Foreign Exchange Controls

Chapter 6

Foreign Exchange Controls

Foreign Exchange Regulations

Foreign exchange dealings are regulated under the Foreign Exchange Regulation Act 1947. Foreign currencies are made available to persons / companies doing business in Pakistan for all purposes under rules which have been clearly defined by the State Bank of Pakistan. There are no restrictions on availability of foreign currency for imports (except for import of banned items or for imports from Israel).

Business houses can buy foreign currencies for all other commercial transactions like payments for export claims, commission payment to foreign agents on exports royalty / franchise, technical fees and dividends (as subsequently described in details), software license / maintenance / support fee, advertisement abroad including advertisement through electronic media, business travel, etc.

Foreign investment in Pakistan enjoys full protection and repatriation facilities. The Foreign Private Investment (Promotion and Protection) Act, 1976 provides guarantees for repatriation of foreign investment to the extent of original investment, profits earned on such investment, and appreciation of capital.

The following are the important foreign exchange regulations pertaining to foreign investment:

Issuance of Share Certificates to Foreign Investors

Under a general permission given by the SBP, shares can be issued to non-resident investors against their investments in those sectors which are open for foreign investments, provided the purchase price has been received in foreign currency through banking channels and the conditions pertaining to investment in that sector have been met. If foreign investment is made in the shape of plant and machinery, the SBP gives permission for issuance of shares after verifying the import documents.

In case, the proceeds of foreign equity and loan are to be utilized for import of plant and machinery, these funds can be retained in a foreign currency account in Pakistan or abroad.

Companies covered under the general exemption can also export the share certificates to the non-resident investors, without the SBP’s prior approval.

Remittance of Dividend

Each company which wants to make remittance of dividends, should advise the Joint Director (Investment Division), Exchange Policy Department, SBP, Karachi, the name of its bankers through whom it would like to make remittance. On receipt of nomination of a bank from the company, the SBP will authorize the bank concerned to effect remittance of dividends, whether interim or final, to the nonresident shareholders of the company without its prior approval. Commercial banks are authorized to remit dividends to foreign investors net of taxes, if applicable.

Disinvestment Proceeds

Banks can remit disinvestment proceeds to the extent of market value less brokerage / commission on submission of Stock Broker’s memo showing the particulars of sale, in case of listed companies and to the extent of break up value of shares, as certified by a practicing Chartered Accountant, in case of a private limited company or unlisted public limited company.

Remittance Facility to Foreign Employees

Foreign technical and managerial personnel working in Pakistan under a work visa are allowed to transfer to their countries of domicile, the difference between their salaries and estimated living expenses in Pakistan on monthly basis, through their banks.

Commercial banks are also allowed to remit foreign exchange for foreign experts and technicians engaged for supervision of installation and commissioning of plant and training of local personnel for running the plant which does not require any governmental approval.

Royalty

Royalty is a fee paid by a local firm to the foreign collaborator in consideration of license to use the foreign manufacturers’ patent / brand name for marketing the product(s).

Technical fee

It is a fee paid by the local firm to the foreign collaborator in consideration of:

  • Engineering and Technical Services including assistance on manufacturing process, testing and quality control, assistance by way of making available patented process and / or secret know-how and rights to avail technical / confidential information resulting from continuous technical research and development, etc.; and
  • No technical fee is allowed for simple conventional process goods, which are being produced in the country, without foreign technical collaboration. Payment of Royalty, Franchise / Technical Fee by the non-manufacturing sectors opened for Foreign Direct Investment like International Food Franchises is permissible, subject to the maximum limit of $100,000 on the initial lump-sum payment, irrespective of number of outlets, and maximum 5% of net sales. The initial period, for which such fees will be allowed, should not exceed five years. Subsequent extension in time period will be considered provided these projects also make investment in allied upstream projects. The SBP has laid down certain conditions for remittance of Royalty and Technical Fee to facilitate the execution of agreements for transfer of technology. The conditions for remittance of royalty and technical fee are as follows: Upon execution of an agreement for transfer of technology with foreign collaborator, the local firm would designate any of the Authorized Dealers (Banks) in foreign exchange in Pakistan, through whom payments under the agreement will be made and send an authenticated copy of the agreement to the SBP through the designated bank within 30 days from the date of its execution. The SBP will record the agreement, if it conforms to the foregoing definitions of Royalty / Technical Fee. Remittance of Royalty / Technical Fee would be allowed by the Authorized Dealer designated for the purpose, without the prior approval of the State Bank subject to the following:
  • Application for remittance of Royalty / Technical Fee is submitted by the firm concerned in the prescribed form;
  • The correctness of the information furnished in the application must be certified by the Auditors of the firm;
  • Payment of income tax supported by a certificate from auditors of the paying firm. In case it is claimed that the payment is exempt from levy of income tax, then relevant exemption certificate from the competent tax authorities would be required; and
  • The applicant company must be incorporated and operating in Pakistan. Remittance of Royalty/Franchise and Technical Fee or commission/service charges for the financial sector may be allowed by the State Bank, on case-to-case basis, in respect of foreign collaborators branded financial products/services. The one-time lump sum up-front Royalty/Technical Fee/Franchise fee should not exceed $500,000. Continuing payments should not exceed 0.25% of customers billing.

