Islamabad, December 12, 2025 – The Federal Board of Revenue (FBR) has clarified the principles of taxation for permanent establishments (PEs) of non-resident persons operating in Pakistan under Section 105 of the Income Tax Ordinance, 2001 for the tax year 2026.
Understanding these rules is crucial for foreign businesses and investors operating in Pakistan. Here’s what you need to know:
Key Taxation Principles for Non-Resident PEs
1. Separate Entity Concept
The profit of a permanent establishment in Pakistan is calculated as if it were a distinct and independent entity, performing similar activities under similar conditions, and dealing independently with the non-resident head office.
2. Allowable Deductions
Expenses incurred for the PE’s business operations—executive, administrative, or operational costs—are generally allowed as deductions, whether incurred in Pakistan or abroad.
3. Disallowed Payments to Head Office
Certain payments from the PE to the head office or other PEs of the non-resident are not deductible, including:
o Royalties, fees, or payments for tangible or intangible assets.
o Compensation for services, including management services.
o Interest or profit on loans, except for banking operations.
4. Head Office Expenditure Limits
Deductions for head office expenses are limited to a proportion of the PE’s turnover in Pakistan, relative to the non-resident’s global turnover.
5. Definition of Head Office Expenditure
Includes:
o Rent, local rates, taxes, repairs, and insurance outside Pakistan (excluding foreign income tax).
o Salaries of head office employees.
o Travel costs for head office employees.
o Other prescribed expenditures for the PE’s business.
6. Additional Non-Deductible Items
o Profits on debt used to finance PE operations.
o Insurance premiums related to such debt.
Why This Matters for Non-Resident Businesses
These rules ensure that Pakistan-based operations of non-residents are taxed fairly, while preventing excessive deductions claimed by head offices abroad. By treating the PE as a separate entity, Pakistan aligns with international taxation standards and avoids base erosion.
Businesses with PEs in Pakistan are advised to carefully review these regulations to ensure compliance with Section 105 and to optimize their tax planning for the 2026 fiscal year.
🔹 Quick Facts:
• Section: 105, Income Tax Ordinance, 2001
• Applicable To: Permanent Establishments of Non-Residents
• Tax Year: 2026
• Key Focus: Separate Entity Profit Computation & Deduction Limits
Stay Updated: Foreign investors and multinational corporations operating in Pakistan should consult tax professionals to align with these PE taxation principles and avoid penalties.