In a recent development, it has been clarified that the rental income from immovable properties in the United Kingdom (UK) and the United Arab Emirates, including Dubai, owned by resident Pakistanis, is subject to taxation in Pakistan. This clarification comes from former FBR Chairman Shabbar Zaidi in a technical release issued on Saturday.
The technical release, titled ‘Pakistan Tax on Rent from Properties in Dubai, London, etc., by Pakistan Tax Resident,’ addresses the taxability of properties held by Pakistanis in Dubai and the UK, taking into account court judgments from both Pakistan and India.
According to the release, it is considered prudent to assert that this rental income is taxable in Pakistan. Shabbar Zaidi also emphasized that income tax returns for the Tax Year 2023 are due by October 31, 2023. Many Pakistanis who are tax residents in Pakistan own properties in foreign countries, including Dubai, various emirates in the UAE, London, and others. A significant number of these properties are rented out.
It’s important to note that a considerable number of these properties were not previously declared in Pakistani tax returns, even when the sources of income were in Pakistan, and the property owners were tax residents in Pakistan. To address this, the Pakistan government had previously provided opportunities for property owners to declare such assets under the Asset Declaration laws of 2018 and 2019.
The key point emphasized in the release is that income from rent on properties held outside Pakistan is considered taxable income for individuals residing in Pakistan. Additionally, there is a question of whether there is any exemption when there is a Double Taxation Avoidance Agreement (DTAA) under the OECD Model between the country where the property is located and Pakistan. Pakistan has signed such agreements with the UAE and the UK.
The matter has been further complicated due to conflicting orders from the Appellate Tribunal Inland Revenue in 2022 and previous decisions by superior courts in India. Some individuals believe that paying taxes in Pakistan requires the remittance of rental income to Pakistan. However, it’s important to note that foreign exchange laws are separate from taxation, and assets held outside Pakistan are not required to be brought into Pakistan under the Foreign Exchange Regulation Act, 1947.
As for the taxation of rental income for individuals residing in Pakistan, the release states that any rent received or receivable by a Pakistani tax resident from immovable property anywhere in the world, including the UAE or the UK, is subject to taxation in Pakistan.
The release also delves into the interpretation of DTAA and the varying decisions made by appellate authorities and courts. This issue has been raised in Indian courts as well, where similar provisions exist in their treaties. Notably, while the Indian Supreme Court ruled that such income is not taxable in India, it added complexity to the matter rather than resolving it.
In conclusion, the technical release advises that it is prudent to consider this rental income as taxable in Pakistan. However, those who hold different positions are entitled to do so, subject to the understanding that, up to the level of the Tribunal, the matter will be decided against the taxpayer. Even at the level of superior courts, the matter remains open for interpretation.
