Income Tax Ordinance, 2001 — Section 85: Associates

85. Associates. — 3[(1) Subject to sub-section (2), two persons shall be associates where –

(i)the relationship between the two is such that one may reasonably be expected to act in accordance with the intentions of the other, or both persons may reasonably be expected to act in accordance with the intentions of a third person;

(ii)one person sufficiently influences, either alone or together with an associate or associates, the other person; Explanation. – For the purpose of this section, two persons shall be treated as sufficiently influencing each other, where one or both persons, directly or indirectly, are economically and financially dependent on each other and, decisions are made in accordance with the directions, instructions or wishes of each other for common economic goal; or

(iii)one person enters into a transaction, directly or indirectly, with the other who is a resident of jurisdiction with zero taxation regime.] 1 The words “or almost wholly” omitted by the Finance Act, 2003. 2 The words “local authority” substituted by the Finance Act, 2008. 3 Sub-section (1) substituted by the Finance Act, 2023. The substituted sub-section read as follows: “(1) Subject to sub-section (2), two persons shall be associates where the relationship between the two is such that one may reasonably be expected to act in accordance with the intentions of the other, or both persons may reasonably be expected to act in accordance with the intentions of a third person.” 151 Chapter V – Provisions Governing Persons

(2)Two persons shall not be associates solely by reason of the fact that one person is an employee of the other or both persons are employees of a third person.

(3)Without limiting the generality of sub-section (1) and subject to sub section (4), the following shall be treated as associates

(a)an individual and a relative of the individual;

(b)members of an association of persons;

(c)a member of an association of persons and the association, where the member, either alone or together with an associate or associates under another application of this section, controls fifty per cent or more of the rights to income or capital of the association;

(d)a trust and any person who benefits or may benefit under the trust;

(e)a shareholder in a company and the company, where the shareholder, either alone or together with an associate or associates under another application of this section, controls either directly or through one or more interposed persons

(i)fifty per cent or more of the voting power in the company;

(ii)fifty per cent or more of the rights to dividends; or

(iii)fifty per cent or more of the rights to capital; and

(f)two companies, where a person, either alone or together with an associate or associates under another application of this section, controls either directly or through one or more interposed persons

(i)fifty per cent or more of the voting power in both companies;

(ii)fifty per cent or more of the rights to dividends in both companies; or

(iii)fifty per cent or more of the rights to capital in both companies. 152 Chapter V – Provisions Governing Persons

(4)Two persons shall not be associates under clause (a) or (b) of sub section (3) where the Commissioner is satisfied that neither person may reasonably be expected to act in accordance with the intentions of the other. 1[(5) In this section, –

(i)“relative” in relation to an individual, means

(a)an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual, or of a spouse of the individual; or

(b)a spouse of the individual or of any person specified in clause (a);

(ii)jurisdiction with zero taxation regime means jurisdiction as may be prescribed.] 1 Sub-section (5) substituted by the Finance Act. 2023. The substituted sub-section (5) read as follows: “(5) In this section, “relative” in relation to an individual, means

(a)an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual, or of a spouse of the individual; or

(b)a spouse of the individual or of any person specified in clause (a).” 153 Chapter V – Provisions Governing Persons PART II INDIVIDUALS Division I Taxation of Individuals