Portfolio Investment and Special Convertible Rupee Account (SCRA)

Non-residents are allowed to trade freely in the shares quoted on the Stock Exchanges in Pakistan. For this purpose the non-residents will be required to open “Special Convertible Rupee Account” with any Authorized Dealer in Pakistan. Such accounts can be fed by remittances from abroad or by transfer from a foreign currency account maintained by the non-resident investor in Pakistan. The balance available therein can be used for purchase of any share quoted on the Stock Exchange. Disinvestments proceeds may be credited to these accounts, provided evidence of the sale price in the shape of stockbroker’s memo is produced. The fund available in such special accounts can be transferred outside Pakistan or credited to a foreign currency account maintained in Pakistan at any time without prior approval of the State Bank. These accounts can also be credited with dividend income. Transfers from one such account to another may also be made in case of transfer of shares between the two account-holders.

Exchange Companies

A three stage procedure has been prescribed for establishment of Exchange Companies, starting from obtaining an NOC from the SBP, applying to the SECP for incorporation and obtaining license for commencement of operations from the SBP. Foreign participation in exchange companies is permissible up to 50%. These companies can deal in foreign currency notes, coins, postal notes, money orders, bank drafts, travellers’ cheques and transfers. They can also open currency exchange booths at public places for dealing in foreign currency notes and coins and purchase of traveller’s cheques.

Foreign Currency Borrowing for Plant and Machinery

Private foreign currency loans

General permission has been granted to private sector entrepreneurs to obtain foreign currency loans from banks / financial institutions abroad, parent companies of the multinationals and as suppliers credit including credit under PAYE Scheme, not involving government guarantee, for financing foreign currency cost of the projects covered by the government’s industrial and investment policies. The repayment period of such loans / credit should not be less then five years. Loan agreement in respect of such private foreign currency loans including suppliers’ credit under PAYE Scheme are required to be registered with SBP together with the repayment schedule thereof. Such registration allows remittance of interest and loan instalments, after deduction of applicable tax, without requiring prior approval.

Exchange Rate Fluctuation Risk

Authorised Dealers (Banks) provide forward cover for export, import, foreign private loans, repatriable foreign currency loans (excluding loans obtained by foreign contractors and branches of foreign companies), in accordance with the conditions prevailing in the market.

Other Foreign Private Loans – Any Purpose

Individuals, firms, companies resident in Pakistan including foreign controlled companies and branches of foreign companies but excluding banks may obtain foreign currency loans from abroad on repatriable basis for any purpose on the following terms and conditions:

  • No ceiling on amount of loan. The repayment period, however, should not be less than five years and the repayment should be made in equal instalments.
  • Interest payable in arrears on half yearly / yearly basis at a rate not exceeding the relevant LIBOR plus 1.5% and will be subject to Pakistan taxes as may be leviable.
  • Exchange rate fluctuation shall be borne by the borrower and no forward cover in foreign currency would be provided by the Authorised Dealers.
  • No bank guarantee for securing such loans would be provided from Pakistan.
  • The borrower must get the agreement registered with an Authorized Dealer who will handle all transactions there under and intimate the details after receipt of all disbursements to the SBP in prescribed form along with Proceeds Realisation Certificate showing encashment of loan into Pak Rupees. Thereafter, the Authorised Dealer would be free to remit the instalments of principal and interest on due dates in terms of repayment schedule, after deduction of tax, if leviable thereon. No prepayment would be permissible.

Short Term Foreign Private Loans

Short-term loans from abroad by exporters

Exporters, who have valid firm commitments with foreign buyers for export of goods from Pakistan, can obtain short-term foreign currency loans from abroad to the extent of value of such firm commitment. Authorised Dealers and borrowers are free to negotiate the interest rates and the maximum tenure of such loan shall be the maximum period prescribed for repatriation of export proceeds plus 60 days.

