Income Tax Rule 15 clarifies which foreign taxes qualify for relief against double taxation, including withholding taxes on dividends, salaries and other income.
ISLAMABAD: The Federal Board of Revenue (FBR) has explained the rules governing foreign income tax and relief against international double taxation for Pakistan’s Tax Year 2027, covering July 1, 2026 to June 30, 2027.
The FBR issued the Income Tax Rules, 2002, updated up to September 15, 2026, explaining Rule 15, which applies to Sections 102 and 103 of the Income Tax Ordinance, 2001.
Under Rule 15, a foreign levy qualifies as foreign income tax if it is legally imposed as a tax by a foreign country and is substantially equivalent to income tax under Pakistan’s Income Tax Ordinance.
The rules specify that compulsory payments imposed under the authority of a foreign government can qualify as taxes. However, penalties, fines, interest and similar obligations are excluded.
A foreign levy will also not qualify as income tax to the extent that the person paying it receives or is entitled to receive a specific economic benefit in exchange.
Conditions for foreign tax recognition
Rule 15 further explains that foreign taxes must generally apply to transactions or events that generate income, gains or profits under Pakistan’s tax law.
The taxable amount should also be calculated after allowing significant expenses and depreciation or amortisation of capital costs attributable to the relevant receipts, subject to the provisions of foreign tax law.
The FBR may also recognise the character of foreign-source dividend or interest income in accordance with its treatment under Pakistan’s Income Tax Ordinance.
Withholding taxes eligible for recognition
The rules specifically recognise certain foreign taxes as substantially equivalent to Pakistan’s income tax, including:
• Withholding tax on dividends.
• Withholding tax on gross receipts payable to non-residents where imposed as a final tax.
• Withholding tax on salaries and wages imposed as a final tax.
Rule 15 also defines economic benefits to include property, services, fees, payments, rights to use or extract natural resources, patents and other property, as well as reductions or discharges of contractual obligations.
However, a specific economic benefit must not be generally available on substantially similar terms to all taxpayers or the country’s population.
These provisions establish the criteria for determining eligible foreign tax payments under Sections 102 and 103, helping resident taxpayers obtain relief from international double taxation for Tax Year 2027.