Income Tax Rule 18 outlines how royalty income earned by non-residents from Pakistani sources will be calculated, including allowable deductions for expenses incurred inside and outside Pakistan.

ISLAMABAD: The Federal Board of Revenue (FBR) has outlined the tax treatment of royalty income earned by non-resident persons from Pakistani sources for Tax Year 2027.

The FBR has issued the Income Tax Rules, 2002, updated up to September 15, 2026, for Tax Year 2027, covering the period from July 1, 2026 to June 30, 2027.

Under Rule 18, royalty income received by a non-resident from a resident person or a permanent establishment in Pakistan of a non-resident person is subject to specific rules for calculating taxable income.

Tax Calculation and Allowable Deductions

According to Rule 18, the treatment depends on the date and nature of the agreement under which royalty is received.

For agreements made before March 8, 1980, or agreements made on or after that date where the proposal was approved by the government before March 8, 1980, taxable royalty income is calculated by deducting expenses allowed under Section 40 from the gross royalty amount.

For other agreements, where Section 6(2) does not apply, deductions include:

• Expenditure incurred in Pakistan to earn royalty income, regardless of where payment is made.

• Expenditure incurred outside Pakistan in accordance with the agreement, subject to a limit of 10% of gross royalty income.

For royalty received under other agreements, allowable deductions include expenses incurred in Pakistan to earn the income, expenses in Pakistan for work performed under the agreement, and overseas expenditure relating to such work, capped at 10% of gross royalty income.

Exception Under Section 169

The FBR has clarified that the deduction provisions under clauses (b) and (c) of Rule 18 do not apply where royalty income is covered by Section 169 of the Income Tax Ordinance, 2001.

The provisions establish the applicable framework for determining taxable royalty income received by non-residents from Pakistan during Tax Year 2027.