In Pakistan, income generated from royalties and foreign patents is subject to taxation under the Income Tax Ordinance, of 2001. Whether you are an individual, a business, or a multinational corporation, it is crucial to understand how to calculate tax on such earnings to ensure compliance with the Federal Board of Revenue (FBR) regulations.
This article explains how royalties and foreign patent income are taxed in Pakistan, the applicable tax rates, and the steps to calculate tax liabilities using a Tax Calculator Pakistan or manual methods.
Understanding Royalties and Foreign Patent Income
Royalties refer to payments received for the use of intellectual property, such as trademarks, copyrights, or patents. Foreign patent income is earned when an individual or company in Pakistan licenses their patent rights to an entity abroad.
These incomes are considered passive income and are subject to withholding tax when received from a Pakistani entity. However, income received from foreign sources may be taxed differently based on double taxation treaties between Pakistan and other countries.
Tax Rates on Royalties and Foreign Patents in Pakistan
The tax treatment of royalties and foreign patent income depends on whether the recipient is a resident or non-resident:
For Residents (Individuals and Businesses)
Royalty income is treated as business income and taxed under normal income tax slabs for individuals or corporate tax rates for companies.
A withholding tax of 15% is deducted at the source when the royalty is paid.
Tax credits or exemptions may apply if a double taxation agreement (DTA) exists with the foreign country.
For Non-Residents
If a non-resident receives royalties from a Pakistani entity, a withholding tax of 15% applies under Section 6 of the Income Tax Ordinance, 2001.
The final tax liability depends on whether a DTA exists with the country of the recipient, which may reduce or eliminate tax liability in Pakistan.
For Foreign Patent Income
If a Pakistani resident earns income from a patent licensed abroad, it is taxed as foreign income and subject to standard income tax rates.
Any foreign tax paid can be claimed as a foreign tax credit if a DTA applies.
Steps to Calculate Tax on Royalties or Foreign Patents in Pakistan
Step 1: Identify the Taxable Amount
Determine the total royalty or patent income earned in a given tax year. This includes all payments received from local or foreign entities.
For example, if you receive PKR 1,000,000 as royalty from a company in Pakistan, this amount is subject to withholding tax.
Step 2: Apply Withholding Tax
For resident taxpayers, a 15% withholding tax applies. Using the example:
Withholding Tax=1,000,000×10015=150,000
So, PKR 150,000 will be deducted from the source, and the remaining PKR 850,000 will be received by the taxpayer.
Step 3: Determine Final Tax Liability
If the recipient is an individual, the remaining income is added to other taxable income and taxed based on income tax slabs.
For example, if the taxpayer’s total income (including royalty income) falls under a 25% tax bracket, the final tax calculation on Tax Calculator Lahore is:
Total Tax=850,000×10025=212,500
Adding the withholding tax (PKR 150,000) already paid, the total tax liability is PKR 362,500.
Step 4: Consider Double Taxation Treaties (For Foreign Income)
If you receive royalties or patent income from a foreign country, you may be eligible for a foreign tax credit under a DTA.
For example, if a UK-based company pays you a royalty of PKR 1,000,000, and the UK deducts 10% as tax, you have already paid PKR 100,000 in foreign tax. If Pakistan also applies a 15% tax, you only need to pay the remaining 5% in Pakistan:
Additional Tax Payable in Pakistan=1,000,000×1005=50,000
This ensures you do not pay double tax on the same income.
Step 5: Use a Pakistan Tax Calculator
A Pakistan tax calculator can help simplify the process by:
Automatically applying withholding tax rates
Factoring in income tax slabs
Calculating final tax liability
Considering double taxation agreements for foreign income
Tax calculators allow users to input income details and get instant tax estimates based on current FBR regulations.
Challenges in Calculating Tax on Royalties and Foreign Patents
Variations in DTA Rules – Each country has different double taxation agreements, requiring manual verification.
Foreign Exchange Fluctuations – Income received in foreign currency must be converted to PKR using FBR’s exchange rate.
Exemptions and Rebates – Some industries, such as IT exports, may qualify for tax exemptions that tax calculators may not always factor in.
Filing Tax Returns Correctly – Even if withholding tax is deducted, taxpayers must still file an annual tax return to report royalty and patent income.
Tax Calculator Pakistan
Conclusion
Calculating tax on royalties and foreign patent income in Pakistan requires careful consideration of withholding tax rates, income slabs, and double taxation agreements. While Hamza & Hamza Law Associates can simplify the process, consulting a tax expert is recommended for complex cases. By understanding the taxation process, individuals and businesses can ensure compliance with FBR regulations while minimizing tax liabilities legally.
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