FBR Closes Tax Loophole for Banks Rented Properties: What You Need to Know

On July 1, 2025, the Federal Board of Revenue (FBR) officially eliminated a long-standing tax loophole used by banks for leased or rented property income. This change, enacted through the Finance Bill 2025–26, marks a significant step in Pakistan’s tax modernization and transparency goals. This move aligns with global standards such as those outlined in the OECD Transfer Pricing Guidelines.

1. What Exactly Did FBR Change?

Previously, banks leasing or renting commercial/residential spaces could claim excessive deductions—including inflated rent, repair costs, and interest—thus minimizing taxable rental income. Under the new Finance Bill 2025–26 (full document available on the Ministry of Finance’s official website), these expenses are now strictly reviewed under arm’s length pricing rules, especially for transactions involving related parties.

Key Highlights:

• All rental and related expenses involving connected entities must meet market-value benchmarks
• Deductions will only be approved if they are well-documented and consistent with prevailing market rates

2.Why This Loophole Mattered for Banks

For years, banks exploited ambiguities to claim unwarranted tax breaks:

• Revenue Leakage: Billions of rupees were lost due to underreported profits
• Unfair Market Advantage: Banks leveraged these deductions to report lower earnings compared to non-banking institutions
• Global Criticism: The IMF's recent review of Pakistan's tax system emphasized the need to close such revenue-draining mechanisms

3. How the New Rules Work (Step-by-Step)

4. Financial Impact & Latest Data

• Revenue Boost Goal: The FBR expects this amendment to recover over PKR 10 billion annually
• Karachi Banking Sector Uplift: Banks in Karachi alone contributed 29% more tax revenue post-implementation
• Compliance Uptick: Over 70% of financial institutions have submitted updated lease documentation since July 2025

According to the World Bank’s Pakistan Economic Update 2025, tightening compliance measures like this have helped reduce Pakistan’s fiscal deficit by 1.2%.

5. Broader Tax Policy Overhaul

This change is part of a wider tax reform strategy:

• Section 14AC: Authorizes temporary suspension of banking activity for unregistered taxpayers for up to 3 days (Profit Pakistan Today)
• Real-Time Recovery Powers: As per Mettis Global, FBR can now seize accounts, freeze assets, or deploy officers on-site without prior warning
• Backlash from Business Sector: The Nation reported growing opposition from chambers of commerce citing overregulation and uncertainty

6. Frequently Asked Questions

Q1: Which banks are impacted by this reform?
All scheduled and Islamic banks leasing or renting from related parties.

Q2: What constitutes a “related party”?
Any entity with ownership or management overlap, including subsidiaries and directors’ private companies.

Q3: Are market valuations now mandatory?
Yes. Rental agreements must be backed by a third-party assessment or comparable lease analysis.

Q4: Can this rule be applied retroactively?
Potentially yes—especially for open audits covering current or prior fiscal years under dispute.

7.Expert Tips & Compliance Guidance

1. Audit Your Existing Leases
   Ensure pricing is market-based and properly documented.
2. Independent Valuation is Critical
   Hire registered values to benchmark rates before submitting your tax return.
3. Maintain Audit-Ready Records
   Store contracts, communications, and internal memos in secure, retrievable systems.

4. Consult Tax Experts
   Engage professional advisors familiar with local and OECD transfer pricing rules
   
   Final Thought

The FBR's crackdown on tax evasion via leased properties is a turning point in its tax enforcement strategy. Financial institutions must proactively adapt to these stricter requirements to avoid scrutiny, fines, and reputational damage. With transparency now a regulatory necessity, early compliance is the only path forward.