Pakistan To Grant 10-Year Tax Holiday For Private Equity Funds

by Lorys Charalambous, Tax-News.com, Cyprus

06 June 2006

Pakistan's Central Board of Revenue (CBR) is expected to announce that the profits made by private equity funds will be exempt from taxation for a period of ten years, an official at the Securities and Exchange Commission of Pakistan (SECP) told a national newspaper.

According to the Daily Times, after consulting with the Finance Ministry, the SECP has forwarded a set of budget proposals to the tax authorities stating that profits and gains of PE funds and venture capital investments will be exempt from all taxes, including withholding taxes, for a period of 10 years, or for the life of the fund if less than 10 years.

The news comes after the first private equity fund was launched in Pakistan last week by the Dubai-based Abraaj Capital, a leading regional PE firm, and BMA Capital, a major Pakistan investment company.

The US$300 million Abraaj BMA Pakistan Buyout Fund L.P. is the largest private equity fund targeted at investments in Pakistan. The fund will target an internal rate of return of 30% and will pursue a broad-based and opportunistic strategy.

Observing that Pakistan’s economy is the second fastest growing economy in Asia, Arif Naqvi, CEO & Vice Chairman, Abraaj Capital, commented that:

"The country has achieved an impressive 8.4% growth in GDP in 2005 with relatively low but rapidly increasing levels of debt financing, exports, and FDI creating significant economic upside. The Government’s increasing focus on privatization and the extremely conducive regulatory environment for foreign investment present great opportunities for business and we are proud to be part of it."

Navqi went on the explain that: "The proposed fund will provide its global investors with an opportunity to participate in Pakistan’s success story through a unique and novel asset-class, and through the use of co-investments and leverage, it will facilitate investments of up to US$ 1 billion into Pakistan, across a range of industries over the next four years."

"The timing is perfect," added Farrukh Khan, CEO, BMA Capital.

"Pakistan has increased its rate of privatization completing US$4.7 billion of privatizations in the last three years with the current pipeline estimated at over US$10 billion. Pakistan has also received record FDI of approximately US$3 billion this year," he observed.

Khan added that the fund sees a number of consolidation opportunities in fragmented industries such as insurance, banking, basic materials, power, automotive parts, telecom, textiles.

"We intend to focus on ‘buy & build’ initiatives, under-leveraged companies with quality assets or stable cash flows and under-managed or under-capitalized assets, adding significant value for both our partner companies and shareholders in the process ” he explained.

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