Taxation of non resident and permanent establishment of non resident in pakistan

AAMIR RASHEED - 0300-8422327
TAXATION OF NON-RESIDENT
AND
PERMANENT ESTABLISHMENT OF
NON-RESIDENT IN PAKISTAN

RELEVANT PROVISIONS OF THE LAW
2 Definition
6 Tax on certain payments to non-
residents
7 Tax on shipping and air transport
income
11 Head of Income
44 Exemption under international
agreements
46 Profit on debt
79 Non recognition rule
81 Resident & Non-resident person
94 Principles of taxation of companies
107 Agreement for avoidance of double
taxation
115 Person not required to furnish a
return of income
142 Recovery of tax due by non-resident
members
143 Non-resident ship owner or a charterer
144 Non-resident aircraft owner or
charterer
152 Payment to a non-resident
153 Payment for goods and services
Permanent Establishment of Non-resident
person
101 Geographical source of income
105 Taxation of Permanent Establishment
206A(3) Advance ruling
AAMIR RASHEED, 0300-8422327

Section-2 Definition
Individual not physically present in Pakistan at least 183 days in aggregate.
AOP not having management and control wholly or partly in Pakistan in any time during the tax year
Companies not incorporated (registered) in Pakistan and/ or not having management and control wholly
situated in Pakistan in any time during the year.
A non-resident person is taxable only for his Pakistan Source income subject to Tax Treaty. (an agreement
between countries for avoidance of double taxation)
Section-6 (Tax on certain payment to non-resident person)
Non-resident person if received Pakistan source royalty and fee for technical services will be
paid tax @ 15 % on gross amount.
Exemption
Royalty and fee for technical services are connected with PE
Exempted royalty and fee for technical services as per income tax ordinance
Section-7 Tax on shipping and air transport income of non-resident
Tax shall be imposed @ 8% and 3% respectively on business income of following
Gross amount received or receivable( where in or out side Pakistan) for carriage of
passengers, livestock, mail or goods embarked in Pakistan and
Gross amount received or receivable in Pakistan for carriage of passengers, livestock, mail
or goods embarked outside Pakistan.
AAMIR RASHEED, . 0300-8422327

Section-11 Head of Income
The income of a non-resident person under a head of income shall be computed by
taking into account only amount that are Pakistan-source income.
Section-44 Exemption under international agreements
Any Pakistan source will which Pakistan is not permitted to tax under tax treaty shall
be exempted.
Any salary received by an individual(not being Pakistan citizen) shall be exempt to
extent provided for in agreement between Federal Government and Foreign Government
if
 the individual is either not resident or resident on solely by reason of performing
services.
Individual is citizen of that Foreign Country.
Salary is paid by the Foreign Country or Public international organization out of fund or
grants released as Aid to Pakistan in pursuance of such Agreement.
Any income received by a person (not being a citizen of Pakistan) engaged as a
contractor, consultant, or expert on a project in Pakistan shall be exempt to the extent
provided for in a bilateral or multilateral technical assistance agreement between the
Federal Government and a foreign government or public international organization,
where
 The project is financed out of grant funds in accordance with the agreement
 The person is either a non-resident person or a resident person solely by reason of
the performance of services under the agreement and
AAMIR RASHEED, FCA. 0300-8422327

Section-46 Profit on debt
Any profit received by a non-resident person on a security issued by a resident person shall be
exempt from tax under this Ordinance where
the persons are not associates
the security was widely issued by the resident person outside Pakistan for the purposes of
raising a loan outside Pakistan for use in a business carried on by the person in Pakistan
the profit was paid outside Pakistan; and
 the security is approved by the Central Board of Revenue for the purposes of this section.
Section-79 Non-recognition rule
No gain/loss on disposal of property is arise where:
 between spouses under an agreement to live apart;
 by reason of the transmission of the asset to an executor or beneficiary on the death of a
person;
 by reason of a gift of the asset;
 by reason of the compulsory acquisition of the asset under any law where the consideration
received for the disposal is reinvested by the recipient in an asset of a like kind within one
year of the disposal;
 by a company to its shareholders on liquidation of the company; or
by an association of persons to its members on dissolution of the association where the assets
are distributed to members in accordance with their interests in the capital of the association.
Exemption
If the person acquiring the assets is Non-Resident Person AAMIR RASHEED, FCA. 0300-8422327

