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(TO BE PUBLISHED IN THE GAZETTE OF PAKISTAN – EXTRAORDINARY PART.I)  

GOVERNMENT OF PAKISTAN  

REVENUE DIVISION  

CENTRAL BOARD OF REVENUE  

—-  

  Islamabad, the 6th January 2006  

N O T I F I C A T I O N  

(Income Tax)  

            S.R.O. 49(I)/2006.-  WHEREAS the Government of the Islamic Republic of Pakistan and the Government of the Republic of Yemen have executed an Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income on the 2nd March, 2004, as set out in the Annexure to this Notification;  

            NOW, THEREFORE, in exercise of the powers conferred by sub-section (1) of section 107 of the Income Tax Ordinance, 2001 (XLIX of 2001), the Federal Government is pleased to direct that the Agreement shall enter into force upon the exchange of instruments of ratification and its provisions shall have effect:-  

(a)        as regards taxes withheld at source, it shall apply to the amounts that are paid or entered into the accounts on or after the first day of January of the Gregorian year following the year in which the Agreement comes into force; and  

(b)        as regards other taxes imposed on income, to the tax years that begin on or after the first day of January of Gregorian year that follows the year in which the Agreement comes into force.  

Annexure  

“AGREEMENT  

BETWEEN THE GOVERNMENT  

OF THE ISLAMIC REPUBLIC OF PAKISTAN  

AND THE GOVERNMENT OF THE REPUBLIC OF YEMEN  

FOR THE AVOIDANCE OF DOUBLE TAXATION AND  

THE PREVENTION OF FISCAL EVASION WITH  

RESPECT TO TAXES ON INCOME  

 

PREAMBLE  

The Government of the Islamic Republic of Pakistan and the Government of the Republic of Yemen desiring to conclude an Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and to promote and strengthen the economic relations between the two countries,  

Have agreed as follows:  

CHAPTER I  

SCOPE OF THE AGREEMENT  

Article 1  

PERSONS COVERED  

This Agreement shall apply to persons who are residents of one or both of the Contracting States.  

Article 2  

TAXES COVERED  

1.         This Agreement shall apply to taxes on income imposed on behalf of a Contracting State or of its political subdivisions or local authorities, irrespective of the manner in which they are levied.  

2.         There shall be regarded as taxes on income, all taxes imposed on total income, or on elements of income including taxes on gains from the alienation of movable or immovable property, taxes on the total amounts of wages or salaries paid by enterprises.

 

3.                  The existing taxes to which the Agreement shall apply are in particular:

 

(a)                in the case of Pakistan, the income tax;

(hereinafter referred to as “Pakistan tax”) and

(b)               in the case of Yemen:

 

1.      Real estate tax and it includes tax on real estate yield and tax on real estate sales.

2.      The commercial and industrial profits tax imposed on natural person.

3.      The commercial and industrial tax imposed on body corporate (companies).

4.      Tax on free and other non-commercial professions.

5.      Tax on salaries and wages and the like.

           

(hereinafter referred to as “Yemeni tax”)

4.         The Agreement shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of the Agreement in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of significant changes made to their tax law.

CHAPTER II

DEFINITIONS

Article 3

GENERAL DEFINITIONS

1.         For the purposes of this Agreement, unless the context otherwise requires:

(a)        The term “Pakistan” when used in a geographical sense means Pakistan as defined in the constitution of the Islamic Republic of Pakistan and includes any area outside the territorial waters of Pakistan which under the laws of Pakistan and international law is an area within which Pakistan exercises sovereign rights and exclusive jurisdiction with respect to the natural resources of the seabed and subsoil and superjacent waters;

(b)        The term “Republic of Yemen” means the territory of the Republic of Yemen, including all islands and zones adjacent to Yemeni territorial waters in which, in accordance with international law, the Yemeni state can exercise right related to the sea surface, under it and its natural resources.

(c)        The term "company" means any body corporate or any entity that is treated as a body corporate for tax purposes;

(d)        The term "competent authority" means:

(i)         In case of Pakistan, the Central Board of Revenue or its authorized representative; and

(ii)        In case of Yemen, the Minister of Finance or whosoever legally represents as regard the Republic of Yemen;

(e)        The term “Contracting State” and the “other Contracting State” means Pakistan or Yemen, as the context requires;

(f)         The terms "enterprise of a Contracting State" and "enterprise of the other Contracting State" mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State;

(g)        The term "international traffic" means any transport by a ship or aircraft operated by an enterprise which has its place of effective management in a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State;

(h)        The term "national" means:

(i)         Any individual possessing the nationality of a Contracting State;

(ii)      Any legal person, partnership or association deriving its status as such from the laws in force in a Contracting State.

(i)         The term "person" includes an individual, a company and any other body of persons;

            (j)         The term “tax” means Pakistan tax or Yemeni tax, as the context requires.

2.         As regards the application of the Agreement at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning which it has at that time under the laws of that State concerning taxes to which the Agreement applies.

