Association of Persons

An AOP (Association of Persons), as per the Income Tax Ordinance, 2001 of Pakistan, refers to a partnership-like entity formed by two or more individuals, firms, or entities with the aim of conducting business activities or generating income. It is not a company, and therefore, it does not have a separate legal identity from its members (unlike a company, which is considered a separate legal entity). Instead, an AOP is a taxable entity in which the members share profits, losses, and responsibilities.

Key Features of an AOP under the Income Tax Ordinance, 2001:

Definition of AOP:

  • An AOP is defined in Section 80(2) of the Income Tax Ordinance, 2001 “association of persons” includes a firm, a Hindu undivided family, any artificial juridical person and anybody of persons formed under a foreign law, but does not include a company.

Nature of the AOP:

  • An AOP is not a separate legal entity, meaning it doesn’t have its own legal personality distinct from its members.
  • Members of an AOP are usually individuals, partnerships, or other associations.
  • The income earned by the AOP is taxed at the level of the AOP, and it is then distributed to the members based on their respective shares in the AOP. The members are then taxed individually on their share of the income.

Taxation of AOP:

  • The AOP itself is treated as a separate taxpayer for income tax purposes.
  • It is required to file an income tax return and pay tax on the income earned by the association.
  • The income of the AOP is taxed at the applicable rates for individuals or other associations, depending on the type of income it generates.
  • Once the tax is paid by the AOP, the distribution of income to members is also subject to taxation, with each member being taxed individually on their share of the profits.

 

 

 

Key Characteristics:

  • No Separate Legal Personality: Unlike a company, an AOP does not have its own legal status, and the members are personally liable for any debts or obligations incurred by the AOP.
  • Profit Sharing: Profits, as well as liabilities, are shared among the members of the AOP according to the terms of their agreement, which may or may not be in writing.
  • Eligibility for Taxpayer Status: For an AOP to be considered a taxpayer, it must consist of more than one person (individual or entity) involved in a business or income-generating activity.

Key differences of Partnership And Company:

  • Partnership: While an AOP is similar to a partnership in terms of profit-sharing and joint liability, a partnership is formed under the Partnership Act, 1932 and is a legally recognized entity with its own set of rules for operation. In contrast, an AOP is not a separate legal entity and is governed under the Income Tax Ordinance.
  • Company: A company, under the Companies Ordinance, 1984, has a distinct legal identity, limited liability, and separate taxation. AOPs, on the other hand, do not have this status.

Some of the key benefits of partnership in Pakistan:

Easy Formation: Partnership is one of the easiest forms of business to establish in Pakistan. It requires minimal legal formalities and can be formed with a simple partnership deed.

Shared Risk: Partners share the risks and liabilities of the business, which can help reduce the burden on individual partners.

Shared Profits: Partners share the profits of the business, which can be a motivating factor for partners to work together towards a common goal.

Tax Benefits: Partnerships are taxed as pass-through entities, meaning that the partners are taxed on their individual shares of the partnership income, rather than the partnership itself being taxed.

Access to Capital: Partnerships can attract investors and raise capital more easily than sole proprietorships

 

Frequently Asked Questions (FAQs)

Q.  What is an AOP (Association of Persons)?

A.  An Association of Persons (AOP) is a business or entity formed when two or more individuals, firms, or entities come together to carry out business or generate income. Unlike a company, an AOP does not have a separate legal identity from its members, and profits or losses are shared among the partners according to the terms of the partnership agreement.

Q.  What documents are required for AOP-partnership registration in Pakistan?

A.  Scanned copies of:

  • Partners’ CNICs (Both sides).
  • Partners’ NTN Certificate.
  • Partnership Deed that describes the terms and conditions of the partnership, including the names and addresses of the partners, the business objective, and the profit-sharing ratio.
  • Rent agreement or ownership documents of the business premises.
  • Utilities bill.
  • letterhead

Q.  Why should I register an AOP?

A.  Registering an AOP with the Federal Board of Revenue (FBR) is essential for:

  • Obtaining a National Tax Number (NTN), this is required for filing tax returns and conducting legal business operations.
  • Tax compliance: It ensures that the AOP complies with the Income Tax Ordinance, 2001, and is legally recognized as a taxpayer.
  • Opening a business bank account, obtaining licenses, and operating legally.

Q.  How do I register an AOP with FBR?

A.  To register an AOP with the FBR:

  1. Fill out Form-181 on the FBR IRIS Portal.
  2. Submit the required documents along with the application form.

 

 

Q.  Can an AOP have foreign partners?

A.  Yes, an AOP can have foreign partners, but they must submit copies of passports or other valid identification documents for registration. If the foreign partner does not have a National Tax Number (NTN), they may need to apply for one as part of the registration process.

Q.  Can an AOP convert into a company?

A.  Yes, an AOP can convert into a company under the Companies Act, 2017 if the partners decide to adopt a corporate structure for their business. The conversion process involves re-registering the business as a company, creating a new legal entity, and complying with the relevant corporate laws.

Q.  Can an AOP be dissolved?

A.  Yes, an AOP can be dissolved if the partners agree to end the business or if certain conditions are met. The dissolution process involves:

  • Settling all liabilities and obligations.
  • Distributing remaining assets among partners as per the terms of the partnership deed.
  • Notifying the FBR of the dissolution and filing final tax returns.

 

 

Scroll to Top