Section-81 Resident & non-resident person
A person shall be a resident person for a tax year if the person is;
 resident individual, resident company or resident association of persons for the year or
the Federal Government.
A person shall be a non-resident person for a tax year if the person is not a resident person for
that year.
Secton-94 Principles of taxation of companies
Where sub-section (3) of section 92 applies, the income of a member of an association of
persons chargeable under the head “Income from Business” for a tax year shall include;
in the case of a resident member, the member’s share in the total income of the association; or
in the case of a non-resident member, the member’s share in so much of the total income of
the association as is attributable to Pakistani-source income.
 The share of a loss of a non-resident member shall be limited to the extent that the loss
relates to the derivation of Pakistan-source income.
Under Finance Bill 2017, dividend income received from a non resident company treated as
dividend income rather than business income or other source income.
Section-107 Agreement for avoidance of double taxation
The Federal Government may enter into an agreement with the government of a Foreign country
for avoidance of double taxation and prevention of fiscal evasion. The provision of agreement
have effect in the following manner;
relief from the tax payable under this Ordinance;
the determination of the Pakistan-source income of non resident persons;

Section-107 Agreement for avoidance of double taxation
 where all the operations of a business are not carried on within Pakistan, the
determination of the income attributable to operations carried on within and
outside Pakistan, or the income chargeable to tax in Pakistan in the hands of non-
resident persons, including their agents, branches, and permanent establishments in
Pakistan;
the determination of the income to be attributed to any resident person having a
special relationship with a nonresident person; and
 the exchange of information for the prevention of fiscal evasion or avoidance of taxes
on income chargeable under this Ordinance and under the corresponding laws in force
in that other country.
Section-115 Person not required to furnish a return of income
A Non-Resident person is not required to furnish Income Tax Return if;
Owns immovable property with a land area of two hundred and fifty square yards or
more or
Owns any flat located in areas failing within the municipal limits existing immediately
before commencement of Local Government Laws in the province or area in a
Cantonment or the Islamabad Capital Territory.
If the above non resident person is;
Not a Company
Person whose taxable income does not exceed taxable limit AAMIR RASHEED, FCA. 0300-8422327

Section-115 Person not required to furnish a return of income
 A welfare institution approved by Tax Ordinance
Section-142 Recovery of tax due by non-resident members
The tax due by a non-resident member of an association of persons in respect of the
member’s share of the profits of the association shall be assessable;
 in the name of the association or
of any resident member of the association and
 may be recovered out of the assets of the association or
 from the resident member personally.
A person making a payment under this section shall be treated as acting under the
authority of the non-resident member and is hereby;
indemnified in respect of the payment against all proceedings, civil or criminal,
and
 all processes, judicial or extrajudicial,
 notwithstanding any provisions to the contrary in any written law, contract or
agreement.
The provisions of this Ordinance shall apply to any amount due under this section as if it
were tax due under an assessment order. AAMIR RASHEED, FCA. 0300-8422327

Section-143 Non-resident ship owner or charterer
A ship master before departure furnish A RETURN showing the gross amount as per Section-7 in
order to determine the amount of tax due under Section-7 after calling for all details and
accounts.
The Collector of Custom shall not grant port clearance for ship until;
RETURN is furnished
Tax under Section-7 is paid or
Arrangements of payments have been made.
Exemption of filing return before departure
Satisfy Commissioner not able to furnish RETRUN before departure.
Has made satisfactory arrangements for its payments.
Furnish RETURN within 30 days from departure.
Section-144 Non-resident aircraft owner or charterer
A non-resident owner or charterer of aircraft shall furnish A QUARTER RETURN within 25 days
from each quarter of financial year showing gross amount specified in section-7 in order to
determine the amount of tax due after calling for all details and accounts.
Tax imposed must be paid within time specified in notice. If such tax is not paid within 3 month
of service of notice, the Commissioner may issue to the authority by whom clearance may be
granted to the aircraft operated by non-resident person A CERTIFICATE specifying the name of
non-resident person and amount of tax AAMIR RASHEED, FCA. 0300-8422327

Section-144 Non-resident aircraft owner or charterer
The authority to whom A CERTIFICATE is issued shall refuse clearance from aircraft from any
airport in Pakistan to any aircraft owned or chartered by such non-resident until tax due has
been paid.
Section-152 Payment to non-resident ( provide option to opt of Final tax regime, under
Finance Bill, 2017)
Every person paying royalty or fee for technical services to a Non-Resident that is chargeable to
tax under section-6 shall deduct tax @17.
Every person making a payment in full or part(including advance) to a Non-Resident Person on
execution of;
A contract or sub-contract under a construction, assembly or installation project in Pakistan,
including for supply of supervisory activities in relation to such projects
Any other contract for construction or services rendered relating thereto or
A contract for advertisement services rendered by T.V Satellite Channels.
Shall be deducted tax @ 7 % for filers and @ 13% for non-filers. (as per Finance Bill 2017)
Insurance premium or reinsurance premium to non-resident. ( 5% in both case)( not applied on
PE of Non resident on Commissioner’s satisfaction)
Tax deducted above is Full and final tax on the income of Non-Resident Person
Advertisement services of non-resident person relaying from outside Pakistan. (10% in both
case)
Any other case (20% in both case)( not applied where tax deducted under section
149,150,156,233 and 172) AAMIR RASHEED, FCA. 0300-8422327