The exchange risk shall be borne by the borrower. However, the loan and the interest thereon have to be repaid out of the related export proceeds.

Repatriable foreign currency loans by foreign controlled companies for working capital

Foreign controlled companies are allowed to contract foreign currency loans from banks/ financial  nstitutions or from their Head Office or from other overseas branches/ associates abroad for meeting their working capital requirements, subject to the conditions that the repayment period should not exceed twelve

months and the interest should not exceed 1% over LIBOR. Such loans can be rolled over for further periods, not exceeding twelve months each. Upon maturity of such loans, the Authorised Dealer will allow remittance of interest and principal after deduction of applicable tax, if leviable, based on the proceed realization certificate for inward remittance of foreign exchange. Branches of foreign companies are not allowed to pay interest on such loans. Foreign contractors are also not allowed to pay interest on such loans and repayment by them can only be made after completion of contract and submission of clearance certificate from the tax authorities.

Foreign currency loans for working capital by Pakistani firms

Pakistani firms and companies functioning in Pakistan, excluding banks, may obtain foreign private loans on non-repatriable or repatriable basis, subject to the following conditions: –

Non-repatriable basis

These loans are treated as Rupee loans and neither principal nor interest/profit would be remittable abroad. Repayment of loans and interest would be made in Pakistan in Pak Rupees.

Repatriable basis

  • The loan must be interest free and for a period not less than one year.
  • No bank guarantee for securing such loans would be provided from Pakistan.
  • No forward cover shall be provided.

The agreement for a loan on repatriable basis and its repayment schedule are required to be registered with SBP, where after, the Authorised Dealer is allowed to remit instalment of principal on due date.

Prepayments of Foreign Private Loans

The SBP allows prepayments of foreign private loans (other than the Government guaranteed loans), on a case-to-case basis. This facility can be availed by borrowers who have the rupee counterpart available with them or they have the capacity to generate rupee funds themselves.

Possession of Foreign Currency

There is no restriction on residents and non-residents on bringing in, and holding foreign currency. However, there is a ceiling of US$ 10,000 on taking foreign currency out of Pakistan. This ceiling is in addition to any amount released by any bank under the SBP’s rules.

Foreign Currency Accounts

Following are allowed to open and maintain FCA without prior approval from SBP:

  • Pakistan national resident in or outside Pakistan, including those having a dual nationality.
  • All foreign nationals, whether residing abroad or in Pakistan.
  • Joint Account in the names of residents and non-residents.
  • All diplomatic missions accredited to Pakistan, and their Diplomatic Officers.
  • All International Organisations in Pakistan.
  • Firms and companies established / incorporated and functioning in Pakistan, including those having foreign share-holdings, except for certain specified types of foreign currency remittances, for which required procedure has been provided separately in the foreign exchange regulations.
  • Charitable Trusts, Foundations, etc., which are exempted from income tax.
  • Branches of foreign firms and companies in Pakistan;
  • Non-resident Exchange Companies, even if owned by a bank or financial institution.
  • All foreign firms / corporations, other than banks and financial institutions owned by Banks, ncorporated and operating abroad, provided these are owned by persons, who are otherwise eligible to open foreign currency accounts.

However, the facility is not available to airlines operating in / through Pakistan or collecting passage and freight in Pakistan and the investment banks, leasing companies and modaraba companies including those which have been granted licenses to deal in foreign exchange.

FCA’s can be fed, subject to the specified conditions mainly in respect of nature of transactions effecting generation of foreign exchange, i.e., FCA’s can not be fed through proceeds of securities sold to non-residents, amount representing payments for exports of goods and services, any foreign exchange borrowed with the permission of SBP, unless otherwise permitted and any foreign exchange purchased from a bank in Pakistan for any purpose.

However, FCA’s can be fed through remittance from abroad, travelers cheques issued from outside Pakistan, foreign currency notes and foreign exchange generated by the encashment of securities issued by the Government of Pakistan. Resident corporate bodies and legal entities cannot, however, generate funds from the kerb market for deposit in FCA’s.

Foreign equity and foreign currency loan can be retained in a Special Foreign Currency Account opened with a bank in Pakistan. The funds available in such foreign currency accounts can only be used for those purposes which are related to the business of the account holder or which are otherwise permitted

under the foreign exchange regulations. Any unutilised amount of foreign currency in these accounts will be required to be converted into Rupee at the inter-bank market and no withdrawal will be allowed in the shape of foreign currency notes.

Those branches / liaison offices / representative offices of foreign companies which have been permitted to be established on the condition that they would meet their expenses out of funds received from their head office, are required to convert such funds, i.e., foreign currency into Rupees with a bank in Pakistan.

