The income tax treaty between Estonia and Pakistan officially entered into force on 30 April, 2024, marking a significant milestone in bilateral economic relations.
Signed on 20 November, 2023, this historic agreement is the first of its kind between the two nations.
Key Points of the Treaty:
- Taxes Covered: Applies to income taxes in both Estonia and Pakistan, including Pakistan’s super tax.
- Residence: Clarifies how residency for tax purposes will be determined if someone is considered a resident of both countries.
- Withholding Tax Rates: Sets specific withholding tax rates on various types of income, including
- Dividends: 12.5%
- Interest: Generally, 12.5%, but exempt for government entities and certain loans
- Royalties: 10%
- Technical Service Fees: 10%
- Business Presence: A company will be considered to have a permanent establishment in a country if it provides services there for more than 183 days in a year.
- Dispute Resolution: If tax authorities disagree on how to apply the treaty, the issue can be brought to arbitration.
- Capital Gains: Specifies which capital gains can be taxed by each country, such as those from real estate or business assets.
- Double Taxation Relief: Outlines how each country will avoid taxing the same income twice. Estonia will generally credit taxes paid in Pakistan, while Pakistan may offer a tax deduction for dividends under certain conditions.
- Anti-Abuse: Includes measures to prevent people from using it to unfairly reduce their tax burden.
- Effective Date: Applies in Estonia from 1 January, 2025, and in Pakistan from 1 July, 2024.
This new tax treaty is expected to boost business and investment between Estonia and Pakistan by providing greater tax certainty and reducing administrative burdens.
