Canada–Pakistan Tax Treaty Summary

📌 Scope & Definitions

Article 1 — General Scope

• Applies to residents of one or both of Canada and Pakistan

• Does not restrict exemptions, deductions, or credits available under domestic law or other agreements

• Each State retains the right to tax its own residents under domestic law where the Convention does not provide otherwise

• The Convention is one of Canada's older treaties and predates many modern OECD standard provisions

Article 2 — Taxes Covered

• Canada: income taxes imposed by the Government of Canada under the Income Tax Act

• Pakistan: income tax including super tax imposed under the Income Tax Ordinance

• Applies to any substantially similar future taxes enacted by either country

• Does not cover social security contributions, sales tax, customs duties, or provincial/territorial taxes in Canada

Article 3 — General Definitions

• Defines: Canada, Pakistan, person, company, competent authority, national, international traffic, taxable year

• Canada's competent authority: Minister of National Revenue or authorised representative

• Pakistan's competent authority: Central Board of Revenue or authorised representative

• Undefined terms carry their respective domestic-law meaning under the law of the State applying the Convention

📌 Residence & Permanent Establishment

Article 4 — Residence

• A person is a resident if liable to tax by reason of domicile, residence, place of management, or similar criteria

• Dual-residency tie-breakers for individuals applied in order: (1) permanent home, (2) centre of vital interests, (3) habitual abode, (4) nationality, (5) mutual agreement

• For companies: resident in the State where place of effective management is situated

• Dual-resident companies resolved by mutual agreement between competent authorities

• Pakistan treats an individual as resident if present in Pakistan for 183 days or more in a tax year

Article 5 — Permanent Establishment (PE)

• PE = fixed place of business: place of management, branch, office, factory, workshop, mine, oil/gas well, quarry, or other place of extraction of natural resources

• Building site, construction, assembly, or installation project = PE if it continues for more than 183 days

• Service PE: furnishing of services through employees or other personnel = PE if activities continue for more than 183 days within any 12-month period

• Supervisory activities connected to a building site = PE if lasting more than 183 days

• Dependent agent with authority to conclude contracts = PE

• Agent who habitually maintains a stock of goods and regularly delivers goods on behalf of the enterprise = PE

• Preparatory or auxiliary activities do not create a PE

• Independent broker or agent acting in the ordinary course of business does not create a PE

📌 Business & Property Income

Article 6 — Income from Immovable Property

• Income from real property situated in the other State may be taxed in the situs State

• Covers agriculture, forestry, direct use, letting, and all other forms of use of immovable property

• Applies equally to income from immovable property of an enterprise and from property used for independent personal services

• Rights to variable or fixed payments for the working of mineral deposits and other natural resources treated as immovable property

Article 7 — Business Profits

• Taxable only in the residence State unless a PE exists in the other State

• If PE exists, the other State may tax profits attributable to the PE on an arm's-length, separate-entity basis

• Deductions allowed for executive, general administrative, R&D, and other expenses incurred for the PE regardless of where incurred

• No profits attributed to a PE solely from purchasing goods for the enterprise

• Profits attributed to a PE in prior years may not be reassessed after 5 years unless fraud or wilful default is involved

Article 8 — Shipping and Air Transport

• Profits from ships or aircraft in international traffic: taxable only in the residence State

• Covers transportation of passengers, mail, livestock, and goods; related activities; incidental rental of ships or aircraft

• Container profits used in connection with international transport: taxable only in the residence State

• Gains from alienation of ships or aircraft used in international traffic: taxable only in the residence State

Article 9 — Associated Enterprises (Transfer Pricing)

• Each State may adjust income where related-party transactions are not at arm's length

• Where one State makes an upward adjustment, the other State shall make a corresponding downward adjustment to avoid double taxation

• Pakistan's transfer pricing rules under the Income Tax Ordinance 2001 apply in conjunction with this Article

📌 Passive Income — Withholding Rates

Article 10 — Dividends

• Direct investment (beneficial owner is a company holding ≥25% of the capital): 15%

• All other cases (portfolio): 20%

• Dividends attributable to a PE in the source State: taxed under Business Profits (Article 7)

• Pakistan's domestic withholding rate on dividends paid to non-residents is generally 15%; treaty rate applies where more favourable

• Note: the relatively high portfolio rate of 20% reflects the treaty's age and Pakistan's negotiating position at the time of signing

Article 11 — Interest

• General treaty rate: 15%

• Fully exempt (0%) if derived and beneficially owned by:

