Foreign source salary of resident individuals

Introduction

With Pakistan's growing diaspora working across the Middle East, UK, USA, Canada, Australia, and other countries, a common and important tax question arises: If I am a resident of Pakistan but earn a salary from a foreign country, do I have to pay income tax on that salary in Pakistan?

The answer depends on a specific condition under Pakistan's Income Tax Ordinance, 2001 — and getting this right can mean the difference between paying tax twice on the same income or being completely exempt from Pakistani income tax on your foreign earnings.

Section 102 of the Income Tax Ordinance, 2001 specifically addresses the tax treatment of foreign source salary received by resident individuals in Pakistan. It provides a clear and straightforward rule: if tax was already paid or deducted on your foreign salary in the country where you worked, that salary is exempt from income tax in Pakistan. If no tax was paid abroad, the salary becomes taxable in Pakistan.

Legal Basis — Section 102, Income Tax Ordinance, 2001

Section 102 of the Income Tax Ordinance, 2001 is titled "Foreign Source Salary of Resident Individuals." It provides that where a resident individual receives salary from a foreign source — meaning salary paid by a foreign employer for services rendered outside Pakistan — that salary shall be exempt from tax in Pakistan, provided the income tax payable on the salary has been paid in the foreign country.

This provision is based on the internationally recognised principle of avoiding double taxation — a resident individual should not be taxed twice on the same income, once in the country where they earned it and again in their home country of residence.

Section 102 operates independently of Pakistan's Double Taxation Agreements (DTAs) — meaning it applies even where no formal DTA exists between Pakistan and the foreign country. The only condition is that tax must have been paid or deducted on the salary in the foreign country.

Who Is a "Resident Individual" for This Purpose?

Section 102 applies specifically to resident individuals — persons who are considered resident in Pakistan under the residency rules of the Income Tax Ordinance, 2001. An individual is generally considered a resident of Pakistan for a tax year if they are present in Pakistan for 183 days or more during that tax year.

This means Section 102 is relevant to:

• Pakistani nationals living in Pakistan but working part-time or contractually for a foreign employer
• Persons who have returned to Pakistan after working abroad but still receive some salary from a foreign source
• Remote workers in Pakistan employed by foreign companies who pay salary from abroad
• Persons on short foreign assignments who remain resident in Pakistan for the year (183+ days in Pakistan)

What Is "Foreign Source Salary"?

Foreign source salary under Section 102 refers to salary income that is:

• Paid by a foreign employer — an employer based outside Pakistan
• For services rendered outside Pakistan — work performed in a foreign country
• Received by a person who is a resident of Pakistan for the relevant tax year

Examples of foreign source salary include:

• A Pakistani engineer working on a project in Saudi Arabia for a Saudi company — salary paid in Saudi Riyals
• A doctor employed at a hospital in the UAE — monthly salary paid in Dirhams by a UAE employer
• A software developer in Pakistan employed by a US company — monthly salary remitted from the US
• A professional on a short-term assignment in the UK — salary paid by a UK employer during the assignment period

The Two Conditions — When Is Foreign Salary Exempt?

Section 102 grants exemption from Pakistani income tax on foreign source salary when either of the following conditions is satisfied:

Condition 1 — Tax Paid in the Foreign Country

If the individual has paid income tax in the country where they earned the salary, that salary is exempt from income tax in Pakistan. The key requirement is that the tax must have been actually paid — meaning the individual filed a tax return in the foreign country, computed their tax liability, and paid it to that country's tax authority.

Evidence required:

• Tax return filed in the foreign country for the relevant period
• Tax payment receipt or proof of payment to the foreign tax authority
• Tax clearance certificate or assessment order from the foreign tax authority (where available)

Condition 2 — Tax Deducted at Source by Foreign Employer

If the individual's foreign employer deducted income tax from their salary and deposited it with that country's tax authority, the salary is exempt from income tax in Pakistan. This is the equivalent of the withholding tax mechanism — the employer acts as a tax collector and deducts tax before paying the net salary to the employee.

Evidence required:

• Salary slips from the foreign employer showing tax deducted each month
• Annual salary certificate or Form W-2 (USA), P60 (UK), or equivalent document from the foreign employer confirming total salary and tax deducted
• Employment contract confirming the salary and country of employment

Either condition — actual payment by the employee OR deduction at source by the employer — is sufficient to qualify for the Section 102 exemption. Both conditions do not need to be simultaneously present.

When Is Foreign Salary Taxable in Pakistan?

If neither condition is satisfied — meaning no tax was paid by the individual and no tax was deducted by the employer in the foreign country — the foreign source salary is taxable in Pakistan as salary income under the normal provisions of the Income Tax Ordinance, 2001.

This situation commonly arises when:

• The foreign country does not levy income tax on the type of salary earned (for example, certain Gulf countries like UAE, Saudi Arabia, Qatar, Kuwait, and Bahrain do not impose personal income tax)
• The individual falls below the taxable threshold in the foreign country and no tax is due or deducted
• The foreign employer fails to deduct tax that was legally required
• The individual works in a foreign country informally without any tax registration or compliance

Summary — Section 102 Decision Chart

Practical Examples

Example 1 — Exempt (Tax Deducted in UK)

Mr. Asad is a resident of Pakistan. He works for a UK company on a contract basis and is physically present in the UK for 6 months of the year (remaining 6 months in Pakistan — making him a Pakistan resident for the year with 183+ days in Pakistan). His UK employer deducts PAYE (Pay As You Earn) income tax of GBP 3,000 from his salary and deposits it with HMRC (UK tax authority).

