How are a non-resident partner's share and a firm managed partly from abroad taxed?

A partnership firm with a partner abroad is taxed in two layers under the Income Tax Ordinance, 2001. First, the firm’s own residence decides how much of its income Pakistan taxes. Second, section 142 gives FBR a way to collect any tax a non-resident partner owes on his share from inside Pakistan. Both rules are current in the Ordinance as amended to 30 June 2026.

When is a partnership firm a resident AOP?

Section 84 makes an association of persons a resident AOP for a tax year if the control and management of its affairs is situated wholly or partly in Pakistan at any time in the year. A firm is an AOP for this purpose. Two words in the test carry most of the weight:

• “Partly”: the firm does not need to be run entirely from Pakistan. If some of the control and management is here, the test is met.
• “At any time in the year”: section 84 sets no minimum number of days. On its wording, control and management situated partly in Pakistan at any point in the tax year meets the test.

Section 81 then treats a resident AOP as a resident person, and any person that is not resident as non-resident. The Ordinance does not define “control and management” in section 84, so which decisions count is a question of fact that the text does not settle.

Why does residence matter for the firm’s tax?

Section 11 sets the scope. For a resident person, income under each head is computed by taking into account both Pakistan-source and foreign-source income. For a non-resident person, only Pakistan-source income is counted. A resident firm therefore brings its foreign earnings into its Pakistani return, while a non-resident firm does not.

Section 92(1) taxes the AOP separately from its members. Where the AOP has paid tax, an amount a member receives in the capacity of member out of the AOP’s income is exempt. That exemption does not depend on whether the member is resident.

How does section 142 work for a non-resident partner?

Section 142 deals with tax due by a non-resident member in respect of his share of the AOP’s profits:

1. The tax can be assessed in the name of the AOP or of any resident member.
2. It may be recovered out of the AOP’s assets or from the resident member personally.
3. A person who pays under the section is treated as acting under the non-resident member’s authority and is indemnified against proceedings, notwithstanding any contract to the contrary.
4. The amount is treated as if it were tax due under an assessment order, so the Ordinance’s recovery rules apply to it.

Section 142 does not itself list when a non-resident member will have tax due on his share. The Ordinance contains cases where a share is not covered by the section 92(1) exemption, such as the second proviso for an AOP with turnover of three hundred million rupees or above that has not filed audited accounts with its return, and the first proviso for a company member. Whether and how section 142 applies to a particular share is something the section does not work through case by case.

Worked example (illustrative figures)

Rehman Traders is a Faisalabad firm of textile agents. Imran runs day-to-day affairs from Faisalabad and holds 60%. His brother Kashif lives in Dubai, holds 40% and approves major contracts from there. The firm earns made-up income of Rs. 8,000,000 in commission from Pakistani mills and Rs. 2,000,000 in commission from a buyer abroad.

Step 1: residence. Part of the control and management sits with Imran in Faisalabad. Under section 84 the firm is a resident AOP for the tax year.

Step 2: scope of income. Under section 11, as a resident person the firm counts both amounts: Rs. 8,000,000 + Rs. 2,000,000 = Rs. 10,000,000 goes into its income computation.

Step 3: the partners. The firm pays tax on that income under section 92(1). Kashif’s 40% share received out of that taxed income is exempt under the same sub-section, subject to its provisos.

Contrast. Suppose instead that every decision about the firm was taken outside Pakistan for the whole year. The section 84 test would not be met, the firm would be non-resident under section 81, and section 11 would count only the Rs. 8,000,000 of Pakistan-source income.

What if …?

What if the non-resident partner is himself unsure of his own residence? The partner’s residence is a separate test. Section 82 makes an individual resident on grounds including presence in Pakistan for one hundred and eighty-three days or more in the tax year, or being a citizen who is not present in any other country for more than one hundred and eighty-two days, or who is not a resident taxpayer of any other country. His residence affects his own return, not the firm’s residence under section 84.

What if the non-resident member is a company? The first proviso to section 92(1) excludes a company member’s share from the AOP’s total income and taxes the company separately at the company rate. That is covered on its own page.

What if tax on the non-resident partner’s share cannot be collected from him? Section 142 allows it to be assessed on the firm or a resident partner and recovered from the firm’s assets or that partner personally.

Common mistakes

• Looking at where the partners live instead of where the firm is run. Section 84 is about control and management of the AOP’s affairs.
• Treating “partly” as “mainly”. The section says wholly or partly.
• Leaving foreign commission out of a resident firm’s return. Section 11 includes foreign-source income for a resident person.
• Assuming the Pakistani partner cannot be pursued for the overseas partner’s tax. Section 142 expressly allows assessment on, and recovery from, a resident member.

What to check in the official text

Read section 84 with sections 81 and 11, then sections 92(1) and 142 in the official PDF. Double tax treaties, the tax laws of the country where the partner lives, and provincial taxes are outside this corpus and are not covered here.