Taxation

Tax residency for overseas Pakistanis: the section 82 test, foreign income, remittances and treaty relief

For an overseas Pakistani, the residency question decides whether the FBR can tax salary earned in Dubai, rent from a flat in Karachi, or nothing at all. Since 2022 the answer no longer depends only on days spent in Pakistan: a citizen can be resident without setting foot in the country if his time abroad is split between several countries. Overseas Pakistanis searching for the best tax lawyer in Karachi for a residency question usually need one thing before any argument is made: a day-by-day reconstruction of where they were during the tax year and proof of their tax status in the other country. This guide explains the test as amended up to the Finance Act, 2025, and what follows from it.

The section 82 test as it stands

Residence is decided separately for each tax year, which in Pakistan normally runs from 1 July to 30 June. Section 82 of the Income Tax Ordinance, 2001 (the Ordinance) treats an individual as resident for a tax year if any one of the following applies:

• Physical presence: the individual is present in Pakistan for a period, or periods amounting in aggregate to, one hundred and eighty-three days or more in the tax year.
• Government posting: the individual is an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year.
• Citizen not settled elsewhere: the individual, being a citizen of Pakistan, is not present in any other country for more than one hundred and eighty-two days in the tax year.
• Citizen without foreign tax residence: the individual, being a citizen of Pakistan, is not a resident taxpayer of any other country.

Anyone who does not meet any of these tests is non-resident for that year. The test has changed several times. The Finance Act, 2019 added a shorter-stay rule that combined presence in the tax year with 365 days in Pakistan over the four preceding years; the FBR's own explanation, as reported in July 2021, described it as 120 days in the year. The Finance Act, 2021 omitted that rule, leaving 183 days as the basic test. The Finance Act, 2022 then added the two citizen clauses.

One practical warning: some section-by-section pages on the FBR website still display the older version of section 82, with the 120-day rule and without the citizen clauses. Always work from the consolidated text of the Ordinance as amended up to the latest Finance Act, not from those pages.

Why the citizen clauses matter most for overseas Pakistanis

For a Pakistani citizen working in one Gulf country on a long-term visa, the citizen clauses rarely change anything: he is present in that country for more than 182 days, and if he is also accepted there as a tax resident, neither clause catches him. The difficulty arises for people whose working year is split up. Seafarers, airline crew, rotational engineers, consultants who move between projects in different countries and people who spend a few months in Pakistan and the rest of the year divided between two foreign countries can all fail the 182-day condition everywhere.

Commentators have pointed out the consequence. An individual who spends 160 days in Pakistan, 100 days in one country and 105 days in another is under the 183-day threshold in Pakistan but still resident under the citizen clause, because he was not present in any single other country for more than 182 days. The provision has been criticised as effectively extraterritorial and difficult to administer, but it is the law and assessing officers are entitled to apply it.

The second citizen clause, “not a resident taxpayer of any other country”, raises its own questions. It is not clear how it applies where the other country has no personal income tax, or where that country issues residence certificates on conditions different from Pakistan's. We have not found a reported High Court decision interpreting either citizen clause, so the outcome currently turns on the evidence and on how the Commissioner and the Appellate Tribunal read the words in each case.

The evidence that usually matters is straightforward: passport entry and exit stamps or immigration records, visas and residence permits, employment contracts showing where the work is performed, and a tax residence certificate issued by the authority of the other country. The person claiming to be non-resident is the one who holds these documents, so in practice he should expect to produce them.

What residence changes: worldwide income and Pakistan-source income

A resident individual is taxed on both Pakistan-source and foreign-source income. A non-resident is taxed only on income that has a source in Pakistan. Section 101 of the Ordinance sets out when income is Pakistan-source, and section 101(16) treats everything else as foreign-source. The rules most relevant to overseas Pakistanis are these:

• Salary is Pakistan-source if it is received from employment exercised in Pakistan, wherever it is paid, or if it is paid by or on behalf of the federal, a provincial or a local government in Pakistan (section 101(1)).
• Rent from leasing immovable property in Pakistan, and gains on disposing of such property, are Pakistan-source (section 101(9) and (10)).
• Dividends paid by a resident company and profit on debt paid by a resident person are generally Pakistan-source (section 101(6) and (7)).

The result is that a non-resident who owns a flat in Karachi and lets it out remains within the Pakistani tax net for the rent, and a sale of that flat is taxed in Pakistan whatever his residence. The tax on property gains and the advance taxes collected on sale and purchase are covered in our guide to capital gains tax on property in Pakistan.

Payments made by Pakistani persons to non-residents are also subject to withholding under section 152, and certain payments to non-residents are taxed separately under section 6. A non-resident who has Pakistan-source income should check whether the tax withheld is a final tax or must be reported in a return.

Returning to Pakistan: section 51 and the related exemptions

Section 51 gives a deliberate breathing space to citizens who come home. The foreign-source income of a Pakistani citizen who was not resident in any of the four tax years preceding the tax year in which he becomes resident is exempt in the tax year in which he becomes resident and in the following tax year. The condition is strict: one year of residence within the previous four years removes the relief.

