Earning income beyond national borders has become increasingly common these days. As a Pakistani freelancer working with international clients, an expatriate sending money home, or an investor with overseas assets, understanding how the entire system of Pakistan’s taxes on foreign income works will be handy.
Pakistan’s tax laws are designed to address the complexities of global income. For residents, this means that worldwide income, including earnings from foreign sources, is subject to taxation. Non-residents, on the other hand, are typically taxed only on income sourced within Pakistan. However, nuances exist, such as tax credits for taxes paid abroad and exemptions under double taxation agreements.
Not everyone is ready and capable of dealing with taxes on foreign income, especially with the complexities involved. However, it’s essential to learn these obligations to avoid being caught off guard. This knowledge helps you make informed decisions, stay compliant, and avoid unexpected penalties.​
In this guide, we’ll share the specifics of how foreign income is taxed in Pakistan, who is affected, and what steps you can take to ensure you are meeting your obligations while making the most of available benefits.
What Counts as Foreign Income for Pakistani Taxpayers
Here is the list of what qualifies as foreign income in Pakistan to ensure proper tax compliance:
- If you are working abroad and receiving a salary from a foreign employer, this income is considered foreign.
- Earnings from renting out property located outside Pakistan fall under foreign income.
- If you have invested in foreign companies and receive dividends, these are classified as foreign income.
- Interest earned on bank accounts held in foreign countries is also considered foreign income.
- Profits from businesses you operate or have a stake in outside Pakistan are included.
As a Pakistani resident, you are generally required to declare and possibly pay taxes on your worldwide income, including these foreign sources. However, there are provisions like tax credits and exemptions that apply, depending on specific circumstances and international agreements.
Also Read: A Detailed Guideline on Essential tax Concepts in Pakistan
Who Is Considered a Tax Resident in Pakistan
Under Section 82 of the Income Tax Ordinance, 2001, you are considered a resident for a tax year (July 1 to June 30) if you meet any of the following conditions:
- Presence in Pakistan: You have been in Pakistan for 183 days or more during the tax year.
- Government Employment Abroad: You are an employee or official of the Federal or Provincial Government posted abroad during the tax year.
- Citizenship and Absence Elsewhere: You are a Pakistani citizen who is not present in any other country for more than 182 days during the tax year and not a resident taxpayer of any other country.
If none of these apply, you are classified as a non-resident for tax purposes.
How Residency Status Affects Taxation
Your residency status directly impacts how your income is taxed in Pakistan:
- Residents: Taxed on their worldwide income, including both Pakistan-source and foreign-source income. This means if you are a resident, you must declare all income earned globally.
- Non-Residents: Taxed only on Pakistan-source income. Foreign income is generally not subject to Pakistani tax for non-residents.
Taxability of Different Types of Foreign Income for Residents
A Pakistani resident can be taxed on various streams of foreign income. However, there are specific rules and potential exemptions for different income types.
Also, calculating tax on foreign income is easy — calculate the total income, convert it to PKR, and calculate the total tax liability by identifying the correct tax rate. For example, if you earn USD 10,000 from foreign employment or investment. With an exchange rate of PKR 300, your foreign income would be 3,000,000.
1. Foreign Salary Income
According to Section 102 of the Income Tax Ordinance, 2001, foreign-source salary income is exempt from tax in Pakistan if you have already paid tax on that income in the foreign country.
Conditions for Exemption:
- You must be a resident individual.
- The salary should be sourced from employment exercised outside Pakistan.
- Foreign income tax must have been paid on that salary.
To claim this exemption, you’ll need to provide:
- Proof of tax payment in the foreign country (e.g., tax payment receipts or certificates).
- Employment contract or salary slips indicating the foreign source of income.
- Bank statements showing the receipt of salary from abroad.
You need to submit these documents along with your tax return to the Federal Board of Revenue (FBR) to validate your exemption claim.
But in case, you haven’t paid yet then your salary earned abroad is taxable in Pakistan. All the allowances received by an employee in relation to their employment are fully taxable.
