Tax on Foreign Income in Pakistan | Detailed Guide by WaysTax

Taxation of foreign income in Pakistan can be complex for residents, non-residents, and overseas Pakistanis. Understanding the rules, exemptions, and compliance requirements is crucial to avoid penalties and optimize tax liabilities.

At WaysTax, we provide expert legal and tax advisory services, including business registration, tax filing, and compliance solutions. 

This guide covers everything you need to know about tax on foreign income in Pakistan for 2025.

What Counts as Foreign Income for Pakistani Taxpayers?

Foreign income refers to earnings generated outside Pakistan, including:

• Salary income from employment abroad
• Business profits from overseas operations
• Dividends from foreign companies
• Rental income from properties located outside Pakistan
• Capital gains from the sale of foreign assets
• Interest income from foreign bank accounts or investments

In Pakistan, Who is Considered a Tax Resident?

Understanding your tax residency status is crucial for determining how your income, both local and foreign is taxed in Pakistan. 

The Income Tax Ordinance, 2001 (Section 82) defines tax residency based on specific conditions.

Tax Residency Rules in Pakistan

You are considered a tax resident of Pakistan for a given tax year (July 1 to June 30) if you meet any of the following criteria:

1. Physical Presence Test (183-Day Rule)

• You have spent 183 days or more in Pakistan during the tax year.
• This applies regardless of nationality.

2. Government Employees Posted Abroad

• If you are an employee or official of the Federal or Provincial Government posted outside Pakistan, you are still considered a tax resident.

3. Pakistani Citizens Not Tax Residents Elsewhere

• You are a Pakistani citizen who:
  • Has not stayed in any other country for more than 182 days during the tax year, and
  • Is not classified as a tax resident in any other country.

If none of these conditions apply, you are classified as a non-resident for tax purposes.

Why Does Residency Status Matter?

• Residents are taxed on their worldwide income (including foreign income).
• Non-residents are only taxed on Pakistan-sourced income.
• Special rules apply to Resident but Not Ordinarily Resident (RNOR) individuals, affecting foreign income taxation.

The Impact of Residency Status on Pakistani Taxation

Your residency status is a determining factor in how your income is taxed under Pakistani law. 

The Income Tax Ordinance, 2001 sets clear distinctions between residents and non-residents when it comes to the scope of taxable income:

1. Resident Individuals

If you qualify as a tax resident in Pakistan, you are liable to pay tax on your worldwide income. This includes income earned from both within Pakistan and outside the country. 

As a resident, you must declare all global earnings, including salary from foreign employers, overseas business profits, dividends from international shares, rental income from property abroad, and gains from foreign investments.

2. Non-Resident Individuals

If you are classified as a non-resident for tax purposes, your tax liability is limited to income that originates in Pakistan. This means that any income you earn from outside Pakistan, such as foreign employment, overseas businesses, or investments abroad is generally not subject to Pakistani income tax. 

However, Pakistan source income such as rental earnings from Pakistani property or dividends from Pakistani companies will still be taxed.

How to Calculate Tax on Foreign Income in Pakistan?

Step 1: Calculate your total foreign income (e.g., salary, rent, dividends, etc.).
Step 2: Convert the foreign currency to PKR using the State Bank of Pakistan’s official exchange rate.
Step 3: Apply the applicable tax rate to determine your tax liability.

Example:

If you received €15,000 from a European client and the State Bank of Pakistan’s average exchange rate for the tax year was PKR 320 per Euro, your taxable income would be calculated as:
€15,000 × 320 = PKR 4,800,000

This converted amount (PKR 4.8 million) would then be added to your total taxable income for the year and taxed according to Pakistan’s progressive income tax rates.

Taxability of Various Foreign Income Types for Residents of Pakistan

For Pakistani residents, foreign income is not something to overlook, it’s a legally taxable stream under Pakistani tax law. 

However, each type of foreign income has its own set of rules, exemptions, and potential reliefs. 

Understanding these distinctions is crucial for full compliance and smart tax planning.

1. Foreign Salary Income

Under Section 102 of the Income Tax Ordinance, 2001, foreign salary income may be exempt from Pakistani tax if certain conditions are met:

Exemption Criteria for Foreign Salary Income

• You must be a resident for tax purposes.
• Your job must be performed outside Pakistan.
• You must have already paid income tax on this salary in the foreign country.

