Understanding Foreign Income Tax in Pakistan (2025)
Foreign Earnings in Pakistan – With the rise of freelancing, global remote work, and overseas investments, more Pakistanis are earning income from abroad. But the question is: Is foreign income taxable in Pakistan? This guide will help you understand who needs to pay tax, how much, and what rules apply—while improving compliance and avoiding double taxation.
Who Is Taxed on Foreign Income?
To determine whether your foreign income is taxable, you must know your residency status:
| Residency Status | Tax Rules |
|---|---|
| Resident | Taxed on worldwide income, including foreign earnings. |
| Non-resident | Taxed only on income sourced from Pakistan. |
If you stay in Pakistan for 183 days or more in a tax year, you qualify as a resident. Therefore, your global income may become taxable.
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When Is Foreign Income Taxable?
Let’s break down different income types and how they’re treated in Pakistan:
| Income Type | Taxable in Pakistan? |
|---|---|
| Foreign salary (taxed abroad) | Not taxable (if proof exists) |
| Foreign business income | Yes, but eligible for a tax credit |
| Dividends, interest, capital gains | Yes, for residents |
Foreign income is not automatically taxable. If you paid tax abroad, Pakistan may offer you relief through tax treaties or credits.
How to Avoid Double Taxation?
To help avoid paying tax twice on the same income, Pakistan offers two relief options:
1. Double Taxation Agreements (DTAs)
Pakistan has signed DTAs with over 60 countries. These treaties reduce or eliminate tax in either country, depending on the income type and source.
2. Foreign Tax Credit (FTC) – Section 103
This law allows residents to reduce their Pakistan tax liability by the amount of tax they’ve already paid abroad. However, the credit:
- Must not exceed the Pakistani tax on the same income.
- Can only be claimed within two years.
- Cannot be refunded or carried forward.
This credit is especially helpful for business owners or investors earning foreign income.
Special Relief for Freelancers & IT Exporters
Pakistan’s freelancers and digital workers benefit from favorable tax policies—if they follow the rules.
| Freelancer Type | Applicable Tax Rate |
|---|---|
| With PSEB Registration | 0.25% (Final Tax) |
| Without PSEB Registration | 1% on remitted amount |
To qualify for lower tax, freelancers must register with Pakistan Software Export Board (PSEB) and receive payments through banks using a PRC (Proceeds Realization Certificate).
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Important Conditions for Claiming FTC
Not all foreign taxes are eligible for credit. Pakistan allows credit only for income taxes. The following table helps clarify:
| Eligible for FTC | Not Eligible |
|---|---|
| Income tax on salary/business | Penalties or fines |
| Withholding tax on dividends | Payments for benefits or fees |
Additionally, the foreign tax must be final and compulsory—not a refund or advance.
Real-Life Example
Let’s say a resident earns PKR 3 million abroad and pays PKR 600,000 in foreign tax. In Pakistan, the tax liability on that income is PKR 1 million. Since the credit is limited to the lower of the two amounts, the person can claim PKR 600,000 in tax credit.
This not only reduces the tax burden but also avoids duplication.
Filing & Compliance Checklist
To stay compliant, consider these important deadlines and steps:
| Action | Deadline/Note |
|---|---|
| File annual income tax return | By September 30, 2025 |
| Pay or claim FTC | Within 2 years |
| Save documents | Keep for at least 6 years |
Make sure to keep PRCs, tax slips, and proof of foreign tax. Without them, your credit claim may be rejected.
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Final Thoughts
Foreign income can bring exciting opportunities, but it comes with tax responsibilities. If you’re a Pakistani resident earning abroad, use tax treaties and credits wisely to stay compliant. Most importantly, file your taxes on time and keep your documents organized.
By understanding these rules, you can avoid penalties, reduce your tax liability, and confidently manage your global earnings. Stay tuned with Bloom Pakistan.
Key Takeaways Table
| Topic | Summary |
|---|---|
| Residency Status | 183+ days in Pakistan = global tax liability |
| Foreign Salary Exemption | Allowed if tax paid abroad with proof |
| Tax Credit Deadline | 2 years from tax year-end |
| Freelancer Tax Rates | 0.25% with PSEB, 1% otherwise |
| Documents Needed | PRC, tax slips, DTA proof, bank records |