Income tax rate for individuals:
| Taxable Income | Tax Rate |
|---|---|
| Does not exceed 600,000 | 0% |
| Exceeds 600,000 but under 1,200,000 | 5% of the amount exceeding 600,000 |
| Exceeds 1,200,000 but does not exceed 2,200,000 | PKR 30,000 + 15% of the amount exceeding 1,200,000 |
| Exceeds 2,200,000 but does not exceed 3,200,000 | PKR 180,000 + 20% of the amount exceeding 1,600,000 |
| Exceeds 3,200,000 but does not exceed 4,100,000 | PKR 430,000 + 30% of the amount exceeding 3,200,000 |
| Exceeds 4,100,000 | PKR 700,000 + 35% of the amount exceeding 4,100,000 |
2. Foreign Business Income
Profits from foreign business ventures are taxable. If tax is paid abroad on this income, you can avail of the foreign tax credit to avoid double taxation.
Federal corporate tax rates on taxable income are as follows:
| Company Type | Tax Rate |
|---|---|
| Banking Company | 39% |
| Public Company | 29% |
| Any Other Company | 29% |
| Small Company | 20% |
3. Foreign Dividends
Dividends received from foreign companies are taxable in Pakistan. However, if you have paid withholding tax on these dividends in the foreign country, you can claim a foreign tax credit under Section 103 of the Income Tax Ordinance.
Learn More about Withholding Tax in Pakistan
4. Rental Income from Properties Abroad
Income earned from renting out properties located outside Pakistan is considered taxable. But if tax has been paid in the country where the property is located, a foreign tax credit can be claimed.
| Annual Rental Income | Tax Payable |
|---|---|
| Up to 600,000 | Exempt |
| 600,001 – 1,200,000 | 15% |
| 1,200,001 – 1,600,000 | 90,000 + 20% |
| 1,600,001 – 3,200,000 | 170,000 + 30% |
| 3,200,001 – 5,600,000 | 650,000 + 40% |
| Above 5,600,000 | 1,610,000 + 45% |
Final tax rates on rental income are taxed at the individual tax rates as specified in the Income Tax Ordinance. Rental income tax rates for companies are 29% for those with an annual turnover of over 250 million and 20% for below 250 million yearly turnovers.
Capital Value Tax Implications in Pakistan for Foreign Assets
5. Foreign Capital Gains
Gains from the sale of foreign assets, such as capital gains on the disposal of immovable properties situated outside Pakistan, interest earned on deposits held in foreign bank accounts, and dividends from companies incorporated outside Pakistan are taxable in Pakistan. Also, profits from securities, stocks, and shares are part of foreign capital gains and the taxes for these are the 15% of the total amount.
The tax rate depends on the asset type and holding period. If capital gains tax has been paid in the foreign country, you can claim a credit against your Pakistani tax liability.
| Open Plots | Constructed Property | Flats | |
| ≤ 1 | 15% | 15% | 15% |
| 1 – 2 | 12.5% | 10% | 7.5% |
| 2 – 3 | 10% | 7.5% | 0 |
| 3 – 4 | 1.5% | 5% | – |
| 4 – 5 | 5% | 0 | – |
| 5 – 6 | 2.5% | – | – |
| 6+ | 0 | – | – |
Exemptions on Foreign Income in Pakistan
Residents are generally taxed on their worldwide income, but there are specific exemptions under section 51 of the income tax ordinance 2021 to be aware of.
- The foreign source income of the Pakistani citizens who have been non-residents for the four tax years is exempt from tax for the tax year of their return and the following tax year. The exemptions facilitate the reintegration of overseas Pakistanis into the national economy.
- If a Pakistani citizen leaves the country during a tax year and remains abroad, any salary earned outside Pakistan during that year is exempt from tax.
Foreign remittances are one of the biggest sources of foreign exchange in Pakistan. The foreign remittance up to Rs. 5 million per year through official banking channels is exempt from income tax. FBR may not even ask for the source, but the excess will be added to taxable income.
Foreign Tax Credit Mechanism in Pakistan
Under Section 103 of the Income Tax Ordinance, 2001, residents can offset taxes paid in foreign jurisdictions against their Pakistani tax liabilities, ensuring fair taxation on global income.
However, the credit is limited to the lesser of:
- The foreign income tax paid, or
- The Pakistan tax payable on that foreign income is calculated using the average Pakistani tax rate applicable to your total taxable income.
This is to prevent you from being taxed twice on the same income and stay aligned with international tax principles.
To claim the Foreign Tax Credit in Pakistan, the following conditions must be met:
- You must be a resident taxpayer in Pakistan during the tax year.
- The foreign tax must be paid within two years after the end of the tax year in which the foreign income was earned.
- The credit applies only to foreign-source income that is also taxable in Pakistan.
