How to determine if you are resident for tax purposes?

Tax laws of Pakistan require to determine the residential status of a person. This requirement applies to individuals as well as companies and AOPs.

I have tried to answer different questions regarding residential status.

Why it is important to determine residential status?

A resident person is taxable for his Pakistan source as well as Foreign source income, whereas, a non-resident person is taxable for only Pakistan source income.

In addition, certain provisions of income tax law apply differently to non-residents.

Therefore, it is important to determine residential status.

Does this requirement apply only to individuals?

Residential status is determined  for individuals as well as companies and partnerships/joint ventures (AOPs).

I am a Pakistani national, and one of my friend is UK national. Does it imply that I am resident and my friend is not?

Residential status has no relationship with nationality or domicile of an individual.

Residential status is determined on the basis of number of days a person is physically present in Pakistan during a Tax Year. Therefore, a Pakistani national can be non-resident and a Foreign national can be resident.

Is residential status determined once or each year?

Residential status is determined separately for each tax year.

What is criteria to determine residential status of an individual?

If an individual is physically present in Pakistan for:

• 183 or more days in a tax year; or
• 120 or more days in the tax year and 365 or more days in aggregate in the preceding 4 tax years,

he/she shall be considered resident.

If any of the requirements meets, the person becomes resident.

I am a Pakistani citizen and I have not been out of Pakistan during last four years. I have got a job in Canada and I travelled to Canada on December 25, 2018. Am I non-resident?

Evaluation of residential status is made on both above criteria, each of them independently.

You have been physically present in Pakistan for 178 days in current tax year. At the same time you have been physically present in Pakistan in last four tax years – more than 120 days in each tax year and more than 365 days in aggregate. So you are resident.

I am a Pakistani government employee posted abroad. Am I non-resident?

A government employee posted abroad is resident irrespective of his physical stay in Pakistan.

How number of days are counted to determine residential status of individual?

Rule 14 of the Income Tax Rules, 2002 provides guidance in calculating number of days for residential status of an individual.

• Day of arrival in Pakistan is considered full day in Pakistan.
• Day of departure from Pakistan is considered full day in Pakistan.
• Public holidays in Pakistan are considered physically present.
• Personal leaves in Pakistan are considered physically present.
• A day that the individual’s activity is interrupted in Pakistan due to any strike, lock-down or any other delay is included.
• Any other holiday spent in Pakistan before, during or after any activity in Pakistan is included.
• A day in Pakistan solely by reason of being in transit is not included.

For example, Jeffrey is a UAE national and arrives in Pakistan on December 30, 2018 and leaves on June 30, 2019. His physical stay in Pakistan counts to 184 days. Therefore, he will be considered resident, and his worldwide income will be taxable in Pakistan (subject to Tax Treaty).

What is the concept of short term resident?

If an individual is resident only because of his employment, and he is present in Pakistan for not exceeding three years, such individual is considered short term resident.

Foreign source income of such individual which is not brought or received in Pakistan is exempt from tax.

Please note that this doesn’t apply to business established in Pakistan by an individual foreigner.

For example, Jane is a foreign national who has been appointed by her employer to work in Pakistan for two years. Her employer has allowed her to conduct training sessions in Pakistan or abroad. She has conducted three training sessions in the first year:

• Training Session in Islamabad: A fee of USD 10,000 in equivalent PKR was received from a Pakistan firm in her local bank account. It is business income in Pakistan, and is taxable.
• Training Session in Dubai: A fee of USD 15,000 was received in her Dubai account and never brought to Pakistan. It is her foreign source income not brought or received in Pakistan, which is exempt.
• Training Session in UK: A fee of USD 25,000 was received in her local Pakistani bank account. It is her foreign source income, which has been received in Pakistan. Therefore, it is taxable.

I am an individual citizen of Pakistan and have returned to Pakistan (returning expatriate), and I have become resident in the current tax year. Will my foreign source income be taxable?

If a returning expatriate was non-resident in the 4 preceding tax years, his foreign source income will be exempt from tax in the current as well as next tax year.

I have a company which is incorporated in Pakistan. Can it be non-resident in any case?

A company incorporated in Pakistan is resident without any condition.

Please note that company includes societies, NPOs and trusts.

If a company is incorporated in Pakistan but controlled/managed wholly outside Pakistan, would it be non-resident?

If a company is incorporated in Pakistan it is resident.

How residential status of a foreign company is determined?

A company that is incorporated outside Pakistan is resident if control and management of the affairs is situated wholly in Pakistan in the tax year.

For example, X-mate is a foreign company working in Pakistan. Few of the board meetings were held in Pakistan, but remaining board meetings were held in the country of incorporation. The company will be non-resident.

How residential status of partnerships and joint ventures (local or foreign) is determined?

Partnership and JV are common examples of AOP.

AOP is resident if control and management of affairs of the AOP is situated wholly or partly in Pakistan in the tax year.

For example, five foreign nationals set up a JV in Lahore. If one or more of the board meetings are held in Pakistan, it will be considered resident.