Taxation of Non- Residents in Pakistan

What Does Residence Status Mean?

Residence status is of utmost importance when one is to determine the taxable income of a person in a specific country. Residence status is used in Pakistan like most countries to determine the taxable income and tax liability of individuals, firms and corporations. Pakistan tax liability of a non-resident person is heavily influenced by their tax residency, particularly if they have overseas income or capital gains. In most cases, residents must pay tax on some or all of their foreign income and capital gains, whilst non-residents do not. Residence can also influence how much tax is paid on income and capital gains earned in the Pakistan.

Resident Individual:

Section 82 of the Income Tax Ordinance, 2001 defines a resident individual as

an individual who is present in Pakistan for a period of, or periods amounting in aggregate to, one hundred and eighty-three days or more in the tax year;
an individual who is an employee or official of the Federal Government or a Provincial Government posted abroad in the Tax Year.

Previously, the individuals who were in Pakistan for at least 120 days in the current tax period and they have been in Pakistan for 360 or more days in aggregate during the last four tax years were also considered residents but this condition has been removed from the law through Finance Act, 2021. Now, for tax year 2022 and onwards only an individual who is in Pakistan for 183 days in aggregate or an employee of federal or provincial government posted abroad during the current tax year shall be considered resident individuals.

A Resident Company

In accordance with section 84 of the Income Tax Ordinance, 2001, a company is considered a resident company if

it is incorporated or formed by or under any law in force in Pakistan;
the control and management of the affairs of the company is situated wholly in Pakistan at any time in the year; or
it is a Provincial Government or Local Government in Pakistan.

Association of Persons

An Association of Persons, in accordance with the is Resident for a Tax Year if the control and management of its affairs is situated wholly or partly in Pakistan at any time in that year.

Non-Resident Persons

An Association of Persons, a Company and an Individual are considered non-resident for a tax year if they are not resident for that year.

Residence status does not always remains the same. It may change, specially in the case of individuals, when the individual decides to come to Pakistan in a tax year and stays here for at least 183 days. The phrase “tax year” is often used in the literature of tax. Tax year in Pakistan runs from 1^st July to 30^th June.

Distinction between resident and non-resident persons is also important for equitable treatment of taxpayers. If this distinction is not made, for example if a non-resident is treated as a resident, he or she might become a victim of double taxation as they would be paying full taxes on worldwide income where they are residents and paying full taxes in Pakistan. There can, however, still be some situations where an individual is resident of two countries. In such cases, under most bilateral or multilateral treaties, the individual is usually considered resident of country where they have a permanent home and if they do not have a permanent home in any country, they would be considered resident of a country of which they are national. And if they are national of both countries, the question of residence is settled through mutual agreement of the countries.

Taxability of Different Incomes of Non-Resident Person

As a general principle, it is agreed that only the Pakistan source income of a non-resident person is taxable in Pakistan. They have no tax liability in Pakistan on the incomes earned in any other country in the world.

Pakistan Source Income

Section 101 of the Income Tax Ordinance, 2001 deals with the geographical source of income and distinguishes between Pakistan-source incomes and Foreign-source incomes. The following incomes are considered Pakistan source incomes.

Salary received from employment anywhere in Pakistan or paid by any government in Pakistan.
Income from business activities carried out in Pakistan.
Dividend paid by Resident Company
Profit on debt paid by a Resident Person.
Property or rental Income from the lease of immovable property in Pakistan.
Pension paid by a resident or a permanent establishment in Pakistan of a non-resident.

Any income that does not fall in these categories is foreign-source income and is not taxable in Pakistan in case of a non-resident persons.

Overseas Pakistanis

Overseas Pakistanis, even though they are Pakistan nationals and hold Pakistan Origin Card (POC) or National Identity Card for Overseas Pakistanis (NICOP) will be considered non-residents for taxation purposes if they stay for less than 183 days in Pakistan. However, these overseas Pakistanis have families, friends and business interests in Pakistan. They send remittances to Pakistan, want to buy properties in Pakistan and may earn rental or business income that is taxable in Pakistan. If they do not file their income tax returns and choose to stay non-filers, the taxes they pay at source will be double of the taxes they would pay if they were filers. There are many benefits available to non-resident persons who file their income tax return.

Withholding Taxes on Payments to Non-Residents

Certain withholding taxes are paid by non-resident persons while receiving payments from resident persons under section 152 of the Income Tax Ordinance, some these taxes include:

15% tax on royalty or fee for (Minimum Tax)
7% tax on execution of a contract or sub-contract under a construction, assembly or installation project in Pakistan, including a contract for the supply of supervisory activities in relation to such project or any other contract for construction or services rendered relating thereto (Minimum Tax)
7% tax on gross amount for a contract for advertisement services rendered by T.V. Satellite Channels. (Minimum Tax)
10% tax is to be deducted from every person making a payment for advertisement services to a non-resident media person relaying from outside Pakistan (Minimum Tax)
5% of the gross amount of fee for off-shore digital services is deducted by every banking company (Final Tax)
3% of the gross amount for provision of services by a non-resident person.

There are a number of other withholding taxes as well and these increase by 100% for non-filers.

Benefits of Filing for Non-Residents

Non-resident persons and overseas Pakistanis can avail the following benefits by becoming tax filers

If an expatriate or non-resident files a tax return and gets added to the ATL (Active Taxpayers List) published by the Federal Board of Revenue, they will be entitled to obtain all of the benefits of being a filer in Pakistan, including tax reductions of more than 50% and, in some circumstances, complete elimination.
Some expats send their international remittances to Pakistan. If this money is sent through a bank account and you can present encashment certificates, it is fully exempt from tax. You can increase your white money by declaring it in the return.
Non-residents are exempt from filing a wealth statement and should only file Return u/s 114 of the Income Tax Ordinance, 2001.
Taxes deducted at source are adjustable in the income tax return for example advance tax deducted at the time of registration, transfer or sale of motor vehicle under section 231B, on domestic consumer electricity bill under section 235, on educational institution fee under section 236I (however, if a taxpayer presents a certificate that he or she has no Pakistan-source income and all the fee is transferred through normal banking channels, no tax will be deducted on educational fee), tax paid on purchase / transfer of immovable property under section 236k.
Any Pakistan- source income which Pakistan is not permitted to tax under a tax treaty shall be exempt from tax under this Ordinance.
Any foreign-source income of an individual citizen of Pakistan who was not resident in four tax years preceding the tax year in which he or she became a resident is exempt from tax under section 51 of the Income Tax Ordinance.

In addition to the fact that only Pakistan-source income of non-resident person is taxable in Pakistan, there are a number of exemptions available to non- resident persons and registering for income tax filing their returns will only decrease their taxes while increasing their white money at the same time.

If you need any assistance with filing of taxes, setting up and running your business in Pakistan, the team at Arif & Associates will be delighted to help you.