Corporate & Tax Practice — Briefing

LLP Taxation After the Finance Act 2026: From Company to AOP

For the first time since the structure was introduced in 2017, the law now says in plain words how a Limited Liability Partnership is taxed. The Finance Act 2026 moves the LLP out of the corporate tax net and into the association-of-persons regime, with effect from Tax Year 2027 (1st July 2026 to 30th June 2027).

Anyone who has advised a client on whether to register a Limited Liability Partnership has run into the same wall. The LLP Act, 2017 created a body corporate that behaves like a partnership, but the tax law had never said whether the Federal Board of Revenue should treat it like a company or like a firm. In practice the FBR leaned toward the company side, because an LLP is a body corporate, and the definition of “company” in the Income Tax Ordinance picks up most body corporates. That meant corporate tax rates, the full company compliance load, and very little of the flexibility the structure was sold on. The Finance Act 2026 has now settled the question, and it has settled it the other way.

What the Finance Act 2026 actually changed

Two amendments to the Income Tax Ordinance, 2001 do the work. Both are short, and together they reclassify the LLP from a company to an association of persons (AOP).

Clause (a) of section 80(2) is the definition of “association of persons”. By writing the LLP into that clause, the legislature places it squarely inside the AOP family.¹ Until now the prevailing reading put the LLP into the “company” definition under section 80(2)(b), which captures a body corporate formed under any law in force in Pakistan. The new wording pulls it across.

Section 92 is the operative rule for taxing an AOP. The AOP is taxed as a separate entity, and the share of profit a member draws out of that already-taxed income is exempt in the member’s hands, so the same money is not taxed twice.² Bringing the LLP under section 92 confirms that an LLP now follows this mechanic. The new sub-section (4A) is the guard against abuse: if the LLP’s own income happens to be exempt, the member cannot also claim the profit share tax-free. It is added back and taxed in the member’s hands. The same clause of the Finance Act also omits the Explanation that previously sat under section 92(1); the pass-through rule now operates on the bare text of the sub-section together with the new (4A).

Why this matters: the double-tax problem disappears

The earlier company treatment carried a real cost. A company pays tax on its profit at the corporate rate, currently 29% for non-banking companies, and when that profit is distributed it is taxed again as a dividend in the shareholder’s hands.³ An LLP taxed as a company inherited that double layer while giving its partners none of a shareholder’s distance from management. The whole appeal of an LLP, limited liability without the corporate tax burden, was lost.

Under the new regime the LLP is taxed once, at the entity level, on the AOP slab rates. The partners take their profit share free of further tax, subject only to the section 92(4A) exception above. The structure now does what it was always advertised to do: a limited-liability shell with partnership-style, single-layer taxation.

The tax slabs that now apply

As an AOP, an LLP is taxed under the rate table for AOPs and non-salaried persons in Division I of Part I of the First Schedule to the Ordinance. Worth noting: the Finance Act 2026 cut and re-cut the salaried slab table, but it left the AOP table untouched, so the rates below carry forward into Tax Year 2027 (1st July 2026 to 30th June 2027).⁴

A narrower rate sits alongside this table. Where an AOP is a professional firm that the law, or the rules of its regulating body, prohibit from incorporating, the top rate is capped at 40% instead of 45%.⁴ That concession was written for partnerships of professionals who cannot form a company, such as legal practices. Whether it reaches an LLP is debatable, because an LLP is itself an incorporated body and is not a firm prohibited from incorporating. The safer working assumption is that the standard 45% top rate applies to an LLP, and a professional group wanting the 40% cap should weigh the traditional firm against the LLP rather than assume both attract it.

Surcharge under section 4AB: still a factor for LLPs

The budget headlines announced that the surcharge on high-earning salaried individuals was abolished. That is correct, but it does not help an LLP. The Finance Act 2026 amended the proviso to section 4AB so that no surcharge is payable by salaried individuals.⁵ The main charge in section 4AB survives: a non-salaried individual or an AOP with taxable income above Rs 10 million still pays a surcharge equal to 10% of the income tax otherwise due.⁶

Minimum tax under section 113

Section 113 charges a minimum tax on turnover where the tax on normal income works out lower. The standard rate is 1.25% of turnover, with reduced rates of 0.25% to 0.75% for certain notified sectors, and any excess over the normal liability can be carried forward for up to three years.⁷

The reclassification changes who is caught. A company is subject to section 113 regardless of its turnover. An AOP is brought in only where its turnover is Rs 100 million or more.⁸ So a smaller LLP that would have paid minimum tax as a company now falls outside section 113 until its turnover reaches that threshold. For modest practices and SMEs operating through an LLP, that is a genuine easing.

A related levy falls away entirely. The Alternative Corporate Tax under section 113C, which requires a company to pay the higher of its normal liability or 17% of accounting income, applies to companies only.¹⁵ As an AOP, the LLP is outside it.

