State of residence can tax on income from property in UAE


ISLAMABAD: Appellate Tribunal Inland Revenue (ATIR) Islamabad has declared that there is no bar under international law for the state of residence (Pakistan) to impose a tax on income from property situated in another country (UAE). According to a judgement of the tribunal issued on Monday, the tribunal is of the considered opinion that there is no bar under the state of residence to impose a tax on income from property situated in another state.

The tribunal has rejected the appeal of a Pakistani taxpayer for not taxing the foreign source immovable property income from the UAE. Details of the case revealed that the appellant taxpayer is an individual who derives income from salary and foreign source immovable property income. The case was selected for audit under section 214D of the Income Tax Ordinance, and intimation in this regard was issued by the concerned Commissioner. Thereafter, an Information Document request under section 177(1) of the Ordinance was issued to the taxpayer through IRIS.

Subsequently, the case of the appellant was transferred to the AEOI Zone, Islamabad. Information Document Request was once again issued to the appellant, wherein, the appellant was requested to furnish various details, documents, and other related information about the declaration made in the income tax return filed by the appellant for the Tax Year 2017. The appellant filed a reply along with certain documentation on December 25, 2020.

The tribunal is of the considered opinion that there is no bar under the law for the State of residence to impose a tax on income from property situated in another State. As a result, the appeal of the appellant is rejected.

The authorised representative, appearing on behalf of the appellant, submitted that there is no dispute that the appellant is a resident person and the immovable property in question is situated in Dubai, UAE and rental income is derived from that property. The learned AR drawing force from Paragraph 1 of Article 6 of the Double Taxation Avoidance Agreement (DTAA) between Pakistan and the Government of the United Arab Emirates (UAE), tried to impress upon that as the income derived by a resident of a contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State, may be taxed in that other State; therefore, the rental income of the property owned by the appellant at Dubai could not be brought to tax in Pakistan.

It was submitted by the AR that the expression “may be taxed in” means “shall be taxed only in” a particular State as per the interpretation accorded to the same by different courts.

The learned AR taking support of various judicial pronouncements submitted that Article 6(1) of the Pakistan-UAE tax treaty vested an exclusive taxing right with the State of source and the State of residence was not empowered to levy any tax, even if the State of source did not exercise its power to levy tax.

The AR in support of his aforesaid claim submitted that neither Article 6(1) nor protocol to the tax treaty expressly recognized the right of the State of residence of the owner to tax income from immovable property situated in the State of the source. It was thus the claim of the AR that the income from an immovable property could be taxed only in the State of the source. Further, it was submitted that after the Treaty was signed by the two countries the Ordinance could no longer be the law governing the taxability of such income in the two countries but only the Treaty governs such taxability and thus the provisions of section 4, 10, 11 and 15 of the Ordinance could no longer be looked into for this purpose.

Concerning Article 6(1) of the Treaty regarding taxability of income tax from immovable properties, it was urged on behalf of the appellant that the word ‘may’ would also mean in that context ‘must’ or ‘shall’ because the situs of the property has to be considered and if the situs of the property is situated in Dubai, U.A.E, the income from the property can be assessed to tax only in that country and again under the provisions of the Treaty in question, such income cannot be included in the total income in Pakistan.