Paying a non-resident: section 152 and treaty relief
Paying a non-resident is the withholding area where Pakistani businesses carry the most undiagnosed exposure. The reason is structural: the recipient is outside the system, so there is nobody local to correct the position, and errors accumulate quietly across years of recurring payments.
How the section works
Section 152 places the obligation on the Pakistani payer to deduct tax when making a payment to a non-resident. The rate is not a single figure — it depends on the character of the payment:
| Payment type | Treatment |
|---|---|
| Royalty | Own rate; commonly addressed by a treaty article |
| Fee for technical services | Own rate; treaty may reduce or reallocate |
| Fee for offshore digital services | Own treatment; interacts with significant economic presence rules |
| Contract or sub-contract payments | Own rate, distinct from the goods and services limbs of section 153 |
| Insurance and reinsurance premium | Own rate |
| Profit on debt paid abroad | Own rate; treaty interest article may apply |
| Other payments to non-residents | General provision, character-dependent |
Because the categories are defined by character rather than by industry, the first task is characterisation. Confirm the applicable rate on the current rate card once you have settled which category applies — the rate card guide.
Characterisation is the whole exercise
The most common live question is software and digital services. The same annual payment to a foreign vendor can be:
- A royalty, if you acquire a right to use intellectual property.
- A fee for technical services, if work is performed for you.
- A purchase of goods, for a standard product supplied as such.
- An offshore digital service, where the specific regime applies.
You bought or sold property this year, tax was deducted at the time of registration, and nobody explained whether you get it back.
Treaty relief, and the sequence that matters
Pakistan has double taxation treaties with many jurisdictions. A treaty can reduce or eliminate the charge on specified payment types, but three things are non-negotiable:
- Relief is claimed, not automatic. A payer without documentation should deduct at domestic rates.
- Residence must be established, typically through a tax residence certificate from the other jurisdiction for the relevant period.
- The article conditions must be met, including beneficial ownership and, in many treaties, anti-abuse provisions.
Sequence is everything. Establish the position before payment; once tax is deposited, the recipient pursues a claim. See treaties and Pakistan-source income.
Characterisation drives the rate — the four common answers
| What the supplier actually provided | Usual characterisation | Treaty article to check |
|---|---|---|
| Advice, design, engineering with a deliverable | Fee for technical services | Technical fees / royalties article |
| Right to use software, a brand or a patent | Royalty | Royalties article |
| Goods shipped from abroad, no PE in Pakistan | Business profits | Business profits article — often no Pakistan tax |
| Management or head-office recharge | Fee for technical services, usually | Technical fees article, plus arm's length testing |
An invoice reading "consultancy and software" spans two of these rows at two different rates. The supplier will not split it for you and has no incentive to — the withholding is your obligation, not theirs. Ask for a split invoice at contract stage, when you still have leverage, rather than at payment stage when you do not.
The file to keep per foreign supplier
- The contract, with the scope that supports your characterisation.
- A written note of the characterisation and the reasoning.
- The tax residence certificate, current for each relevant period.
- Any treaty claim documentation and the article relied on.
- Every challan, matched to each payment.
- The withholding statement entries reconciled to the ledger.
Where an exemption or lower-rate certificate is available for the arrangement, obtain it rather than deducting and leaving the supplier to reclaim — the Finance Act 2026 included measures to streamline issuance of exemption certificates for qualifying entities.
Gross-up clauses and who actually bears the tax
Foreign suppliers frequently require payment free of deduction, and the contract carries a gross-up clause putting the withholding cost on you. Three practical consequences:
- The cost is higher than the invoice. On a payment where the applicable rate is 15%, a gross-up means paying roughly 17.6% more than the headline amount so the supplier receives the full figure net.
- Model it before signing. A gross-up clause agreed without computing the effect turns a budgeted contract into an over-budget one from the first invoice.
- Treaty relief becomes commercially valuable to you, not the supplier. Where a gross-up applies, any reduction in the rate reduces your cost. That is a strong reason to obtain the residence certificate promptly rather than treating it as the supplier paperwork.
Where a supplier refuses a gross-up and you deduct from the invoice, expect a shortfall dispute unless the contract is explicit about who bears Pakistani taxes. Address it in the contract, not in correspondence after the first payment.
The related question: permanent establishment
Section 152 addresses withholding on the payment. Separately, a non-resident with a permanent establishment in Pakistan may have profits taxable here directly, and treaty protection for business profits typically falls away. Circumstances that create one include a fixed place of business, a dependent agent concluding contracts, an extended project site, or staff present for a prolonged period.
If your foreign supplier has people in Pakistan for an installation, a long project or an ongoing representative arrangement, that question needs answering alongside the withholding one — and it is much cheaper to settle before the arrangement starts.
Sources
This guide is written against the official and clearly labelled professional references below. Rates, thresholds and portal procedures change between reviews, so open the primary source before relying on a figure.
- Withholding Tax Rate Cards (FBR)
- Income Tax Basics (FBR)
- Overseas Pakistanis tax guidance (FBR)
- Finance Act 2026 (FBR)
Questions people also ask
We pay a foreign software vendor. Is that a royalty or a service?
It depends on what you are actually acquiring — a licence to use intellectual property points one way, a service performed for you points another, and a simple purchase of a standard product may be different again. The characterisation drives the rate and the treaty article, so it is worth resolving in writing before the first payment rather than after several years of deductions at a rate that may be wrong.
The foreign supplier says their country has a treaty so no tax applies. Can we accept that?
Not on their assertion. Treaty relief requires documentation, typically including a tax residence certificate from the other jurisdiction, and the specific article conditions have to be met. Absent proper documentation you should deduct at domestic rates — the exposure for under-deduction sits with you as payer, not with the supplier who advised you.
What happens if we deducted too much and the treaty did apply?
The recipient generally has to pursue the excess through a claim rather than through an adjustment between you. That is slow and sometimes unsuccessful, which is precisely why the treaty and documentation position should be settled before the invoice is paid. Once the tax is deposited, the conversation becomes a procedure.
Does the payment become deductible for us if we withhold correctly?
Correct withholding removes one obstacle to deductibility, but the expense still has to satisfy the ordinary deduction rules. Conversely, failing to deduct or deposit can make an otherwise valid expense non-deductible, so a withholding lapse on a large foreign payment can cost considerably more than the tax itself.
We are paying an overseas contractor a small amount. Is there a de minimis?
Do not assume one. Thresholds and exemptions exist for specific payment types and circumstances rather than as a general small-payment rule, and a series of small payments to the same recipient can be viewed together. Establish the position for the payment type rather than treating size as a reason to skip the analysis.
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