Pakistan-US treaty: status and limitations
The Pakistan-US tax convention was signed in 1957 and remains in force, making it one of the oldest US bilateral tax treaties still operating. The treaty has been modified over time but the underlying framework is dated relative to modern bilateral tax conventions.
Some treaty articles have ambiguous or outdated application. Practical interpretation often defaults to the modernized read (e.g., 15% on dividends), but specific positions should be reviewed with a Pakistani CA familiar with US cross-border tax.
- Article 7 equivalent (Business Profits): Pakistani-resident operating profits taxable only in Pakistan without US PE.
- Dividend article: 15% modern interpretation. Some sources cite higher rates from the original 1957 text.
- Royalty article: 0% for most royalty types.
- FTC mechanism: Pakistan provides foreign tax credit on US tax paid.
Withholding rates by income type for Pakistani residents
| Income type | Default US rate | Pakistan treaty rate (modern interp.) |
|---|---|---|
| US-source dividends | 30% | 15% |
| US-source portfolio interest | 30% | 15-30% (ambiguous) |
| US-source royalties | 30% | 0% for most types |
| Business profits without US PE | Generally not taxed | Generally not taxed |
How FBR treats US LLCs
Federal Board of Revenue (FBR) generally treats US single-member LLCs as transparent for Pakistani tax purposes. LLC operating income flows through to your annual Pakistani income tax return and is taxed at applicable Pakistani rates.
Pakistani banking is often the harder challenge than US tax for Pakistani LLC owners. Mercury approval rates for Pakistani profiles are lower (~60% in our intake) vs Wise Business (~95%). Sequence applications carefully.
How to file W-8BEN-E from Pakistan
- Line 1: LLC legal name
- Line 4: Chapter 3 status: Disregarded Entity
- Line 5: Country of residence: Pakistan
- Line 6: Permanent residence address in Pakistan
- Line 8: US TIN (EIN)
- Line 9: Foreign TIN (your Pakistani NTN)
- Part III: claim treaty benefits citing the applicable article
Common mistakes by Pakistani founders
- Not filing W-8BEN-E with US payers (30% default applies)
- Missing Form 5472 + 1120 ($25K penalty)
- Not declaring LLC income on Pakistani tax return
- Missing SBP (State Bank of Pakistan) reporting on USD inflows
- Applying first to Mercury when Wise Business has better Pakistani approval rates