Can a subsidiary's tax loss be surrendered to its holding company under group relief, and what shareholding is needed?

Group relief lets one company in a Pakistani group use another group company’s current-year business loss against its own business income. It is not automatic: section 59B of the Income Tax Ordinance, 2001, as amended to 30 June 2026, sets ownership, business and approval conditions, and reverses the benefit if the shareholding drops within five years.

What does the law say?

Section 59B(1) allows “any company, being a subsidiary or a holding company” to surrender its assessed loss for the tax year, excluding capital loss and brought forward losses, “in favour of its holding company or its subsidiary or between another subsidiary of the holding company”.

The shareholding needed depends on whether the group has a listed company:

Group	Direct holding by the holding company in the subsidiary
One of the group companies is a public company listed on a registered stock exchange in Pakistan	55% or more
None of the group companies is listed	75% or more

Section 59B(1A) caps the loss that can be surrendered at (A/100) x B, where A is the percentage of share capital the holding company holds in the subsidiary and B is the subsidiary’s assessed loss.

What conditions have to be met?

Section 59B(2) allows the claiming company to set the surrendered loss off against its income under the head “Income from Business” in the tax year and the following two tax years, subject to these conditions:

• (a) continued ownership of the subsidiary’s share capital for five years, at 55% for a listed company or 75% or more for other companies;
• (b) a group company engaged in the business of trading cannot avail group relief;
• (ba) a company whose business income is taxed under any provision other than Division II of Part I of the First Schedule cannot avail group relief. This clause was inserted by the Finance Act, 2025;
• (c) a holding company that is a private limited company with 75% ownership “gets itself listed within three years from the year in which loss is claimed”;
• (d) the group companies are locally incorporated under the Companies Act, 2017;
• (e) the Board of Directors of each company approves the loss surrendered and the loss claimed;
• (f) the subsidiary “continues the same business during the said period of three years”;
• (g) every group company meets SECP corporate governance and group designation requirements and is designated as entitled to group relief; and
• (h) any other condition as may be prescribed.

Clause (a) speaks of five years and clause (f) of three years. The section does not reconcile the two periods, and this page does not either.

What happens after the loss is surrendered?

• Time limit. Section 59B(3) says the subsidiary cannot surrender its losses to the holding company for more than three tax years.
• Unused loss. Under section 59B(4), surrendered losses not adjusted in those three tax years go back to the subsidiary, which carries them forward under section 57. Section 57 allows a business loss to be carried forward for no more than six tax years after the year it was first computed.
• Cash payment. Section 59B(6) requires the claiming company, with board approval, to transfer cash to the surrendering company equal to the tax payable on the profits set off against the acquired loss, at the applicable tax rate. That transfer “would not be taken as a taxable event” for either company.
• Clawback. Under section 59B(5), if the holding company disposes of shares within the five years so that its holding falls below 55% or 75%, it must, in the year of disposal, offer the profit on which tax was not paid because of the surrendered losses.
• Share transfers to form the group. Section 59B(7) says share transfers made to acquire share capital for forming the group are not a taxable event where SECP or State Bank approval has been obtained. Sale and purchase from a third party is taxable.

Worked example (illustrative figures)

A Karachi holding company, unlisted, holds 80% of a manufacturing subsidiary. Neither company trades, both are taxed under Division II, and all approvals and designations are in place. Tax year 2027:

1. Subsidiary’s assessed loss for the year: Rs. 40,000,000.
2. Maximum surrender under section 59B(1A): (80 / 100) x Rs. 40,000,000 = Rs. 32,000,000.
3. Holding company’s business income for tax year 2027: Rs. 20,000,000. It sets off Rs. 20,000,000 of the surrendered loss, leaving Rs. 12,000,000 for tax years 2028 and 2029.
4. Cash the holding company transfers to the subsidiary under section 59B(6), at the 29% Division II rate for an ordinary company: Rs. 20,000,000 x 29% = Rs. 5,800,000.
5. If Rs. 12,000,000 is still unused after tax year 2029, section 59B(4) returns it to the subsidiary to carry forward under section 57.

Section 59B does not say in terms what happens to the remaining Rs. 8,000,000 that falls outside the (A/100) x B formula. Section 57 is the general rule for carrying forward a company’s own business loss.

How is this different from group taxation?

Section 59AA is a separate regime. It lets “Holding companies and subsidiary companies of 100% owned group” opt, irrevocably, to be taxed as one fiscal unit. Group relief under section 59B needs only 55% or 75% ownership but moves losses for a limited period and on conditions, rather than combining the group’s income.

Common mistakes

• Surrendering old losses. Only the assessed loss for the tax year qualifies, not brought forward or capital losses.
• Surrendering the full loss of a partly owned subsidiary. Section 59B(1A) limits it to the ownership percentage.
• Including a trading company. Clause (b) of section 59B(2) excludes a group company engaged in trading.
• Including a company taxed outside Division II. Clause (ba), inserted by the Finance Act, 2025, excludes it.
• Ignoring the five-year holding. A sale that drops the holding below the threshold triggers the clawback in section 59B(5).

What to check in the official text

Read section 59B in full with its footnotes, section 57 and section 59AA in the official PDF. Clause (h) of section 59B(2) allows further conditions to be prescribed, and clause (g) depends on SECP group designation rules; neither is covered on this page. Confirm which group companies are listed before applying the 55% or 75% test.