Pakistan grants tax exemptions on $3.3B in foreign loans, mostly from Chinese banks

The federal government has quietly granted sweeping tax exemptions on more than $3.3 billion in foreign loans, mostly refinanced debt from Chinese banks, by bypassing standard tax regulations.

The loans, approved under a syndicated facility backed by a $500 million guarantee from the Asian Development Bank (ADB), included a key lender condition: no tax liabilities on interest income.

To fulfill this, the Federal Board of Revenue (FBR) issued a special statutory regulatory order, S.R.O. 01/2025, exempting foreign lenders from taxes under Rule 8(4) of the Seventh Schedule of the Income Tax Ordinance, 2001.

An official stated the tax exemption will range between 10% and 20%, depending on the specific terms agreed with each lender.

Breakup of refinanced and rolled-over loans

The government approved a large syndicated facility with three major Chinese lenders: China Development Bank (CDB), Industrial and Commercial Bank of China (ICBC), and Bank of China, totaling RMB 15 billion (around $2.1 billion).

The ADB-backed facility required that the lenders bear no tax costs in Pakistan. To comply, the FBR invoked its legal powers and issued S.R.O. 01/2025 on May 12, 2025. The exemption ensures the government, not lenders, absorbs any tax-related costs, possibly amounting to billions of rupees.

CDB refinanced $1 billion; ICBC extended $500 million and added $300 million. The Bank of China provided $500 million in total. Standard Chartered contributed $200 million under its LNG Tranche 9, while ECO Trade and Development Bank rolled over $65.2 million.

Smaller refinancing of $40 million each was also secured from CDB and ECO Bank.

No-tax clause tied to ADB guarantee

Finance Division officials confirmed the facility was structured with ADB’s $500 million policy-based guarantee to reduce borrowing costs.

“The loan facility has been offered on the condition that taxes applicable in Pakistan will not be borne by the lenders,” officials said.

The tax cost will either be absorbed by the government or waived using Income Tax Ordinance provisions. Cabinet approval was required for activating these rarely-used clauses.

Mounting reliance on debt rollovers

Pakistan’s dependence on refinancing from allies, particularly China, has grown as the country navigates tight repayment deadlines and external account pressures.

Analysts caution that refinancing only postpones deeper problems tied to Pakistan’s debt structure and current account deficits.

Still, officials argue that the ADB-backed syndicated facility helps shore up foreign exchange reserves and supports liquidity during IMF-led reforms.

The cabinet has instructed the Finance Division to finalize policy terms with ADB and seek further syndications with commercial lenders. The State Bank of Pakistan will oversee disbursements and repayments.