Understanding Income tax obligations is essential, especially when it comes to foreign income. If you’re a resident taxpayer in Pakistan, you may be wondering whether your income earned abroad is subject to tax at home. This blog breaks down what the law says, what exemptions exist, and how Pakistan’s tax treaties might apply to your situation.
Income Tax from Foreign Income In Pakistan
Yes, foreign income is taxable for residents of Pakistan. According to the Income Tax Ordinance, 2001, a resident individual is liable to pay tax on worldwide income. This includes both income earned in Pakistan and income earned abroad.
Under Section 11 and Section 101 of the Ordinance, residents must report and pay tax on all sources of income unless specifically exempted.
Who Is a Resident for Tax Purposes?
An individual is considered a resident for a tax year if they:
- Are physically present in Pakistan for 183 days or more, or
- Are employees of the Government of Pakistan posted abroad.
(See our full blog on residency rules for more details.)
Exemptions and Foreign Tax Credit
While foreign income is taxable, certain reliefs and exemptions are available:
1. Foreign Salary Income
Under Section 102, salary earned abroad by a resident individual is exempt from tax in Pakistan if:
- The salary is earned outside Pakistan, and
- Foreign income tax has been paid on that salary.
This exemption is commonly claimed by Pakistani citizens working in the Middle East or Europe, where taxes are deducted at source.
2. Foreign Tax Credit (Section 103)
If foreign tax is paid on income that is also taxable in Pakistan, a foreign tax credit can be claimed. This credit is the lower of:
- The actual foreign tax paid, or
- The amount of Pakistani tax payable on the same income.
Documentation such as tax returns filed abroad, tax certificates, and remittance records are essential to claim this credit.
3. Temporary Residency Exemption
If an individual becomes a resident of Pakistan only because of temporary employment and their stay does not exceed three years, they may be exempt from tax on foreign-source income. However, this exemption does not apply to:
- Business income from operations in Pakistan
- Foreign income brought into or received in Pakistan
What Do the Courts Say?
In Lahore High Court’s 2020 ruling (2020 PTD 1193), it was held that tax treaties override local tax law in case of conflict, in accordance with Section 107 of the Ordinance. This means that Double Taxation Avoidance Agreements (DTAAs) are crucial in determining the final tax treatment of foreign income.
Pakistan’s Network of Tax Treaties
Pakistan has signed tax treaties with more than 66 countries. These treaties are mostly based on the OECD Model Tax Convention and aim to:
- Prevent double taxation, and
- Allocate taxing rights between countries.
Treaties often define whether a certain type of income (such as dividends, royalties, or business profits) is taxable in the source country, residence country, or both — and at what rate.
Key Takeaways
| Topic | Resident Individual |
|---|---|
| Taxability of Foreign Income | Yes (worldwide income is taxable) |
| Exemption on Salary | Exempt if taxed abroad and documentation provided |
| Foreign Tax Credit | Available under Section 103 |
| DTAA Relief | Treaty overrides local law (per Section 107) |
| Documentation Needed | Tax return, foreign tax receipt, remittance proof |
Final Thoughts
If you are a resident of Pakistan with foreign income, you are generally liable to pay tax on that income unless a treaty or exemption applies. To ensure you maximize reliefs and stay compliant, always:
- Keep proof of foreign tax paid
- Check if a tax treaty applies
- File your income tax return on time, disclosing all income sources
For tailored advice, consult a qualified tax advisor in Pakistan who can review your documents and help you make informed tax decisions.