  • The Government, a political subdivision, or central bank of the other State

  • The Bank of Canada or the State Bank of Pakistan

  • Export Development Canada or equivalent Pakistani export financing body

  • Any other institution as may be agreed upon by the competent authorities

• Excess interest arising from a special relationship between payer and recipient taxed under domestic law

• Pakistan's domestic withholding rate on interest to non-residents is generally 10–15% depending on the nature of the interest

Article 12 — Royalties

• General rate: 15%

• Covers payments for use of copyright, patent, trademark, design, secret formula, industrial, commercial, or scientific equipment, and know-how

• Cultural royalties (literary, dramatic, musical, or artistic works): 15%

• Equipment royalties: 15%

• Technical fees and payments for technical services treated similarly to royalties under this treaty

• Royalties attributable to a PE or fixed base: taxed under Article 7 or Article 14

• Pakistan's domestic withholding rate on royalties to non-residents is generally 15%

📌 Capital Gains

Article 13 — Gains

• Gains from alienation of immovable property situated in the other State: taxable in the situs State

• Gains from alienation of shares deriving more than 50% of their value directly or indirectly from immovable property situated in the other State: taxable in the situs State

• Gains from alienation of business assets forming part of a PE or fixed base: taxable in the State where the PE or fixed base is situated

• Gains from alienation of ships or aircraft in international traffic: taxable only in the residence State

• Gains from alienation of shares of a company resident in the other State: may be taxed in the other State if the alienator held at least 25% of the company's capital at any time during the 12 months preceding the alienation

• All other gains: taxable only in the residence State

📌 Personal Services

Article 14 — Independent Personal Services

• Taxable in the residence State

• Also taxable in the source State if the individual has a fixed base regularly available in that State, or is present for more than 183 days in any 12-month period

• Income attributable to the fixed base or to the period of presence may be taxed in the source State

Article 15 — Dependent Personal Services (Employment Income)

• Taxable only in the residence State unless work is performed in the other State

• Exemption from source-State tax if:

  • Individual is present for ≤183 days in any 12-month period, AND

  • Remuneration is paid by an employer who is not a resident of the source State, AND

  • Remuneration is not borne by a PE or fixed base in the source State

• Special rules apply to employees of ships and aircraft in international traffic: taxable only in the residence State of the employer

Article 16 — Directors' Fees

• Directors' fees and similar payments derived by a resident of one State from a company resident in the other State may be taxed in the source State

• Applies to members of a board of directors or equivalent governing body

Article 17 — Entertainers and Athletes

• Income derived by entertainers (theatre, film, radio, TV, music) and athletes from activities performed in the other State may be taxed in the State of performance

• Applies regardless of Articles 14 and 15

• Exemption if the visit is substantially supported by public funds of the residence State or a political subdivision thereof

• Anti-avoidance provision: applies even where income is channelled through a third-party entity rather than paid directly to the entertainer or athlete

📌 Government Service, Pensions & Education

Article 18 — Government Service

• Salaries paid by a State or its political subdivision to an individual for services rendered to that State: taxable only in the paying State

• Exception: taxable only in the other State if the individual is a resident and national of that other State and not a national of the paying State

• Government pensions follow the same rules as salary payments above

Article 19 — Pensions and Annuities

• Private pensions and annuities derived by a resident of one State from sources in the other State: taxable only in the residence State

• Social security benefits paid by one State to a resident of the other State: taxable only in the paying State

• Alimony and maintenance payments: taxable only in the recipient's State of residence

• Child support payments: exempt from tax in both States

Article 20 — Students and Apprentices

• A student or business apprentice present in the host State principally for education or training is exempt from tax in the host State on payments received from abroad for maintenance, education, or training

• Exemption applies for the duration of full-time study or training only

• Does not cover wages from local employment unrelated to the educational or training purpose

Article 21 — Professors and Teachers

• A professor or teacher who visits the other State for up to 2 years for teaching or research at a recognised educational or research institution is exempt from tax in the host State on remuneration for such teaching or research

• Does not apply if the research is undertaken primarily for the private benefit of a specific person or persons

• The 2-year exemption period begins from the date of first arrival in the host State for the relevant purpose

📌 Other Income

Article 22 — Other Income

• Income of a resident of one State not dealt with elsewhere in the Convention: taxable only in the residence State

• Exception: if the income arises in the other State, that State may also tax it under its domestic law

• Income attributable to a PE or fixed base: taxed under Article 7 or Article 14

📌 Relief from Double Taxation

Article 23 — Relief from Double Taxation

• Canada: provides a foreign tax credit for Pakistani taxes paid on income arising in Pakistan, limited to the proportion of Canadian tax attributable to that income