Section-152 Payment to non-resident
Sale of goods (except commercial import under section-148) For rendering of or
providing services
On execution of contract excluding rendering of or providing services
Shall deduct tax on gross amount (13%)
The Commissioner may allow PE of non resident no deduction or deduction at reduced rate if tax
is adjustable.
Where a person make payment without deducting tax under this section the person making
before payment furnish to the Commissioner a notice having
The name of address of the non-resident person
The nature and amount of the payment
The commissioner may allow not to deduct or give order to deduct tax as per this section
Furnishing a notice to Commissioner mentioning above shall not apply to a payment on account
of;
An import of goods where title to the goods passes outside Pakistan where;
The supply is made by the Head Office outside Pakistan of a person to a Permanent
Establishment of the person in Pakistan
Supply by PE of person outside Pakistan to a PE of person in Pakistan AAMIR RASHEED, FCA. 0300-8422327
Filer Non-filer
Company 4% 7%
Other
case
4.5% 7.75%
Filer Non-filer
Company 12% 14%
Other
case
15% 17.5%

The supply is made between associates
The supply is made by a resident person or a Pakistan PE of non-resident person
Education and medical expenses remitted in accordance with the regulations of state
Bank of Pakistan.
Section-153 Payment for goods and services
Every person making a payment in full or part including advance to a resident person for
Sale of goods
Rendering of or providing of services
On execution of a contract excluding sale and service contracts
Shall deduct tax on gross amount including sale tax as;
2017 2016
Filer Non-
filer
Filer Non-
filer
Sale of rice, cotton seed or edible oils 1.5% 1.5% 1.5% 1.5%
Sale of fast moving consumer goods by
distributors thereof
In case of company 3% 3% 4% 6%
In case of other than Company 3.5% 3.5% 4.5% 6.5%

2017 2016
Filer Non-
filer
Filer Non-
filer
Sale of other goods
In case of Company 4% 7% 4% 6%
In case other than Company 4.5% 7.75% 4.5% 6.5%
Rendering of or providing services
Transport services
In case of other than Company 2% 2% 2% 2%
Advertisement services by electronic and print
media
In case of Company 1.5% 14.5% 1% 12%
In case other than Company 1.5% 17.5% 1% 15%
Other services
In case of Company 8% 14.5% 8% 12%

2017 2016
Filer Non-
filer
Filer Non-
filer
In case other than Company 10% 17.5% 10% 15%
Execution of Contract
In case other than Company 7.5% 12.5% 10% 7.5%
Execution of contract by sports person 10% 10% 10% 10%

Section-153 Payment for goods and services…….continue……
Every exporter or an export house making a payment in full or part including advances to a
Resident Person or PE in Pakistan of Non resident for rendering of or providing of services of
Stitching, dying, printing, embroidery, washing, sizing and weaving shall be deduct tax @1% on
gross amount.
Tax deducted under this section shall be Full and Final tax provided;
Where payment is received on sale or supply of goods by a (Sale of goods)
Company being manufacturer of such goods or
Public company listed on a registered stock exchange in Pakistan
Tax deducted on rendering of services shall be minimum tax on transaction provided;
Where above mentioned minimum tax in respect of freight forwarding services, cargo services,
courier services, manpower outsourcing services, hotel services, security guard services,
software development services, tracking services, advertising services( other than print or
electronic media), share registrar services, engineering services or car rental services (if tax
payable must be less than 2% of total turnover) is in excess of corporate tax (34%) the excess
amount of tax paid shall be carried forward for adjustment against tax liability of next 5 years.
This clause shall not apply on aforementioned services companies if tax payable is more than 2%
of total turn over.
 tax deducted on execution of contract shall be adjustable if recipient is a public listed companyAAMIR RASHEED, FCA. 0300-8422327