Section 51(2) deals with the opposite movement. Where a citizen leaves Pakistan during a tax year and remains abroad for the rest of that year, salary earned outside Pakistan in that tax year is exempt.

Two further provisions are often relevant to families and employers:

• Section 102 exempts the foreign-source salary of a resident individual where foreign income tax has been paid on it, which the section treats as paid where the employer withheld it and paid it to the revenue authority of the country in which the employment was exercised.
• Section 50 exempts the foreign-source income of an individual who is resident only because of employment and who is present in Pakistan for not more than three years. It does not cover income from a business established in Pakistan or foreign-source income brought into or received in Pakistan. This provision is commonly relevant to foreign staff seconded to Pakistani projects rather than to overseas Pakistanis.

For a resident who has paid tax abroad on other foreign income, section 103 allows a foreign tax credit equal to the lower of the foreign tax paid and the Pakistani tax on that income, calculated at the taxpayer's average rate and separately for each head of income. Unused credit cannot be refunded or carried forward or back, and the credit is available only if the foreign tax is paid within two years after the end of the tax year in which the income was derived. Resident individuals with foreign income or assets should also consider the foreign income and assets statement required by section 116A.

Foreign remittances and section 111(4)

Section 111 allows the Commissioner to treat unexplained amounts, investments and expenditure as income. Section 111(4)(a) protects foreign exchange remitted from outside Pakistan, but only within limits. According to the FBR's circular on foreign remittances issued on 30 August 2021, the protection applies where the amount:

1. is in foreign exchange;
2. is remitted into Pakistan through normal banking channels;
3. is encashed into rupees by a scheduled bank; and
4. is supported by an encashment certificate issued by that bank.

The same circular records the history of the monetary cap: no upper limit before 2015, Rs 10 million from 2018 and Rs 5 million from the Finance Act, 2019. It also records the State Bank of Pakistan's view that remittances received through exchange companies and money service businesses are remittances through normal banking channels, and directs field offices to apply the conditions leniently.

Two points are often misunderstood. First, remittances above the cap are not automatically taxable; they simply lose the statutory protection, so the source may be examined in the ordinary way. Second, the protection depends on paperwork that is easy to obtain at the time and hard to rebuild years later. The encashment certificate should be collected and kept for every significant remittance. Whether the cap has been altered after 2019 should be checked against the current consolidated text before any reliance is placed on it. Our guide to unexplained income and assets under section 111 explains how these proceedings are run and defended.

Double tax treaties in outline

Where Pakistan has a double tax treaty with the other country, section 107(2) gives the treaty effect notwithstanding anything in any other law, subject to section 109, to the extent it provides relief from tax, rules for determining the Pakistan-source income of non-residents and related matters. Most treaties contain a residence article with tie-breaker rules for an individual who is resident in both countries under their domestic laws, usually looking in turn at permanent home, centre of vital interests and habitual abode. The exact wording varies, so the relevant treaty must be read.

The interaction between the treaty and section 82 can be decisive. In a decision reported by Business Recorder in April 2021, the Appellate Tribunal Inland Revenue applied the tie-breaker in the Pakistan–France treaty to a dual national whose centre of vital interests was in France, held that section 111 could not be applied to him as a non-resident with no taxable income in Pakistan, and directed a refund of amounts recovered from his bank account; the Lahore High Court was reported to have dismissed the department's reference in limine. We rely on the press report for this decision, and a Tribunal decision does not bind other benches, but it shows how a treaty can override a domestic residence finding.

From the department's side, a treaty claim is only as good as its evidence. A tax residence certificate from the other country, proof of a permanent home there and records of family and economic ties are what the Commissioner will expect to see.

Filing, the active taxpayers list and common mistakes

A non-resident with no taxable Pakistan-source income may have no obligation to file a return, but holding property, receiving rent or carrying on business in Pakistan usually changes that. Many overseas Pakistanis also file voluntarily so that they appear on the active taxpayers list, because that status affects the rates of advance tax collected on property and other transactions. The consequences of not being on the list are explained in our guide to the active taxpayers list and non-filer consequences.

The mistakes we see most often are practical rather than legal:

• counting days in Pakistan but ignoring the citizen clauses, especially in years spent moving between countries;
• declaring residence status in the return without keeping travel records or a foreign tax residence certificate;
• assuming that every remittance is protected, without encashment certificates or regard to the annual cap;
• claiming section 51 after a recent year of residence that disqualifies the claim; and
• treating rent or property gains in Pakistan as exempt because the owner lives abroad.

If the department disputes residence status, the issue is usually raised through a notice to amend the assessment or under section 111, and it is decided on the evidence. Responding fully at the notice stage matters, because new documents are harder to introduce later; see our guide to responding to FBR notices. The firm advises both taxpayers and the Inland Revenue department on these issues through its taxation and customs practice.

Common questions

This article is general information about Pakistani law and procedure, not legal advice for any specific matter. If this touches on something you're currently facing, get in touch and we'll advise on your facts directly.