• Pakistan: provides a credit for Canadian taxes paid on income arising in Canada, creditable against Pakistani tax on the same income

• Tax sparing provision: Canada allows a credit for Pakistani tax that would have been paid but for a Pakistani tax incentive or exemption granted under Pakistani law to promote economic development

• Exempted income may still be taken into account in determining the applicable rate on remaining income (exemption with progression)

• The tax sparing credit is a notable feature reflecting Pakistan's developing country status at the time of negotiation

📌 Non-Discrimination & Procedure

Article 24 — Non-Discrimination

• Nationals of one State shall not be subjected to more burdensome taxation in the other State than nationals of that other State in the same circumstances

• Stateless persons resident in one State are also protected

• PE of an enterprise of one State shall not be taxed less favourably than enterprises of the other State carrying on the same activities

• Deductibility of interest, royalties, and other payments to residents of the other State cannot be restricted solely on grounds of foreign residence

• Companies owned by residents of the other State shall not be subject to more burdensome taxation than similar domestic companies

Article 25 — Mutual Agreement Procedure (MAP)

• Residents may present cases to the competent authority of their State within 3 years of first notification of taxation not in accordance with the Convention

• Competent authorities shall endeavour to resolve disputes by mutual agreement

• Competent authorities may communicate directly, including through a joint commission

• In practice, MAP cases between Canada and Pakistan can be lengthy given administrative capacity constraints

Article 26 — Exchange of Information

• Competent authorities shall exchange information necessary for carrying out the Convention and domestic tax laws

• Information received shall be treated as confidential and disclosed only to persons involved in tax administration and enforcement

• Banking secrecy and lack of domestic interest cannot be invoked to refuse exchange of information

• Each State shall use best endeavours to collect taxes on behalf of the other State

Article 27 — Diplomatic Agents and Consular Officers

• Nothing in the Convention affects the fiscal privileges of diplomatic agents and consular officers under general rules of international law or special agreements

📌 Entry into Force & Termination

Article 28 — Entry into Force

• The Convention was signed on 24 February 1976 and entered into force on 26 May 1977

• Effective for withholding taxes: income arising on or after 1 January 1977

• Effective for other taxes: taxable years beginning on or after 1 January 1977

• Note: the treaty has not been substantially updated since 1976 and predates many modern OECD standard provisions including detailed LOB clauses, mandatory arbitration, and BEPS-related anti-avoidance measures

Article 29 — Termination

• Convention remains in force indefinitely

• Either State may terminate by giving written notice through diplomatic channels on or before 30 June of any calendar year; Convention ceases to have effect from 1 January of the following year

📌 Practical Considerations Unique to Canada–Pakistan

• Treaty Age: The 1976 treaty is one of Canada's oldest in force and lacks many protections and provisions found in modern treaties including detailed LOB rules, mandatory arbitration, and comprehensive BEPS anti-avoidance measures

• Tax Sparing: The tax sparing credit may benefit Canadian investors in Pakistani enterprises that benefit from Pakistani tax holidays or incentives; professional advice is recommended to confirm eligibility

• Pakistan's Super Tax: Pakistan has periodically imposed a super tax on high-income earners and large companies; treaty interaction with the super tax should be confirmed with a specialist

• Withholding Rates: Pakistan's domestic withholding tax system is complex with numerous rates and categories; treaty rates should always be compared against current domestic rates to determine which is more favourable

• MLI: Canada has ratified the OECD MLI; Pakistan has also signed the MLI; both countries' MLI positions should be reviewed to determine which treaty provisions have been modified including PE definitions and anti-avoidance rules

• FBR Administration: Pakistan's Federal Board of Revenue (FBR) administers tax treaties; treaty relief procedures including withholding tax exemption certificates should be obtained in advance of transactions

• Diaspora Remittances: Given the significant Pakistani-Canadian diaspora, the treaty has practical relevance for individuals with income sources in both countries including rental income, pensions, and investment returns

This summary is for general reference only. Always consult the full Convention text, any related Protocols, and the OECD Multilateral Instrument (MLI) modifications for authoritative guidance. Rates shown are maximum treaty rates; lower domestic rates take precedence. Given the treaty's age (1976) and Pakistan's significant tax reforms since then, professional advice is strongly recommended for any cross-border Canada–Pakistan tax planning or compliance matters. Consult a qualified tax professional with expertise in both Canadian and Pakistani tax law for advice specific to your situation.