Pakistan's Federal Board of Revenue has published the Income Tax (Amendment) Ordinance 2022, which was promulgated on 2 March 2022 with immediate effect. One of the main measures of the ordinance provides a loss carryforward incentive for companies that acquire a majority of the share capital in a "sick industrial unit" through a scheme of amalgamation or merger. This includes that the acquiring company will be entitled to set off the latest tax year and carried forward losses of the acquired company, excluding capital losses, for a period of three years if the following conditions are met:

• there is continued ownership for five years starting from 30 June 2023 and there is no change in the share capital of the acquiring company;
• the assets of the acquired company are not sold up to 30 June 2026; and
• the acquired company continues the same business until 30 June 2026.

Losses of an acquired company are set off against the income of the acquiring company according to the formula (A/100) x B, where:

• A is the percentage share capital held by the acquiring company of the acquired company; and
• B is the loss of the acquired company.

Where the losses surrendered by the acquired company are not set off against the income of the acquiring company in the said three tax years, the acquired company shall carry forward the losses in accordance with standard loss carryforward rules (Section 57 of the Income Tax Ordinance). If the acquiring company fails to revive the acquired company by tax year 2026, the acquiring company is required, in tax year 2027, to pay tax on the amount of profit that was reduced by the losses surrendered by the acquired company.

For the purpose of the incentive, a "sick industrial unit" means a company that is an industrial undertaking and:

• has accumulated losses, for a continuous period of three years prior to 1 July 2022, equal to or exceeding its entire capital and reserves at the time of acquisition, as the case may be; or
• has defaulted towards repayment of outstanding debts owed to banking companies or non-banking financial institutions for a consecutive period of three years immediately before acquisition, as the case may be; or
• has been declared as such by the Federal Government in a notification published in the Official Gazette.

A sick industrial unit is deemed to be revived if the said company attains the maximum production capacity that it had obtained before the industrial unit was considered "sick". For this purpose, the acquired company must produce a certificate to the effect that it stands revived, duly issued by the Engineering Development Board, along with the return of income filed for tax year 2026.