Non-Resident Taxation in Pakistan: Guide

Introduction

In today’s globalized economy, individuals and businesses often earn income from countries where they do not reside. Pakistan’s tax laws contain specific provisions governing the taxation of non-residents. This blog provides a clear and practical understanding of how non-residents are taxed under the Income Tax Ordinance, 2001, including types of taxable income, withholding obligations, and recent legal developments.

Who is a Non-Resident?

Under the Income Tax Ordinance, 2001, a non-resident includes:

• Individuals who do not stay in Pakistan for 183 days or more in a tax year.
• Companies or associations of persons (AOPs) whose control and management is wholly outside Pakistan.

Taxable Income of Non-Residents

Non-residents are taxed only on income that is Pakistan-source. The major categories include:

1. Income from Property or Assets in Pakistan

• Rental income from property situated in Pakistan is taxable.
• Capital gains from the sale of immovable property in Pakistan are subject to tax.

2. Business Income

• If a non-resident has a Permanent Establishment (PE) in Pakistan, its Pakistan-source business income is taxable at regular corporate tax rates.
• If no PE exists, payments made to the non-resident are generally taxed via withholding tax.

3. Royalty and Fee for Technical Services (FTS)

• Royalties and FTS paid to non-residents are subject to 15% withholding tax under section 152.
• Reduced rates may apply under Double Taxation Agreements (DTAs).

4. Dividends, Interest, and Other Passive Income

• Dividends paid by Pakistani companies are subject to a 15% withholding tax.
• Interest on debt instruments is also taxable.
• Shipping and air transport income is taxed under special rules or treaties.

Withholding Tax Mechanism (Section 152)

Under Section 152, any Pakistani resident making a payment to a non-resident for services, royalties, contracts, or technical assistance must deduct tax at source, unless exempted under law or a treaty.

There are three key scenarios:

• 152(1) – Non-residents without PE: Final tax.
• 152(2A) – Non-residents with PE: Tax deducted is adjustable.
• 152(2) – Royalties, FTS, insurance premiums, etc.: Final tax (unless DTA says otherwise).

Double Taxation Agreements (DTAs)

Pakistan has signed DTAs with more than 65 countries, including the UK, UAE, China, USA, and Germany. These treaties help in:

• Avoiding double taxation.
• Reducing withholding tax rates.
• Resolving residency conflicts.

To claim treaty benefits, non-residents must file a Certificate of Residence and follow the procedural requirements of SRO 979(I)/2021.

Tax Registration and Filing Obligations

Non-residents may be required to:

• Register with FBR and obtain an NTN.
• File a return of income if they have a PE or Pakistani-source income not subject to final tax.
• Appoint a representative under Section 172 for tax compliance in Pakistan.

Recent Developments and Compliance Considerations

• Section 152A has been introduced for digital services (e.g., online platforms), making foreign tech companies liable for tax on digital supply.
• Non-resident contractors in Pakistan must maintain proper documentation to justify exemptions or lower rates under DTAs.

Conclusion

Understanding taxation laws for non-residents in Pakistan is essential for compliance and effective tax planning. With a combination of domestic laws and treaty benefits, non-residents can manage their tax liabilities while fulfilling their obligations.

For expert guidance on non-resident taxation, DTAs, or setting up a PE in Pakistan, feel free to contact R.M. Tahir & Co., Chartered Accountants.