- You must provide evidence of the foreign tax paid, such as:
- Certified copies of tax payment receipts from the foreign tax authority.
- Declarations from the payer confirming tax deduction at source.
- In cases where standard documentation is not available, the Commissioner may accept alternative evidence that is deemed satisfactory.
- Any unutilized foreign tax credit cannot be refunded, carried back to previous years, or carried forward to future tax years.
Double Taxation Avoidance Agreements (DTAAs)
These agreements ensure that individuals and businesses are not taxed twice on the same income by both Pakistan and the foreign country where the income originates.
Double Taxation Treaties of Pakistan
The treaties specify the rule for determining which country has the right to tax different types of income or profits. It also mentions the maximum tax rate that can be applied.
Pakistan has signed double taxation treaties with 68 countries, including the United States, the United Kingdom, the UAE, Saudi Arabia, France, China, and more. The treaties are designed to prevent taxation and promote cross-border investment between Pakistan and other countries.
The treaties are incredibly beneficial as double taxation is a significant burden on individuals and businesses. It leads to higher tax liability and reduces the money for investment or other purposes.
Benefits of DTAAs in Preventing Double Taxation
- Income is taxed in only one of the two countries, or tax paid in one country is credited against tax payable in the other.
- Lower tax rates on dividends, interest, royalties, and fees for technical services.
- Certain types of income, such as pensions or government salaries, may be exempt from tax in one of the countries.
- Clear rules provide certainty to taxpayers and help avoid disputes.
How to Declare Foreign Income in Your Tax Return?
Section 116A of the Income Tax Ordinance 2001 sheds light on the disclosure of foreign income and assets. According to the rules, resident individual taxpayers who meet one of the following criteria need to file a foreign income and assets return.
- If your foreign income earned outside Pakistan exceeds US$ 10,000 (excluding salary already taxed by a foreign government). If your income exceeds the threshold, you must file a foreign income and assets statement.
- Owning foreign assets over US$100,000 compels you to file them in your return. The asset can be an investment, bank accounts, real estate, or valuable property.
What do I need to disclose in the Foreign Income Tax Return?
The foreign income tax return requires comprehensive details of your foreign financial.
- The first step is to provide a snapshot of your foreign financial standing as of the tax year’s closing state.
- If you have transferred any foreign assets during the year, disclose the recipient and consideration.
- Provide complete details of all foreign income earned, expenses incurred to generate that income, and necessary maintenance expenses.
You should maintain proper records and documents like salary slips, bank certificates, and tax payment receipts to support your disclosure.
Essential Considerations for Non-Resident Pakistanis and Foreign Investors
- Non-resident Pakistanis can benefit from filer tax rates when purchasing property. It is only possible if the funds used are remitted through a proper banking channel, encouraging formal investment.
- Both residents and non-residents should maintain Active Taxpayer Status by filing their returns before the due date. This unlocks many benefits and special tax rates in various transactions.
- To prevent tax avoidance through offshore entities, Pakistan has implemented CFC rules. A Controlled Foreign Company is a non-resident company where:
- More than 50% of its capital or voting rights are held directly or indirectly by Pakistani residents, or
- More than 40% is held by a single Pakistani resident.
If a Pakistani resident holds more than 10% in a CFC, a proportionate share of the CFC’s income is included in the resident’s taxable income in Pakistan. Also, no income is attributed if the CFC’s income is less than PKR 10 million or if the resident’s ownership is below 10%. Income taxed under CFC rules is not taxed again when distributed as dividends.
FAQs
Are remittances considered taxable income?​
No, remittances sent through official banking channels are generally not taxable in Pakistan; however, amounts exceeding PKR 5 million in a tax year may require source verification.​
What are the penalties for non-declaration of foreign income?
Failure to report foreign income or assets in Pakistan can result in a penalty of 2% of the foreign income or asset value for each year of non-disclosure, as stipulated under Section 116A of the Income Tax Ordinance, 2001. Additionally, willful concealment may lead to further penalties or prosecution. ​
Ensure Compliance with Pakistan’s Foreign Income Tax Laws—Get Expert Advice Now
​The foreign income taxation process in Pakistan can be complex, with ever-changing regulations and potential penalties, but you don’t have to face them alone. The tax experts at PakTaxCalculator specialize in providing tailored tax solutions to meet your income tax needs. Call us at +92 321 630 6286, and let’s simplify your tax journey together with personalized support.​
