The Federal Board of Revenue (FBR) has clarified the rules governing the recovery of unpaid tax from company directors, shareholders, and members of associations of persons (AOPs) for Tax Year 2027.
Under Section 139 of the Income Tax Ordinance, 2001, certain individuals may become responsible for outstanding tax liabilities when the tax cannot be recovered from the company, association, or relevant member. Understanding these provisions is important for business owners, directors, shareholders, and partners in Pakistan.
When Can Directors and Shareholders Be Liable for Company Tax?
Under Section 139, where tax payable by a private company cannot be recovered from the company, certain directors and shareholders may be held jointly and severally liable for the outstanding amount.
This provision can also apply when a private company has been wound up or entered liquidation.
The liability may extend to:
- Company directors: Directors who were serving during the relevant tax year, excluding directors employed by the company.
- Shareholders: Individuals who owned at least 10% of the company’s paid-up capital during the relevant tax year.
Liability depends on the conditions prescribed by law and is not automatically imposed on every director or shareholder simply because a company owes tax.
Can Directors and Shareholders Recover Tax They Pay?
Section 139 provides recovery rights to individuals who pay company tax under these provisions.
A director who pays the outstanding tax may seek reimbursement from the company or recover an appropriate share from another director.
Similarly, a qualifying shareholder who pays the tax may seek recovery from the company or from another shareholder covered by the law, according to the applicable ownership proportions.
These provisions help determine how the financial burden may be shared among the relevant parties.
Tax Liability of Associations of Persons (AOPs)
Section 139 also establishes rules for tax liabilities involving associations of persons, including certain partnerships and business associations.
- If tax payable by an AOP member on their share of income cannot be recovered from that member, the AOP may become liable for the unpaid amount.
- If tax payable by an AOP cannot be recovered from the association, its members during the relevant tax year may become jointly and severally liable.
- A member who pays tax under these provisions may seek recovery from the AOP or another relevant member, as permitted by law.
These rules aim to provide a mechanism for recovering unpaid tax where the original taxpayer or association cannot pay.
Why Section 139 Matters for Businesses
Section 139 highlights the importance of maintaining proper tax records and monitoring outstanding tax obligations. Directors, shareholders, and AOP members should understand their potential exposure and review their responsibilities under the Income Tax Ordinance.
Businesses can reduce compliance risks by maintaining accurate financial records, filing tax returns on time, and addressing tax demands promptly.
How Xact Legal Can Help
Xact Legal provides tax and legal advisory services to businesses and individuals in Pakistan. Our team can help clients understand tax liability provisions, review compliance obligations, assess potential risks, and navigate relevant tax matters.
Contact Xact Legal for professional guidance on corporate tax compliance, directors’ responsibilities, shareholder liability, and AOP taxation.