What tax must a company deduct when paying a foreign company for royalties, technical fees or services, and can treaty rates be used?

When a company in Pakistan pays a foreign company, section 152 of the Income Tax Ordinance, 2001 usually requires it to deduct tax before the money leaves. The rate depends on what is being paid for and whether the foreign company has a permanent establishment in Pakistan. This page reads the Ordinance as amended to 30 June 2026, so the rates are those for tax year 2027.

What does the law say?

Section 152 has several deduction rules for non-residents. The ones a trading or manufacturing company meets most often are:

Sub-section	Payment	Rate source	Rate
(1)	Royalty or fee for technical services chargeable under section 6	First Schedule, Part I, Division IV	15% of the gross amount
(1A)	Contract or sub-contract under a construction, assembly or installation project in Pakistan, other construction contracts and related services, and advertisement by TV satellite channels	Part III, Division II, para (1)	7% of the gross amount payable
(1AA)	Insurance or re-insurance premium	Part III, Division II, para (1A)	5%
(1AAA)	Advertisement services by a non-resident media person relaying from outside Pakistan	Part III, Division II, para (3)	10%
(2)	Any other amount paid to a non-resident	Part III, Division II, para (2)	20% of the gross amount paid

Division IV of Part I also charges 15% on fees for offshore digital services. For those, section 152(1C) puts the deduction duty on the bank or financial institution making the remittance, not on the paying company.

Section 6 is the charging section behind sub-section (1). It taxes a non-resident on Pakistan-source royalty or fee for technical services on the gross amount. Section 6(3) takes out a royalty effectively connected with a permanent establishment in Pakistan, a fee for services rendered through such an establishment, and an exempt royalty or fee.

What if the foreign company has a permanent establishment in Pakistan?

Section 152(2A) applies to payments by a prescribed person, which includes a company, to a permanent establishment in Pakistan of a non-resident. It covers goods, services and contracts. The rates in Division II are:

Payment to a permanent establishment	Rate
Goods, payee a company	5%
Goods, other payee	5.5%
Listed services such as transport, courier, IT, engineering, car rental and inspection	8% (4% for IT and IT enabled services)
Other services	15%
Contracts, sportspersons	15%
Other contracts	8%

Can treaty rates be used?

Section 107(1) lets the Federal Government enter into tax treaties and implement them by notification. Section 107(2) says that the agreement and the notification “shall, notwithstanding anything contained in any law for the time being in force, have effect” where they provide relief from tax or determine Pakistan-source income. Sub-section (2) is itself made subject to another anti-avoidance provision of the Ordinance, so read it in full.

Section 152 itself refers to treaties in sub-section (5). A payer who intends to pay a non-resident without deduction must first give the Commissioner written notice. Payments “liable to reduced rate under relevant agreement for avoidance of double taxation” are excluded from that notice requirement.

This page does not quote any treaty rate, because the treaties are not in this corpus. Whether a lower rate applies depends on the specific treaty with the payee’s country of residence and on the payee qualifying under it.

Worked example (illustrative figures)

Karachi Pharma Limited makes three payments to foreign companies without a permanent establishment in Pakistan in November 2026:

1. Royalty for a product licence, Rs. 10,000,000: 10,000,000 x 15% = Rs. 1,500,000 deducted under section 152(1).
2. A contract with a foreign engineering company to install a production line at its Karachi plant, Rs. 4,000,000: 4,000,000 x 7% = Rs. 280,000 deducted under section 152(1A).
3. A payment for a service that is not a technical service and not covered by any other sub-section, Rs. 2,000,000: 2,000,000 x 20% = Rs. 400,000 deducted under section 152(2).

Total deducted: 1,500,000 + 280,000 + 400,000 = Rs. 2,180,000. If a treaty gives a lower rate on the royalty, the treaty rate replaces the 15% to the extent section 107 gives it effect.

Common mistakes

• Applying 20% to a royalty. Royalties and fees for technical services taxable under section 6 go through section 152(1) at 15%. Section 152(2) covers amounts not covered by the other sub-sections.
• Paying without deduction because the payee says it is not taxable. Section 152(5) requires notice to the Commissioner first. Under section 152(6), the Commissioner can direct deduction.
• Assuming a treaty rate applies automatically. It depends on the treaty’s terms and on section 107(2).
• Deducting from the net amount. Each rate applies to the gross amount paid or payable.

What to check in the official text

Read section 152 in full: the consolidated text prints several substituted and omitted versions next to the current wording. Check section 152(3), which lists amounts to which section 152(2) does not apply, and section 152(7), which lists payments for imports of goods to which the notice requirement does not apply. For treaty relief, obtain the notified treaty and check the Income Tax Rules for any form or certificate requirements. Neither is in this corpus.