If these conditions apply, you can legally claim an exemption, but documentation is key.

Documents Required for Foreign Salary Income

• Salary slips or employment contracts showing your foreign employer.
• Proof of tax paid abroad (e.g., tax certificates or receipts).
• Bank statements verifying remittances to Pakistan.

If you haven’t paid tax abroad or don’t qualify for exemption, your entire salary is taxable under Pakistani law, including any allowances, benefits, or bonuses.

Individual Tax Slabs (FY 2024–2025):

2. Foreign Business Income

If you operate a business outside Pakistan while maintaining your tax residency, the profits you earn from that venture are taxable in Pakistan.

However, if tax has already been paid in the foreign country, you may claim a foreign tax credit to avoid double taxation, as per Pakistan’s Section 103 and relevant double taxation treaties (DTAAs).

Corporate Tax Rates in Pakistan

To claim tax relief, make sure to maintain audited records, foreign tax returns, and any filings submitted abroad.

3. Dividends from Foreign Companies

If you receive dividends from international investments, they are taxable in Pakistan as income from “other sources.” 

However, if a withholding tax was already deducted in the country of origin, you are entitled to a foreign tax credit.

To ensure proper crediting and compliance, provide:

• Dividend certificates from the foreign company.
• Documentation of the withholding tax paid.
• Exchange rate conversion proofs.

4. Rental Income from Overseas Properties

If you own a rental property outside Pakistan and earn income from it, that income is fully taxable if you’re a resident taxpayer. 

However, like other foreign income types, if you’ve paid property tax for overseas Pakistani or income tax abroad, you may claim a foreign tax credit.

Individual Rental Income Tax Rates

For companies, the rate is 29% for large enterprises and 20% for small companies (revenue below PKR 250 million).

5. Foreign Capital Gains

Profits earned from the sale of foreign properties, stocks, securities, or other capital assets are taxable in Pakistan if you are a resident. 

The tax rate depends on:

• The type of asset
• The holding period
• Any foreign tax already paid

Capital Gains Tax Rates (CGT) on Immovable Property

Gains from foreign shares and mutual funds are generally taxed at 15% flat.

Exemptions on Foreign Income in Pakistan

While Pakistani residents are generally liable to pay tax on their worldwide income, the Income Tax Ordinance, 2001 (Section 51) outlines specific exemptions that provide significant relief under certain circumstances, especially for overseas Pakistanis and returning residents.

1. Tax Relief for Returning Non-Residents

According to Section 51(1)(g) of the Income Tax Ordinance, if a Pakistani citizen has been a non-resident for the past four consecutive tax years, their foreign source income Pakistan is exempt from tax:

• For the tax year they return to Pakistan, and
• For the following tax year.

This exemption is designed to encourage overseas Pakistanis to reintegrate into the local economy without immediate tax pressure.

2. Salary Earned Abroad During the Year of Departure

If a Pakistani individual leaves the country during a tax year and begins working abroad, any salary earned abroad in that same year is not subject to Pakistani tax provided:

• The employment is exercised outside Pakistan, and
• The income is earned after the individual has become a non-resident under tax rules.

This is a helpful exemption for those transitioning from domestic to foreign employment.

3. Tax Exemption on Foreign Remittances

Foreign remittances sent through official banking channels enjoy special protection under Pakistani tax law:

• Remittances up to PKR 5 million annually are exempt from income tax, and
• The Federal Board of Revenue (FBR) typically does not require proof of source for these transfers.

However, if annual remittances exceed PKR 5 million, the excess amount may be added to the taxable income, unless you can provide documentation proving it is not income (e.g., gifts, loans, etc.).

Note that:

• Exemptions must be supported by appropriate documentation such as travel records, foreign tax certificates, employment contracts, or bank remittance slips.
• These exemptions do not apply to non-residents who are simply sending funds back to Pakistan unless they fall under the official remittance rules.

Comprehending Pakistan’s Foreign Tax Credit System

Section 103 of the Income Tax Ordinance, 2001 provides relief through the Foreign Tax Credit (FTC) mechanism. 

This system ensures that residents are not unfairly taxed twice on the same income and brings Pakistan’s tax regime in line with global standards.

