A non-resident is assessable to income tax in Pakistan if it derives income deemed to be from Pakistani sources through a permanent establishment (PE) or other business connection in Pakistan.

A non-resident with a PE or business nexus is taxable in much the same way as a resident company. The profit of the permanent establishment shall be computed on the basis that it is a distinct and separate entity engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the non-resident person of which it is a permanent establishment. The branch or PE is allowed to deduct any expenses incurred for the purposes of its business activities, including executive and administrative expenses so incurred, whether in Pakistan or elsewhere. However, no deduction is allowed for amounts paid or payable by the permanent establishment to its head office or to another permanent establishment of the non-resident person (other than towards reimbursement of actual expenses incurred by the non-resident person to third parties) by way of:

a. royalties, fees or other similar payments for the use of any tangible or intangible asset by the permanent establishment;

b. compensation for any services including management services performed for the permanent establishment;

c. or interest income on moneys lent to the permanent establishment, except in connection with a banking business.

Similarly, no account shall be taken in the determination of the income of a permanent establishment of amounts charged by the permanent establishment to the head office or to another permanent establishment of the non-resident person (other than towards reimbursement of actual expenses incurred by the permanent establishment to third parties) by way of royalties, compensation for services, or interest on moneys lent, as explained above.

Finally, an overall limitation applies by virtue of which the deductible amount allowed to a PE on account of head office expenditure is capped at the amount as bears to the turnover of the permanent establishment in Pakistan in the same proportion as the non-resident‘s total head office expenditure bears to its worldwide turnover.

Shipping and air transport income derived by non-resident enterprises is assessed to presumptive taxation. Under this system, net taxable income is deemed to be equal to 8% of gross receipts for shipping businesses, and to 3% of gross receipts for air transport businesses.

Non-resident companies without a PE or business connection to Pakistan are subject to withholding tax on specified Pakistani-source income. The withholding tax is final in certain situations; in others it is treated as a prepayment towards the final tax liability.

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