Section-153 Payment for goods and services…….continue……
Tax deducted under payment made to print or electronic media for advertisement services shall
be full and final tax liability.
Commissioner relaxation of withholding taxes where tax is adjustable.
Not withheld tax or withheld tax at reduced rates in normal case
In case of abovementioned services companies, above relaxation will be given when such
companies made advance payment equal to 2% of the Turnover of immediately preceding tax
year.
This section shall not apply to;
 A sale of goods where the sale is made by importer of the goods and tax under section 148 (
Commercial importer)
Payment made to traders of yarn by the taxpayers specified in zero-rated regime of sale tax
A refund of any security deposit
A payment made by Federal Government, a Provincial Government or a Local Government to a
contractor for construction materials supplied to the a contractor by the said Government.
A cotton ginner who deposits in the Government Treasury, and amount equal to the amount of
tax deductible on the payment being made to him and evidence to this effect is provided to the
prescribed person
The purchase of an asset under a lease and buy back agreement by a Modaraba, leasing
company, banking company or financial institution
Any payment for securitization of receivables by SPV( Special purpose vehicle)
Note: Under Finance Bill 2017, the service provider shall collect advance tax of recipient of services on theAAMIR RASHEED, FCA. 0300-8422327

PERMANENT ESTABLISHMENT OF NON-RESIDENT PERSON
Section-101 Geographical source of income
Non-resident person earned income in Pakistan is a Pakistan source of income in any type if
Income derived by PE of Non-Resident Person.
 sale of goods or merchandise or other business activities of the same or similar kind as those sold by the
person through a PE in Pakistan.
Any business connection in Pakistan. ( Real and sufficient connection must be)
Rendering of independent services of any kind ( Royalty and Technical Fee)
Any gain from disposal of property used in deriving income by PE
Section-105 Taxation of a PE in Pakistan of a non-resident person
The general and the most significant rules in relation to the computation of business
income of PE is that all the provisions of the Ordinance as applicable to resident
enterprises are applicable to the PE including;
 Depreciation
Amortization
Bad debts

TAX IMPLICATION ON NON-RESIDENT HAVING PE
Deductible business expenses and allowable business incomes
Carry forward and sett off of losses
Distinct and separate entity from non-resident person/Head Office
In determining attributable and taxable profit of PE and non-resident, Tax Ordinance
treats PE as independent and separate legal entity from Non-resident/Head office.
Allowability of Business expenses.(excluding Head Office Expenses)
All the expenses incurred for taxable activity including royalty income and fee for
technical services of PE, including executive and administrative expenses so incurred
whether in Pakistan or elsewhere, are allowable expenses with subject to the provisions
of Ordinance. These expenses must be revenue nature and bear the element of
commercial expediency.
Allowability of Head Office Expenses
Head office of PE remains engage with PE in different countries in order to facilitate
business activities of PE which would result in occurrence of expenses by Head office
specially for and on the behalf of PE. This kind of expense belong to business expense
of PE which need to be deducted from PE’s business taxable income. Therefore,
Ordinance would allow such expenses on the basis of formula mentioned below,
Allowable head office expenses = Pakistan Turnover/World wide TO*Total HO expenses

10% maximum limit of expenses out side Pakistan relevant to earn royalty income and fee for
technical services by PE. ( Income tax Rules, 2002)
Nature of Head office expenses are:
 salaries, travelling expense of such employees, rent and rates
Any other expenditure which may be prescribed.
Disallowance of Expenses/Incomes
The following expenses paid or payable/received or receivable to or from head office or other PE
of the head office can not be allowable expenses/incomes.
Royalty fees for use of tangible or intangible assets by PE.
Compensation for any services including management services for PE.
Profit on debt of money lent to PE by Head Office ( other than Banking business)
Any interest paid or payable by non resident on debt to finance PE business
Any insurance premium paid or payable in respect of above debt.
Example. ABC US Co. borrows funds to establish PE in Pakistan. The interest being paid by the
Company is not allowable expense in Pakistan for PE.
Note:
PE Pakistan source Income would be either NTR income or FTR income. Above mentioned
Allowability would be allowed against NTR taxable income only.

Section-152 Payment to non-resident person having Permanent Establishment
Every prescribed person making payment to PE of non-resident shall deducted tax @15
from gross amount including sale taxes in the following manners;
Sale of goods including advances.
Rendering of services, royalty fee and technical fee.
Execution of contract.
Note: Under NTR income, where tax deducted is adjustable, exemption of not deducting
tax or deducted at reduced rate would be allowed to recipient of amount (PE) on
Commissioner discretion.
Note: Full time exemption is allowed to Petroleum Exploration and Production
Companies (PE)
Section-206A(3) Advance ruling
The Finance Bill 2017, has omitted the proviso and advance ruling shall now be
applicable on Permanent Establishment in Pakistan of Non-resident.

Taxation of non resident and permanent establishment of non resident in pakistan

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