Super tax under section 4C

Super tax under section 4C applies to a “person”, which includes an LLP whether it is taxed as a company or as an AOP, so the change in status does not remove it. The Finance Act 2026 substituted the rate table in Division IIB of Part I of the First Schedule. Under the revised table, super tax is charged at 10% of income where the income of a banking company, a person taxed under Part I of the Fifth Schedule (petroleum exploration and production), or a person deriving income from the sale of fertilizer exceeds Rs 150 million, and at 8% of income for any other person whose income exceeds Rs 500 million.⁹ For the great majority of LLPs the income will sit well below these figures, so super tax will rarely bite.

One new relief deserves a mention for trading LLPs. The Finance Act 2026 inserts clause (104B) into the Second Schedule: section 4C does not apply to a person whose realised export proceeds for the tax year exceed eighty percent of total turnover.¹⁶ A predominantly exporting LLP that does cross the Rs 500 million line can therefore still sit outside super tax.

Advance tax under section 147

An AOP pays advance tax in quarterly instalments under section 147, calculated by applying the tax-to-turnover ratio of the latest assessed year to the turnover of each quarter. The instalments fall due on or before 25 September, 25 December, 25 March, and 15 June.¹⁰ Section 147 applied to the LLP as a company too, so the obligation itself is not new, but the computation now follows the AOP basis. The Finance Act 2026 made only a narrow change here, omitting sub-section (6C) of section 147.¹¹

Two compliance shifts worth flagging to clients

Return filing moves to 30 September

A company filing for a 30 June year-end has until 31 December to file its return. An AOP files by 30 September.¹² An LLP’s annual income tax return therefore moves forward by three months. Diaries and engagement letters should be updated for Tax Year 2027 (1st July 2026 to 30th June 2027) onward.

Withholding-agent status now depends on turnover

A company is a withholding agent under section 153 regardless of size. An AOP is a “prescribed person” only where its turnover is Rs 100 million or above.¹³ A smaller LLP that had to deduct and deposit tax on its payments as a company is relieved of that role until it crosses the threshold.

Withholding suffered on the LLP’s own receipts

The other side of section 153 also matters: tax deducted from payments the LLP receives for services is generally a minimum tax on that income. The Finance Act 2026 rewrote the service withholding rates in Division III of Part III of the First Schedule. The specified reduced-rate services move from 6% to 7%; independent professional services, expressly including lawyers, doctors, architects, accountants and software engineers working independently, are set at 15%; advertising payments to electronic and print media at 1.5%; terminal and port services rendered by companies at 12%; and all other services at 14%.¹⁷ A professional-services LLP should budget for 15% deducted at source by prescribed-person clients, operating as minimum tax, when projecting its cash position.

Transition for existing LLPs

The Finance Act 2026 takes effect on 1 July 2026, so the new classification governs Tax Year 2027 (1st July 2026 to 30th June 2027) onward. An existing LLP files its return for Tax Year 2026 (1st July 2025 to 30th June 2026) on the old footing, as a company, by the company deadline. The Act contains no transitional provisions for an LLP moving from company to AOP status, so questions such as the fate of brought-forward minimum tax credit under section 113, unabsorbed depreciation and losses assessed in the company years, and the basis for the first advance-tax estimate as an AOP will need to be worked through case by case until the FBR clarifies its position by circular.

Worked examples

The figures below take three LLPs at different profit levels and run the same taxable income two ways: once as an LLP under the AOP slabs, and once as if the same business sat inside a private limited company. They are illustrations, not advice, and the assumptions are stated under the third example.

Example 1 — Small LLP, taxable income Rs 2,000,000

Example 2 — Mid-size LLP, taxable income Rs 6,000,000

Example 3 — Larger LLP, taxable income Rs 20,000,000

A drafting overlap to keep an eye on

The amendment names the LLP in the AOP definition in section 80(2)(a) but does not expressly carve it out of the body-corporate limb of the company definition in section 80(2)(b). On a literal reading an LLP still answers the description of a body corporate while also being named as an AOP. The specific, later and express naming of the LLP in the AOP clause should prevail over the general body-corporate catch-all, and the intent of the amendment is not in doubt. Even so, it is the kind of gap a Commissioner could test in a borderline assessment, and it is worth watching how the FBR words its clarifying circular before treating the point as wholly closed.

LLP, AOP and Private Limited Company at a glance

What this means for entity selection

The LLP has become a serious option where it used to be an awkward one. Against a registered AOP it offers the same single-layer taxation plus genuine limited liability and a separate legal personality, at the price of SECP audit and filing. Against a private limited company it offers an escape from dividend double taxation and from minimum tax at low turnover, at the price of the AOP surcharge once income passes Rs 10 million and a top marginal rate of 45% rather than a flat 29%.

The arithmetic now turns on income level. At higher profits the company’s flat 29% can beat the AOP’s progressive rates that climb to 45%, even after factoring in dividend tax on distributions, particularly where profits are retained rather than drawn. At lower and middle income levels, and where partners intend to draw most of the profit, the LLP usually wins. For clients sitting in an existing private limited company or a traditional firm, a conversion into an LLP is worth modelling, and the tax treatment of the conversion year itself needs separate attention before any restructuring is recommended.