• Is Mr. Asad a Pakistan resident? Yes (180+ days in Pakistan)
• Was tax deducted by foreign employer? Yes — PAYE deducted by UK employer
• Section 102 exemption applies? Yes
• Pakistan tax on UK salary: Nil — Exempt
• Mr. Asad must still declare this salary in his Pakistani return as exempt income

Example 2 — Taxable (Salary from UAE — No Tax Deducted)

Ms. Sara is a Pakistani national who works remotely for a UAE company from her home in Lahore. She is in Pakistan throughout the year — clearly a resident. Her UAE employer pays her a monthly salary in AED with no tax deduction (UAE does not impose personal income tax).

• Is Ms. Sara a Pakistan resident? Yes (in Pakistan all year)
• Was any tax paid or deducted abroad? No — UAE has no personal income tax
• Section 102 exemption applies? No
• Pakistan tax on UAE salary: Taxable — at normal salary rates
• Ms. Sara must declare the UAE salary (converted to PKR) in her annual Pakistani tax return and pay income tax on it

How to Declare Foreign Salary in Pakistan Tax Return

Whether your foreign salary is exempt or taxable, you must declare it in your annual income tax return filed on FBR IRIS:

1. Convert to Pakistani Rupees
   Convert the foreign salary amount to PKR using the State Bank of Pakistan's exchange rate applicable on the date of receipt or the average rate for the tax year.
2. If Exempt (Section 102 applies)
   Declare the salary under the exempt income section of the return. Attach evidence of tax paid or deducted abroad. The income is shown but no tax is computed on it.
3. If Taxable (Section 102 does not apply)
   Declare the salary under the salary income head of the return. It is added to your total income and taxed at the applicable progressive salary tax rates.
4. Maintain Supporting Documents
   Keep salary slips, employer certificates, tax payment receipts, bank remittance records, and employment contracts. FBR may request these during audit.

Frequently Asked Questions (FAQs)

Q1: I work in Saudi Arabia and my employer does not deduct any tax. Does Section 102 help me?
No. Saudi Arabia does not impose personal income tax on employees. Since no tax is paid or deducted in Saudi Arabia, the Section 102 exemption does not apply. Your Saudi salary — if you are a Pakistan resident — is taxable in Pakistan. You must declare it in your Pakistani return and pay income tax at the applicable rates.

Q2: My UK employer deducted tax but I was later refunded most of it by HMRC. Is my Pakistan exemption affected?
If the tax was deducted at source by your employer (PAYE), the Section 102 condition is met at the point of deduction. Whether you subsequently receive a refund from HMRC is a separate matter. However, if the refund effectively means you paid zero tax in the UK, the position should be assessed carefully — consult a tax advisor.

Q3: I receive foreign salary and also earn rental income in Pakistan. How are they taxed?
Each income head is assessed separately. Your foreign salary — if exempt under Section 102 — is excluded from taxable income. Your Pakistan rental income is taxed under the "Income from Property" head at applicable rates. Both must be declared in your annual income tax return.

Q4: Is there a limit on the amount of foreign salary that can be exempt under Section 102?
Section 102 does not impose any upper limit on the amount of foreign salary that can be exempt. The full amount of foreign salary is exempt — regardless of how large it is — provided the condition of tax paid or deducted abroad is satisfied.

Q5: I am a Pakistani freelancer working for US clients. Does Section 102 apply to my income?
Freelancing income from foreign clients is generally treated as business income (Income from Business) — not salary income — if you are self-employed. Section 102 specifically covers salary from a foreign employer under an employment relationship. Freelancers with no employer-employee relationship may fall under different provisions. Additionally, Section 154A may be relevant for foreign remittances received through banking channels. Consult a tax advisor for your specific situation.

Q6: Do I still need to file a Pakistan tax return if my foreign salary is fully exempt under Section 102?
Yes. If you have any income — including exempt income — above the threshold, or if you meet any other filing condition under Section 114 of the ITO 2001, you must file a return. Exempt income is declared in the return even though no tax is due on it. Filing also ensures you appear on the ATL and enjoy filer benefits on all other transactions.

Conclusion

Section 102 of the Income Tax Ordinance, 2001 provides a simple but important rule for resident Pakistanis earning foreign salary: if tax was paid or deducted on that salary in the foreign country, it is exempt from income tax in Pakistan. If no tax was paid abroad, the salary is taxable in Pakistan at normal rates.

The practical implication is country-specific. Salaries from high-tax countries like the UK, USA, Canada, and Australia typically qualify for exemption. Salaries from zero-tax Gulf countries like the UAE, Saudi Arabia, Qatar, and Kuwait typically do not — and must be declared and taxed in Pakistan.

In all cases, the foreign salary must be declared in the annual Pakistani income tax return — either as exempt income or as taxable salary — and all supporting documentation must be maintained for potential FBR audit.