Islamabad, December 10, 2025 – The Federal Board of Revenue (FBR) has provided a comprehensive explanation on what constitutes Pakistan-source income for Tax Year 2026 under Section 101 of the Income Tax Ordinance, 2001.
The updated explanation aims to help taxpayers—both residents and non-residents—accurately determine the origin of their income for tax calculation and compliance.
The FBR’s latest guidance covers salary, business income, royalties, rental income, digital services, dividends, pensions, and capital gains, offering a detailed breakdown of which income streams fall under Pakistan’s taxation jurisdiction.
Salary Income: When Is It Considered Pakistan-Source?
According to Section 101(1):
• Salary is considered Pakistan-source income when:
o It is received from employment exercised within Pakistan, regardless of location of payment.
o It is paid by the Federal, Provincial, or Local Government, even if employment duties are performed abroad.
Business Income Rules for Residents and Non-Residents
For Resident Taxpayers (Section 101(2))
• Income is considered Pakistan-source if it is derived from business activities carried out in Pakistan.
For Non-Resident Taxpayers (Section 101(3))
Business income becomes Pakistan-source when it is directly or indirectly linked to:
• A permanent establishment (PE) in Pakistan.
• Sales in Pakistan of goods similar to those sold through a PE.
• Business activities in Pakistan similar to those conducted through a PE.
• Any business connection in Pakistan, which now includes significant economic presence.
• Imports forming part of an integrated arrangement involving supply, installation, supervision, or related services.
Clarification
Income taxed under special sections (5A, 5AA, 6, 7, 7A) is not treated as income from business.
Significant Economic Presence: Digital and Remote Income Taxed in Pakistan
Under Sections 101(3A) and (3B), FBR broadens the taxation net for digital commerce and remote operations:
A non-resident is considered to have significant economic presence in Pakistan if:
• They conduct transactions involving goods, services, property, or digital downloads exceeding a prescribed threshold.
• They systematically and continuously engage with Pakistani users through digital platforms.
Income is taxed only to the extent attributable to such digital or economic activities.
Independent Services of Non-Residents (Section 101(4))
Non-residents providing professional services, entertainment, or sports activities are taxed if:
• Paid by a resident person; or
• The payment is borne by a non-resident PE in Pakistan.
Capital Gains on Business Assets (Section 101(5))
Gains from disposing of assets used in generating Pakistan-source business income are taxable in Pakistan.
Dividend Income (Section 101(6))
Dividend income is Pakistan-source if:
• Paid by a resident company; or
• Covered under Section 2(19)(f).
Profit on Debt (Section 101(7))
Taxable in Pakistan when:
• Paid by a resident (except when the loan is used for a business outside Pakistan).
• Borne by a non-resident’s permanent establishment in Pakistan.
Royalty Income (Section 101(8))
Taxed if:
• Paid by a resident (unless used for an overseas PE); or
• Borne by a non-resident’s PE in Pakistan.
Rental Income (Section 101(9))
Considered Pakistan-source if derived from:
• Lease of immovable property in Pakistan, developed or undeveloped.
• Rights related to natural resource exploration.
Capital Gains on Property and Shares (Section 101(10)–(13))
Pakistan-source income includes capital gains from:
• Sale of immovable property or natural resource rights in Pakistan.
• Disposal of shares in a company whose assets consist primarily of such property.
• Gains from disposal of shares in any resident company.
Insurance and Reinsurance Premiums (Section 101(13A))
Premiums paid by a Pakistani insurance company to an overseas insurer are treated as Pakistan-source income.
Pension, Annuity, Technical Fees, Digital Services (Sections 101(11), (12), 12A)
Taxable when:
• Paid by a resident, except when linked to an overseas PE; or
• Borne by a non-resident PE in Pakistan.
This includes:
• Technical services
• Offshore digital services
• Annuities and pensions
General Provision: All Other Payments (Section 101(14))
Any other income not specifically categorized is Pakistan-source if:
• Paid by a resident, or
• Borne by a non-resident PE in Pakistan.
Tie-Breaker Rule (Section 101(15))
If income falls under both Section 101(3) and another subsection:
1. Check the other subsection first.
2. If not taxable there, apply subsection (3).
Foreign-Source Income (Section 101(16))
Any income not classified as Pakistan-source under the above rules is considered foreign-source income.
Conclusion
The FBR’s detailed breakdown of geographical source rules for Tax Year 2026 offers clarity for residents, non-residents, digital businesses, service providers, and multinational corporations. The new emphasis on significant economic presence aligns Pakistan’s tax laws with global trends in taxing digital economies.
(Disclaimer: This article is for informational and educational purposes only and does not constitute legal, tax, or financial advice. Readers should consult a qualified tax professional or the Federal Board of Revenue (FBR) for guidance specific to their individual circumstances. The FBR rules and regulations mentioned are subject to change.)