Pakistan welcomes its skilled citizens back with open arms, and the tax system reflects that. This article explores the tax exemption offered to returning Pakistani expats on their foreign-source income, making the transition home smoother financially.
Understanding Tax Residency:
Your tax residency status in Pakistan determines your tax obligations. You’re considered a resident for tax purposes if you:
- Spend 183 days (or more) in a tax year (July 1st – June 30th) in Pakistan.
Tax Exemption for Returning Expatriates:
The Income Tax Ordinance offers a welcome tax break for Pakistani citizens returning home after working abroad. Here’s how it works:
- Exemption Period: If you haven’t been a resident taxpayer in Pakistan for the four tax years preceding your return, any foreign-source income you earn in the year you become a resident (Year 1) and the following year (Year 2) is exempt from Pakistani income tax.
Example:
Let’s say Sarah, a Pakistani citizen, has been working in Dubai for the past five years. During this time, she wasn’t considered a resident taxpayer in Pakistan. In July 2024 (Year 1), she decides to return to Pakistan and takes up a job here.
- Taxable Income: In Year 1 and Year 2, Sarah’s salary earned in Pakistan will be subject to income tax as she’s now a resident. However, any income she earns from her Dubai investments during these two years will be exempt from Pakistani income tax due to the returning expat exemption.
Benefits and Considerations:
- This exemption applies to various types of foreign-source income, including salary earned abroad, interest from investments held overseas, or rental income from foreign properties.
- It allows returning expats to focus on re-establishing themselves in Pakistan without the immediate burden of double taxation on their foreign income.
- Remember, this exemption only applies for the first two years after returning. In Year 3 onwards, any foreign-source income will be subject to Pakistani income tax.
By understanding the tax system and taking advantage of this exemption, returning Pakistani expats can make a smooth financial transition back home and contribute their skills to the nation’s development.
