Taxes for Expats in Pakistan
Your complete guide to expat tax in Pakistan
Taxes for Expats in Pakistan are based on an individual’s residential status and not on his or her nationality or citizenship. Expatriates who stay in Pakistan for 183 days or more in a tax year (1 July to 30 June) are considered to be residents for tax purposes.
Residents of Pakistan are taxed on their worldwide income regardless of where it is received, while non-residents are taxed on their Pakistan-source income only.
Foreign-source income of an individual who is a resident solely by reason of his or her employment in Pakistan and who is present in Pakistan for a period or periods not exceeding in aggregate three years is exempt from tax unless such foreign-source income is brought into or received in Pakistan by the individual or unless the income is derived from a business of the person established in Pakistan.
An expat resident is exempt from Pakistan tax on foreign-source salary if he or she has paid foreign income tax on such salary income.
How is income taxed in Pakistan for expats?
Expat employment income – Income from salary is Pakistan-source income if it is earned in Pakistan, regardless of where it is received. Consequently, an expatriate is taxable on such income in Pakistan, regardless of his or her residential status.
Taxable income includes directors’ fees and all remuneration for employment, subject to allowances and additions for certain non-cash benefits.
Employer contributions to recognized retirement benefit funds, including provident funds (up to certain limits), gratuity funds and superannuation pension funds, do not constitute taxable income for an employee.
Taxes for Expats in Pakistan and employee benefits
A gratuity is a lump-sum payment made to an employee at the time of separation from the employer. The gratuity fund is a separately administered fund created for the purpose of making gratuity payments to employees.
If they exceed certain specified limits, gratuity payments from unapproved gratuity funds are taxable when received by employees.
For employees, the entire salary amount, including allowances and benefits, is subject to tax, with some exceptions such as medical provision, company cars and some rent-free employer-provided accommodation.
Professional expatriate tax advice should be sought to assess particular exceptions.
Expat taxes on self-employment and business income. All individuals who are self-employed or in business are taxed on their business income.
All income received in Pakistan is subject to tax, unless specifically exempt. Residents are taxed on their worldwide income, while non-residents are taxed on their Pakistan-source income only.
Taxes for Expats in Pakistan: Investment Income
Expat tax rules on investment income. In general, dividends are subject to a withholding tax of 12.5% for “filers” and 17.5% for “non-filers.” A “filer” is a taxpayer whose name is on the active taxpayer list because he or she filed an income tax return. A “non-filer” is a taxpayer whose name does not appear on this list. Dividends paid by power generation companies and companies supplying coal exclusively to power generation companies are taxed at a rate of 7.5%.
Interest and profit- and loss-sharing income from investments and deposits, unless otherwise exempt from tax, is subject to a 10% withholding tax for filers or 17.5% for non-filers if profits exceed PKR500,000. Interest on government securities is taxed at the same rates.
Special expat tax rules apply to profit on debt (interest) derived by individual expat taxpayers. Expat tax rules also apply to winnings.
Taxes for expats in Pakistan: Double tax relief and tax treaties
Under Pakistani tax law, residents are taxed on worldwide income. However, a tax credit is generally granted for income from sources outside Pakistan (from both treaty and non-treaty countries), at the lower of the average foreign tax paid or the average Pakistani tax attributable to the foreign income.
Pakistan has entered into double tax treaties with 67 countries.
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