Is a dividend one company receives from another company taxable, and is it exempt within a group?

A dividend paid by one company to another is taxable in the receiving company’s hands in the same way as a dividend paid to an individual. There is one exemption for groups, and it is narrower than many holding companies expect. This page follows the Income Tax Ordinance, 2001 as amended to 30 June 2026, which gives the position for tax year 2027.

What does the law say?

Section 5(1) imposes tax “on every person who receives a dividend from a company” at the rate in Division III of Part I of the First Schedule. The Ordinance treats a company as a person, so a company shareholder is covered. Section 5(2) computes the tax on the gross amount of the dividend, and section 5(3) says the section “shall not apply to a dividend that is exempt from tax under this Ordinance”.

Section 8(1) makes the section 5 tax “a final tax”. A footnote to section 8 records that the Finance Act, 2013 omitted a proviso that read “Provided that the provision of this section shall not apply to dividend received by a company.” Since that omission, final tax treatment covers corporate shareholders as well.

The Division III rates are the same for a corporate shareholder as for anyone else: 7.5% for qualifying IPP pass through dividends, 15% in most cases, 25% where the paying company had no tax payable because of exemption, carried-forward losses or tax credits, and special rates for mutual funds and REIT special purpose vehicles. For a mutual fund dividend, clause (ba) adds that “where the corporate entity is recipient of the dividend, the component derived from the debt securities shall be taxed at the rate of twenty-nine percent”.

When is a group dividend exempt?

Clause (103A) of Part I of the Second Schedule exempts:

Any income derived from inter-corporate dividend within the group companies entitled to group taxation under section 59AA … subject to the condition that return of the group has been filed for the tax year.

Section 59AA lets “Holding companies and subsidiary companies of 100% owned group” opt to be taxed as one fiscal unit. The option is irrevocable, limited to companies locally incorporated under the Companies Act, 2017, and open only to companies that meet SECP corporate governance and group designation requirements and are designated as entitled to group taxation.

So the exemption needs all of these:

1. a 100% owned group;
2. an irrevocable option for group taxation under section 59AA, with SECP designation; and
3. the group return filed for the tax year.

What happened to the exemption for group relief companies?

Two changes narrowed the exemption:

• Clause (103A) once also referred to section 59B. A footnote records that the expression “or section 59B” was omitted by the Finance Act, 2016.
• Clause (103C) exempted dividend income of a company that was eligible for group relief under section 59B. It was inserted in 2019 and omitted by the Finance Act, 2021.

Under the current text, a group that uses group relief for losses but has not opted for group taxation has no exemption for dividends passing between its companies.

How does it work in practice?

The paying company deducts tax at source from the gross dividend at the rates in Division I of Part III of the First Schedule, and for most companies that is the end of it: section 8(1)(e)(ii) treats the receiving company’s liability as discharged to the extent tax was deducted at source. The deduction provision does not itself mention clause (103A). How a paying company inside a section 59AA group is relieved from deducting on an exempt dividend is dealt with elsewhere in the Ordinance and in rules not covered on this page.

Worked example (illustrative figures)

A Lahore holding company receives two dividends in tax year 2027, both from subsidiaries that paid tax on their income.

Dividend 1: Rs. 50,000,000 from a subsidiary it owns 80%. The group is not 100% owned, so section 59AA cannot apply and clause (103A) is not available.

• Rs. 50,000,000 x 15% = Rs. 7,500,000 deducted by the subsidiary.
• The holding company receives Rs. 42,500,000. The Rs. 50,000,000 is not added to its taxable income, because the tax is final under section 8.

Dividend 2: Rs. 20,000,000 from a wholly owned subsidiary, with the group designated and taxed as one fiscal unit under section 59AA, and the group return filed.

• Clause (103A) exempts the dividend, and section 5(3) takes it out of section 5.
• Tax on the dividend: Rs. 0.

If the group return for that year had not been filed, the condition in clause (103A) would not be met and the 15% rate would apply: Rs. 20,000,000 x 15% = Rs. 3,000,000.

Common mistakes

• Taxing the dividend at the corporate rate. A dividend is charged under section 5, not at the Division II company rate, and is final.
• Assuming any subsidiary dividend is exempt. Only dividends within a section 59AA group qualify, and section 59AA requires 100% ownership.
• Relying on clause (103C). It was omitted by the Finance Act, 2021. Group relief under section 59B no longer carries a dividend exemption.
• Forgetting the filing condition. Clause (103A) requires the group return for the tax year to have been filed.

What to check in the official text

Read sections 5, 8, 59AA and 59B, clause (103A) of Part I of the Second Schedule and Division III of Part I of the First Schedule in the official PDF. Section 59AA(6) says group taxation may be regulated through rules made by the Board, and the SECP group designation requirements it refers to are outside this corpus. Confirm the group’s designation before relying on the exemption.