Taxes for Expats in Pakistan

    Your complete guide to expat tax in Pakistan:

    Tax rates

    2017/18 income tax rates

    Salaried individuals

    Taxable Income Band PKR National Income Tax Rates
    0 - 400,000 0%
    400,000 - 500,000 2%
    500,000 - 750,000 5%
    750,000 - 1,400,000 10%
    1,400,000 - 1,500,000 12.5%
    1,500,000 - 1,800,000 15%
    1,800,000 - 2,500,000 17.5%
    2,500,000 - 3,000,000 20%
    3,000,000 - 3,500,000 22.5%
    3,500,000 - 4,000,000 25%
    4,000,000 - 7,000,000 27.7%
    7,000,001+ 30%

     

    Different rates apply for non-salaried individuals.

    A rebate of 50% of the tax payable is available to taxpayers 60 years of age or older whose total taxable income in a tax year is PKR1 million or less.

    Who pays

    Who pays tax in Pakistan?

    Expat tax in Pakistan is 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 works

    How is income taxed in Pakistan?

    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. A gratuity is a lump-sum payment made to an employee at the time of separation from the employer. A 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.

    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.

    CGT

    Do I have to pay capital gains tax?

    In general, capital gains resulting from the disposal of capital assets, other than depreciable assets, receive favourable tax treatment if the assets are held longer than 12 months prior to disposal.

    For assets held longer than 12 months, only 75% of the capital gain is subject to tax at the normal rates.

    These provisions do not apply to expats’ capital gains derived from transfers of public company shares, vouchers of Pakistan Telecommunication Corporation, modaraba certificates, instruments of redeemable capital, derivative instruments and debt securities (collectively known as “securities”). Capital gains derived from the disposal of securities are taxable at the following rates for the 2016 tax year.

    Holding period Rate for 2016 tax year
    < 12 months 15%
    12 months - 24 months 12.5%
    24 months - 48 months 7.5%
    > 48 months 0%

     

    Capital gains on the sale of immovable property are subject to income tax, depending on the following holding periods:

    • If the property was held for a period of up to one year, the tax rate on the gain is 10%.
    • If the property was held for a period of more than one year but not more than two years, the tax rate on the gain is 5%.
    • If the property was held for a period of more than two years, the gain is not taxable.

    However, provincial governments levy stamp duties on every transaction involving immovable property.

    Super tax - The 2015 Finance Act introduced a one-time super tax, which applies for the 2015 tax year to income from all sources, including capital gains of listed securities, and to all persons, including insurance companies, oil and gas and mineral companies, and banking companies.

    The super tax is required to be paid at the time of filing of the expatriate tax return. This tax applies to all types of income, whether taxable under the normal tax regime or the final tax regime at the following rates.

    Deductible expenses - Muslim taxpayers may deduct zakat paid.

    An expat taxpayer may claim a deduction with respect to any mark-up paid on a loan meeting either of the following conditions:

    • It is sanctioned by a scheduled bank or by a non-banking finance institution regulated by the Securities and Exchange Commission of Pakistan.
    • It is advanced by the government, a local authority, a statutory body or a public company listed on a stock exchange of Pakistan.

    To claim the deduction, the following conditions must be fulfilled:

    • The loan must be used for the construction or acquisition of a house.
    • The mark-up is not claimed as a deduction in computing income from residential property.

    To compute the above tax deduction, the average rate of tax is applied to the lesser of the mark-up paid, PKR750,000 or 50% of the taxable income of the individual.

    Expat Allowances - An resident expat may claim a tax credit for charitable donations, including donations in kind, made by him or her to any of the following:

    • A board of education or any university in Pakistan established by or under a federal or provincial law
    • An educational institution, hospital or relief fund established or run in Pakistan by the federal government, provincial government or a local government
    • A nonprofit organization

    Certain resident individuals are entitled to an allowance with respect to premiums paid in an approved pension fund under the Voluntary Pension System Rules, 2005. This expat tax allowance is available to individuals who have obtained a valid National Tax Number or a National Identity Card and are not entitled to benefit under any other approved employment pension or annuity scheme.

    Expat Business deductions - In general, taxpayers may deduct all expenses (excluding personal or capital expenditures) incurred in carrying on a business in Pakistan. Depreciation on fixed assets used in a business is allowed at specified rates.

    Non-resident expat - Non-resident expats are taxed on Pakistani-source employment, self-employment and business income at the rates outlined for residents.

    Individuals are subject to withholding tax at source on income.

    In general, the withholding taxes on non-residents are advance taxes that may be offset against the eventual tax liability for expats.

    DTAs

    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
    IHT

    Is there inheritance or estate tax in Pakistan?

    There is no inheritance tax in Pakistan...however...

    ...do not assume that just because you've expatriated to live in Pakistan that your estate will not be liable to inheritance tax (IHT) in your old home nation, or any nation where you hold assets.  For example, those domiciled in Britain remain liable for IHT on their worldwide estate.

    If you are concerned about mitigating your IHT liability, we'd like to offer you a free initial consultation to determine whether we can help you.

    Finally...

    We believe the above information is accurate, however tax rates and rules can change, and we are NOT tax experts.  Therefore, please do not rely exclusively on the information to determine your liability for tax.

    Speak to a local tax expert for personalised advice, or consult an international taxation consultancy.

    If you'd like our help to source someone to assist you, please get in touch and we will do all we can to help.

    Relax, and join the 10,000 other international investors who have made the smart decision to let us help.

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