What Is a Foreign Tax Credit?

A foreign tax credit allows a resident taxpayer to deduct the amount of tax paid in another country from the tax payable in Pakistan on that same foreign-sourced income.

However, the credit is restricted to the lower of:

• The actual foreign tax paid, or
• The Pakistani tax that would have been payable on that income, based on your average tax rate.

This means you can’t claim a credit for more than what Pakistan would have charged you for the same income.

Key Eligibility Criteria

To successfully claim a Foreign Tax Credit, certain conditions must be fulfilled:

1. Resident Status: You must be a resident taxpayer in Pakistan for the relevant tax year.
2. Foreign Income Must Be Taxable in Pakistan: The income on which the foreign tax was paid should also be included in your Pakistani taxable income.
3. Tax Must Be Paid Within Two Years: The foreign tax must be paid within two years after the end of the tax year in which the income was earned.

Required Documentation

To claim the credit, you’ll need to submit proof of foreign tax payment along with your tax return. 

Acceptable forms of evidence include:

• Official tax receipts or certificates issued by the foreign tax authority.
• Statements from the payer confirming that tax was withheld at source.
• In exceptional cases, if standard documents are not available, the Commissioner Inland Revenue may accept alternative evidence, provided it is deemed reliable.

Limitations to Keep in Mind

• No Refunds or Carryovers: Any unused foreign tax credit cannot be refunded, carried back, or carried forward to other tax years.
• Applies Only to Taxable Foreign Income: The credit only applies to income that is both taxed abroad and taxable in Pakistan. If the foreign income is exempt in Pakistan (such as exempt foreign salary under Section 102), you cannot claim a credit.

Example Scenario

Suppose you earn USD 10,000 in foreign dividends and pay USD 1,000 in foreign tax. If your average tax rate in Pakistan translates to a liability of PKR 250,000 on that income (after currency conversion), and the equivalent of the foreign tax is PKR 300,000, your credit will be limited to PKR 250,000 — the lower of the two amounts.

Double Taxation Treaties (DTTs) of Pakistan

For individuals and businesses operating across borders, double taxation, where the same income is taxed in two different countries can be a major financial burden. 

To combat this, Pakistan has entered into Double Taxation Avoidance Agreements (DTAAs) with several countries, helping ensure fair taxation, reduce tax liability, and encourage international trade and investment.

What Is a Double Taxation Treaty?

A Double Taxation Treaty is a bilateral agreement between two countries that determines how tax will be levied on income earned across borders. 

These treaties define:

• Which country has the primary right to tax specific types of income.
• Whether income will be taxed in both countries and, if so, how to eliminate or reduce the duplication.
• Maximum tax rates that may be applied on items like dividends, interest, and royalties.

Pakistan’s Global Tax Treaty Network

To date, Pakistan has signed DTAAs with 68 countries, including:

• United States
• United Kingdom
• United Arab Emirates (UAE)
• Saudi Arabia
• France
• China
• Germany
• Canada
• Australia
• And many others

These treaties serve as legal frameworks to help avoid double taxation on cross-border income and provide tax relief for both residents and foreign investors.

Key Benefits of Double Taxation Treaties for Taxpayers

1. Avoidance of Double Taxation

The same income is either:

• Taxed in only one country, or
• Tax paid in the foreign country is credited against the tax payable in Pakistan.

2. Reduced Withholding Tax Rates

Lower tax rates may apply to:

• Dividends
• Interest income
• Royalties
• Technical service fees

3. For instance, under certain treaties, withholding tax on dividends may be reduced from the standard 15% to as low as 5%.
4. Exemptions on Certain Types of Income

 Some treaties exempt specific income streams altogether:

• Government pensions or salaries
• Social security payments
• Profits of permanent establishments under defined thresholds

5. Legal Certainty & Dispute Avoidance

DTAAs provide a clear allocation of taxing rights, which helps taxpayers avoid double interpretation issues, tax audits, or international disputes.

Why DTAAs Matter for Expats and Businesses

• Overseas Pakistanis: These treaties can reduce or eliminate tax on foreign income remitted to Pakistan.
• Foreign Companies Investing in Pakistan: DTAAs can significantly reduce the tax cost of doing business, especially in industries involving licensing, consulting, or finance.
• Local Businesses with Global Operations: Helps ensure that income from foreign ventures is not taxed twice, increasing profit margins and reinvestment potential.

