FBR Closes Major Tax Loophole Used By Banks on Rented Properties

The Federal Board of Revenue (FBR) has revised the income tax deduction system for banks operating in rental/leased properties from July 1, 2025, to check the practice of tax avoidance. The FBR has amended the Seventh Schedule of the Income Tax Ordinance 2001 through the Finance Act 2025. According to the Finance Act 2025, where a taxpayer incurs expenditure on leasehold improvements in respect of leased or rented property, the amount so incurred, as reflected in the audited accounts, shall be capitalized and amortized at the rate of ten percent (10 percent) per annum. The amortization under this clause shall commence from the date on which the leasehold improvements are first put to use by the taxpayer. In the event of termination of the lease prior to the completion of the amortization period, the unamortized balance of the capitalized leasehold improvements shall be allowed as a deduction in the tax year in which such termination occurs, after setting off any proceeds received from the disposal or transfer of such leasehold improvements. Finance Act 2025 further disclosed that, notwithstanding anything contained in any applicable financial reporting standard, including International Financial Reporting Standard (IFRS) 16, the depreciation on right-of-use assets and the finance cost relating thereto shall not be admissible as a deduction. In lieu thereof, the actual rent expense incurred during the tax year shall be allowed as an expense, subject to the condition that the banking company furnishes a certificate from its external auditor to the effect that such rent expense has been actually incurred during the tax year: The adjustments specified in the foregoing provisos shall be duly certified by the external auditor of the banking company, Finance Act 2025.