Local Borrowings by Foreign Controlled Companies

Lending to foreign controlled companies for working capital

Authorised Dealers are allowed to grant Rupee loans and credits to foreign controlled companies for meeting their working capital requirements.

Lending to foreign controlled companies for capital expenditure

Foreign controlled companies engaged in manufacturing are allowed to obtain Rupee loans for meeting capital expenditure requirement from banks, development financial institutions and other financial institutions or by issuing Participation Term Certificates, etc. However, other foreign controlled companies require special permission to obtain medium and long-term Rupee loans.

Loans Against Guarantees of Non-residents or Against Collateral

Held Outside Pakistan

Authorised Dealers have general permission under the Foreign Exchange Regulations to grant Rupee loans to their clients (including foreign controlled companies) against guarantees of non-residents / guarantees received from banks functioning abroad.

Immigration Procedure

Salient Features of Existing Visa Policy

To facilitate travel to and staying in Pakistan for foreign businesspersons and investors, business visa policies have been considerably relaxed.

The bonafide businessman & investors from the countries listed below, who have invested at least $200,000, can be issued business visa up to 3 Year with multiple entries by Pakistan Missions Abroad.

  1. Australia 16. Indonesia 31. Qatar
  2. Austria 17. Iran 32. Russian Federation
  3. Bahrain 18. Ireland 33. South Africa
  4. Belgium 19. Italy 34. Saudi Arabia
  5. Brunei 20. Iceland 35. Singapore
  6. Canada 21. Japan 36. Slovakia
  7. China 22. Kuwait 37. South Korea
  8. Czech Republic 23. Luxembourg 38. Spain
  9. Denmark 24. Malaysia 39. Sweden
  10. Finland 25. Netherlands 40 Switzerland
  11. France 26. New Zealand 41. Turkey
  12. Greece 27. Norway 42. Thailand
  13. Germany 28. Oman 43. U.S.A.
  14. Hungary 29. Poland 44. U.A.E.
  15. Hong Kong 30. Portugal 45. United Kingdom.
  • Businesspersons and investors from any of the above 45 countries where there is no Pakistani Embassy will also be granted a thirty-day landing permit on arrival at the airport in Pakistan.
  • Pakistani industrialists and businesspersons interested to invite foreign entrepreneurs from countries, other than the above 45 countries, for promotion of trade and industrial cooperation, are allowed to sponsor, on their own guarantee, the granting of a visa for one month through the Chambers of Commerce and Industry at Lahore, Karachi, Peshawar, Quetta, Islamabad, and the Federation of Pakistan Chambers of Commerce and Industry.

Additional Incentives

Work Visa Procedures

  • A uniform facility has now been in place and foreign technical and managerial personnel have been exempted from obtaining work permits in the newly opened sectors of the economy, viz. agriculture, service and social sectors.

This was already enjoyed by such personnel for working in the manufacturing / industrial and infrastructure sectors. They are now only required to obtain work visas.

  • Work visas are granted subject to a constructive plan to train Pakistani personnel to take over the technical and managerial responsibilities over a reasonable period of time.
  • The work visa is issued for a period of up to 5 years or up to the date of expiry of the applicant’s passport. The concerned Pakistani Mission abroad will grant work visas to the applicant, whereas extension in work visa is endorsed by the Regional Passport Office of the city, where the expatriate is working upon authorisation by the Ministry of Interior.
  • In case of multiple entry visas, the number of entries will not be restricted.

Business Visa Conversion into Work Visa

For the purpose of changing the category of visa of foreign national employees and investors from business visa to work visa, the concerned expatriate is no more required to leave the country for this purpose. The Ministry of Interior will process such requests, upon receiving verification from the BOI.

Registration of Foreigners with the Police

All foreigners are exempted from registration with the police, except for nationals of countries on the negative list. l Even in the case of countries on the negative list (except for Indians and foreigners of Indian origin), foreign nationals in the managerial category who are issued work permits/ visas are exempted from police registration.

Granting of Pakistan Citizenship to Foreign Nationals (Investors)

Any person of a country recognized by Pakistan may obtain Pakistani Citizenship by investing a minimum of US$ 0.75 million in tangible assets and $0.25 million (or equivalent in major foreign currency) in cash on a non-repatriable basis, and by fulfilling the conditions of the Pakistan Citizenship Law. Investment on a nonrepatriable basis means that the amount is brought to Pakistan through normal banking channels, converted into Rupees, and never remitted back.

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