Section 101 of the Income Tax Ordinance defines when salary, business, dividends, royalties, property income and other earnings are treated as Pakistan-source income.
ISLAMABAD: Taxpayers can determine whether income is treated as Pakistan-source or foreign-source income during Tax Year 2027 under Section 101 of the Income Tax Ordinance, 2001.
The Federal Board of Revenue (FBR) has published the Income Tax Ordinance, 2001, amended up to June 30, 2026, for the current tax framework. FBR’s official website lists the June 30, 2026 version of the ordinance.
Tax Year 2027 covers the 12-month period ending June 30, 2027, under the normal tax-year system.
Section 101 sets out the geographical basis for determining whether different categories of income arise from sources in Pakistan.
Salary Income
Salary is treated as Pakistan-source income to the extent that it is received for employment exercised in Pakistan, regardless of where the salary is paid.
Salary is also Pakistan-source income when it is paid by, or on behalf of, the Federal Government, a Provincial Government or a Local Government in Pakistan, regardless of where the employment is exercised.
Business Income of Resident Persons
Business income derived by a resident person is Pakistan-source income to the extent that it arises from a business carried on in Pakistan.
This provision establishes the geographical connection between a resident taxpayer’s business activity and Pakistan for source-of-income purposes.
Business Income of Non-Residents
For a non-resident person, business income is treated as Pakistan-source income to the extent that it is directly or indirectly attributable to a permanent establishment in Pakistan.
The provision also covers income attributable to:
• Sales in Pakistan of goods or merchandise of the same or similar kind as those sold by the non-resident through its permanent establishment in Pakistan.
• Other business activities carried on in Pakistan that are of the same or similar kind to activities conducted by the non-resident through its permanent establishment.
• A business connection in Pakistan.
• Certain imports forming part of an overall arrangement involving the supply of goods, installation, construction, assembly, commissioning, guarantees or supervisory activities.
The import provision can apply regardless of whether title to the goods passes outside Pakistan and whether the goods are imported in the name of the non-resident, its associate or another person.
FBR also clarifies that where income is subject to tax under Sections 5A, 5AA, 6, 7 or 7A, it is not chargeable to tax under the head of income from business.
Significant Economic Presence
Section 101 also incorporates significant economic presence when determining a business connection in Pakistan.
A significant economic presence of a non-resident may arise through transactions involving goods, services or property with a person in Pakistan, including the provision or downloading of data or software in Pakistan, where the aggregate payments exceed the prescribed threshold.
It may also arise where a non-resident systematically and continuously solicits business activities or engages with users in Pakistan through digital means beyond the prescribed threshold.
The provision applies irrespective of whether:
• the agreement relating to the transactions or activities is signed in Pakistan;
• the non-resident maintains a residence or place of business in Pakistan; or
• the non-resident renders services in Pakistan.
Only the portion of income attributable to the relevant transactions or activities is treated as arising from the business connection in Pakistan.
Independent Services
Where a non-resident’s business involves providing independent services, including professional services and the services of entertainers or sports persons, Pakistan-source business income includes remuneration paid by a resident person.
It also includes remuneration borne by a permanent establishment in Pakistan of a non-resident.
These amounts are in addition to income treated as Pakistan-source under the provisions dealing with non-resident business income.
Gains From Business Assets
Any gain arising from the disposal of an asset or property used to derive business income covered by Section 101(2), 101(3) or 101(4) is treated as Pakistan-source income.
Dividends
Dividend income is considered Pakistan-source income where it is:
• paid by a resident company; or
• a dividend covered by sub-clause (f) of clause (19) of Section 2.
FBR also identifies dividends paid by resident companies among the common categories of Pakistan-source income.
Profit on Debt
Profit on debt is Pakistan-source income if it is paid by a resident person.
An exception applies where the profit is payable in respect of debt used for a business carried on by the resident outside Pakistan through a permanent establishment.
Profit on debt is also Pakistan-source income where it is borne by a permanent establishment in Pakistan of a non-resident person.
Royalties
Royalty income is treated as Pakistan-source income where it is paid by a resident person, subject to the exception concerning rights, property, information or services used for a business carried on by the resident outside Pakistan through a permanent establishment.
A royalty is also Pakistan-source income where it is borne by a permanent establishment in Pakistan of a non-resident person.
Rental Income From Immovable Property
Rental income is Pakistan-source income where it arises from the lease of immovable property situated in Pakistan, whether the property is improved or unimproved.
The provision also covers other interests in or over immovable property, including a right to explore for or exploit natural resources in Pakistan.
Any gain from the disposal of such property or rights is also Pakistan-source income.
The rule extends to gains from the disposal of shares in a company whose assets consist wholly or principally, directly or indirectly, of such property or rights.
Pension and Annuity
A pension or annuity is Pakistan-source income if it is paid by a resident person or borne by a permanent establishment in Pakistan of a non-resident person.
Technical Fees
A technical fee is Pakistan-source income when it is paid by a resident person, except where the fee relates to services utilised in a business carried on by the resident outside Pakistan through a permanent establishment.
Technical fees are also Pakistan-source income when they are borne by a permanent establishment in Pakistan of a non-resident person.
Offshore Digital Services
Fees for offshore digital services are Pakistan-source income where they are paid by a resident person, subject to the exception for services utilised in a business carried on by the resident outside Pakistan through a permanent establishment.
Such fees are also Pakistan-source income when borne by a permanent establishment in Pakistan of a non-resident person.
Gains on Shares of Resident Companies
Any gain arising from the disposal of shares in a resident company is treated as Pakistan-source income.
Insurance and Reinsurance Premiums
Any amount paid by an insurance company as an insurance or reinsurance premium to an overseas insurance or reinsurance company is deemed to be Pakistan-source income.
Other Amounts
Section 101 also contains a general rule for income not covered by the preceding provisions.
Any such amount is treated as Pakistan-source income if it is paid by a resident person or borne by a permanent establishment in Pakistan of a non-resident person.
Priority of Source Rules
Where an amount may fall within both the provisions dealing with non-resident business income under Section 101(3) and another sub-section, other than Section 101(14), the other applicable provision is considered first.
If the amount is not Pakistan-source income under that provision, it is then examined to determine whether it qualifies as Pakistan-source income under Section 101(3).
Foreign-Source Income
Section 101(16) provides that an amount is treated as foreign-source income to the extent that it does not constitute Pakistan-source income.
The FBR’s guidance similarly describes foreign-source income as income that is not Pakistan-source income.
Source of Income Rules for Tax Year 2027
Section 101 provides the geographical framework for determining the source of income for Pakistan’s income tax system.
The rules cover a broad range of income, including salary, business profits, independent services, dividends, profit on debt, royalties, rental income, pensions, technical fees, offshore digital services, insurance premiums and gains from property or shares.
For Tax Year 2027, the distinction between Pakistan-source and foreign-source income remains particularly relevant for residents and non-residents with cross-border business, digital transactions, investments, employment or property interests.