance of a tax professional to help you make an informed decision.