I work full time remotely for a foreign company. Am I a freelancer exporting IT services or a salaried employee for tax?

Whether a remote worker is taxed as an employee or as an exporter of services decides whether the salary slabs apply or a flat rate on proceeds. The Income Tax Ordinance, as amended to 30 June 2026, gives rules for each, but it contains no provision that says which one covers a person in Pakistan employed by a foreign company. This page sets out what each rule says so you can see where the gap is.

What does the law say about salary?

Section 12(2) defines salary as “any amount received by an employee from any employment, whether of a revenue or capital nature”. It lists pay, wages, bonus, allowances, perquisites and similar amounts. Section 12(1) charges salary under the head “Salary”.

Section 2 supplies the building blocks:

• Employee (clause 20): any individual engaged in employment.
• Employer (clause 21): any person who engages and remunerates an employee.
• Employment (clause 22): includes a directorship, the holding of public office, and “a position entitling the holder to a fixed or ascertainable remuneration”.

None of these clauses requires the employer to be in Pakistan. A person who holds a position with a fixed monthly remuneration fits the words of clause (22)(b), whoever pays it.

Where is the salary sourced?

Section 101(1)(a) makes salary Pakistan-source income to the extent it “is received from any employment exercised in Pakistan, wherever paid”. If you sit in Lahore or Peshawar and do the work there, the employment is exercised in Pakistan on the plain words of that clause, even though the money comes from abroad.

This matters for section 102. Section 102(1) exempts foreign-source salary of a resident individual where foreign income tax has been paid on it. Section 101(16) says an amount is foreign-source only to the extent it is not Pakistan-source. Salary from work done in Pakistan is Pakistan-source, so the section 102 exemption does not reach it on the face of the text.

What does the law say about exporting services?

Section 154A(1) requires the authorised dealer in foreign exchange to deduct tax from foreign exchange proceeds realised on account of, among other things:

• (a) exports of computer software, IT services or IT-enabled services by a PSEB-registered and certified exporter; and
• (b) services or technical services rendered outside Pakistan or exported from Pakistan.

Division IVA sets 0.25% for the first category (for tax years 2024 up to 2029) and 1% in any other case. Section 154A(2) makes the deduction final tax once the return and other conditions are met.

Where is the gap?

Section 154A speaks of export proceeds and exporters. Section 12 speaks of employees and employment. The Ordinance does not say whether salary paid by a foreign employer to someone working in Pakistan is export proceeds under section 154A, and it does not say that section 154A excludes it. Neither section refers to the other.

This page does not resolve that question. Features that point one way or the other, such as an employment contract, fixed monthly pay, paid leave or invoices, are facts the Ordinance does not rank.

Worked example (illustrative figures)

Hamza lives in Islamabad and works full time for a company in Germany. The figures are invented. The rates are those in the First Schedule for tax year 2027. He receives Rs. 4,800,000 in the year and has no other income.

If the amount is salary. Salary is all of his taxable income, so clause (2) of Division I of Part I of the First Schedule applies. The slab for taxable income above Rs. 4,100,000 and up to Rs. 5,600,000 is Rs. 541,000 plus 29% of the amount above Rs. 4,100,000.

1. Amount above Rs. 4,100,000: Rs. 4,800,000 minus Rs. 4,100,000 = Rs. 700,000
2. 29% of Rs. 700,000 = Rs. 203,000
3. Tax: Rs. 541,000 + Rs. 203,000 = Rs. 744,000

If the amount were export proceeds under section 154A(1)(b). Not PSEB-registered, 1% row: Rs. 4,800,000 x 1% = Rs. 48,000.

The difference shows why the classification matters. The example does not say which one is correct. The Ordinance does not settle it.

What if I am a contractor, not an employee?

If you invoice the foreign company for work and hold no position with fixed remuneration, the facts sit closer to section 154A(1)(b), services exported from Pakistan. The Ordinance still does not give a test for telling a contractor from an employee beyond the section 2 definitions.

Common mistakes

• Assuming a foreign employer means foreign income. Section 101(1)(a) looks at where the employment is exercised, not where the employer is.
• Claiming the section 102 exemption. It applies to foreign-source salary, and salary for work done in Pakistan is Pakistan-source.
• Assuming the bank’s deduction settles the question. Whether section 154A applies depends on the nature of the receipt, which is the very point the Ordinance leaves open.

What to check in the official text

Read sections 2(20) to (22), 12, 101 and 102 together, then section 154A and Division IVA of Part III of the First Schedule. Section 154A(6) lets the Board include or exclude services. Any notification or ruling from the Board on remote employment is not held in this corpus.