Article 4  

RESIDENT  

1.         For the purposes of this Agreement, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State situated therein.  

2.         Where by reason of the provisions of paragraph 1 of this Article an individual is a resident of both Contracting States, then his status shall be determined as follows:

(a)        He shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);

(b)        If the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;

(c)        If he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;

(d)        If he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

3.         Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.

Article 5

PERMANENT ESTABLISHMENT

1.         For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

2.                  The term "permanent establishment" includes especially:

(a)        A place of management;

(b)        A branch;

(c)        An office;

(d)        A factory;

(e)        A workshop;

(f)         A warehouse;

(g)        A permanent sales exhibition or sales outlet;

(h)        A mine, an oil or gas well, a quarry or any other place of exploration and/or extraction of natural resources.

3.         The term "permanent establishment" also encompasses a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities last more than 183 days during a period of twelve months.

4.         Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include:

(a)        The use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise;

(b)        The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display;

(c)        The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

(d)        The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;

(e)        The maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character.

(f)         A fixed place where goods are held for the pursuit of the set of activities referred to in the preceding sub-paragraphs (a) to (e), provided that the overall activity of the fixed place resulting from such set of activities is of a preliminary or supporting character.

5.         Notwithstanding the provisions of paragraphs 1 and 2, where a person – other than an agent of an independent status to whom paragraph 7 applies – is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State in respect of any activities which that person undertakes for the enterprise, if such a person:

(a)        Has and habitually exercises in that State an authority to conclude contracts in the name of the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph; or

(b)        Has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise.

6.         Notwithstanding the preceding provisions of this Article, an insurance enterprise of a Contracting State shall, except in regard to re-insurance, be deemed to have a permanent establishment in the other Contracting State if it collects premiums in the territory of that other State or insures risks situated therein through a person other than an agent of an independent status to whom paragraph 7 applies.

7.         An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, and conditions are made or imposed between that enterprise and the agent in their commercial and financial relations which differ from those which would have been made between independent enterprises, he will not be considered an agent of an independent status within the meaning of this paragraph.

8.         The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

CHAPTER III

TAXATION OF INCOME

Article 6

INCOME FROM IMMOVABLE PROPERTY

1.         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.

2.         The term "immovable property" shall have the meaning which it has under the law of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; ships, boats and aircraft shall not be regarded as immovable property.

3.         The provisions of paragraph 1 shall also apply to income derived from the direct use, letting or use in any other form of immovable property.

4.         The provisions of paragraphs 1 and 3 shall also apply to the income from immovable property of an enterprise and to income from immovable property used for the performance of independent personal services.

Article 7

BUSINESS PROFITS

1.         The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to:

(a)        that permanent establishment;

(b)        sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or

(c)       other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment.

2.         Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.

3.                  (a)        In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including only those executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere which are allowed under the provisions of the domestic law of the Contracting State in which the permanent establishment is situated.

(b)        However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices.

4.         No profit shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.

5.         In so far as it has been customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article.

6.         For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.

7.         Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article.

Article 8

SHIPPING AND AIR TRANSPORT

1.         Profits from the operation of aircraft ships, boats, road vehicles and railways  in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

 

2.         Profits form the operation of ships in international traffic may be taxed in the Contracting State in which the effective management of the enterprise is situated. However, such profits derived from sources within the other Contracting State may also be taxed in that other State in accordance with its domestic law, provided that the tax so charged in that other State shall be 4 per cent.

3.         If the place of effective management of a shipping enterprise or of an inland waterways transport enterprise is aboard a ship or boat, then it shall be deemed to be situated in the Contracting State in which the home harbour of the ship or boat is situated, or if there is no such home harbour, in the Contracting State of which the operator of the ship or boat is a resident.

4.         The provisions of paragraphs 1 and 2 shall also apply to profits from the participation in a pool, a joint business or an international operating agency.

Article 9

ASSOCIATED ENTERPRISES

1.         Where:

(a)        an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or

(b)        the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State, and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

2.         Where a Contracting State includes in the profits of an enterprise of that State – and taxes accordingly – profits on which an enterprise of the other Contracting State has been charged to tax in that other State and the profits so included are profits which would have accrued to the enterprise of the first-mentioned State if the conditions made between the two enterprises had been those which would have been made between independent enterprises, then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of the Agreement and the competent authorities of the Contracting States shall, if necessary, consult each other.

Article 10

DIVIDENDS

1.         Dividends paid by a company, which is a resident of a Contracting State to a resident of the other Contracting State, may be taxed in that other State.

2.         However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the dividends.

This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.

3.         The term "dividends" as used in this Article means income from shares, shares rights, mining shares, founders’ shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.

4.         The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 15, as the case may be, shall apply.

5.         Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except in so far as such dividends are paid to a resident of that other State or in so far as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company’s undistributed profits to a tax on the company’s undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.

Article 11

INTEREST

1.         Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2.         However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10 per cent of the gross amount of the interest.

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