Using a DTAA to Claim Relief

To benefit from a Double Taxation Treaty, a taxpayer typically needs to:

• Be a resident of one of the treaty countries.
• Provide proof of tax residency (e.g., a Tax Residency Certificate issued by FBR).
• Declare foreign income in their local tax return and claim foreign tax credit or exemption as per the relevant treaty.

How to Include Foreign Income on Your Tax Return from Pakistan

With globalization on the rise, many Pakistani residents now hold income and assets abroad. 

To ensure transparency and compliance, the Income Tax Ordinance, 2001, under Section 116A, outlines the mandatory disclosure of foreign income and assets for resident individuals. 

Here’s everything you need to know.

Who Needs to Declare Foreign Income in Pakistan?

If you are a resident taxpayer, you are required to file a Foreign Income and Assets Statement if any of the following conditions apply during the tax year:

1. Foreign Income Over USD 10,000

You must declare your foreign income if the total earned (excluding salary already taxed by a foreign government) exceeds $10,000 in the tax year.

2. Foreign Assets Over USD 100,000

If the aggregate value of your foreign assets (such as real estate, stocks, bank accounts, or other investments) exceeds $100,000, you are legally required to disclose these in your tax return, even if there is no income earned from them.

What Must Be Disclosed in the Foreign Income and Assets Return?

When filing the foreign income tax return, you need to provide a complete and accurate picture of your foreign financial position, including:

1. Snapshot of Foreign Assets

• Detail all foreign-held assets as of June 30 (end of Pakistan’s tax year).
• Include property, investments, bank accounts, shares, insurance policies, and other tangible or intangible assets abroad.

2. Transfer of Foreign Assets

If you’ve sold, gifted, or transferred any foreign asset during the year, you must:

• Name the recipient (with ID details if possible)
• Disclose the consideration received (value or price)

3. Foreign Income Statement

List all sources of foreign income during the year, such as:

• Rental income from overseas property
• Dividends or interest from foreign investments
• Foreign business income

Also disclose:

• Expenses directly incurred to earn that income
• Maintenance costs related to the assets (e.g., property management or bank charges)

What are the Documents You Need to Declare Foreign Income in Your Pakistan Tax Return

You are required to keep supporting documentation for your foreign income and asset disclosure. 

These may include:

• Bank statements or certificates
• Salary slips (if employed abroad)
• Tax deduction or payment certificates from foreign tax authorities
• Property purchase/sale deeds or agreements
• Investment account summaries
• Proof of remittances

While not all documents need to be filed with the return, they must be retained for audit purposes and produced on demand by the FBR tax on foreign remittance.

Penalties for Non-Disclosure

Failure to disclose foreign income or assets can lead to:

• Heavy penalties
• Fines up to 3% of the value of undisclosed foreign assets or income
• Possible prosecution for tax evasion under Pakistan’s tax laws

Key Tax Considerations for NRPs & Foreign Investors in Pakistan

1. Property Investment Benefits

Non-resident Pakistanis (NRPs) can enjoy filer tax rates on property if funds are remitted through official banking channels. 

This includes lower tax on purchase, sale, and gain from property.

2. Active Taxpayer Status (ATL)

Filing a tax return, even with no income helps you stay on the Active Taxpayer List (ATL). 

ATL status gives:

• Lower tax rates
• Better access to investment and financial services

3. Controlled Foreign Company (CFC) Rules

Pakistan taxes income from foreign companies where:

• Pakistani residents own over 50% collectively or 40% individually
• Your share is over 10%, and income exceeds PKR 10 million

Such income is taxable in Pakistan, even without dividend distribution, but won’t be taxed again when actually paid out.

Let Waystax Handle Your Foreign Income Tax Matters in Pakistan

Navigating tax on foreign income in Pakistan can be complex, but you don’t have to do it alone. 

Waystax specializes in simplifying tax compliance for overseas Pakistanis and resident individuals with global income. 

From claiming exemptions and foreign tax credits to filing detailed foreign asset statements, we ensure your filings are accurate and stress-free.

 Contact Waystax Now to Book Your Call and to make your taxes hassle-free!