Pakistan

Tax-deferred employer plans

EOBI (Employees' Old-Age Benefits Institution) is Pakistan's social insurance program. It is pay-as-you-go, not a foreign trust under Treas. Reg. §301.7701-7. The exemption is available only to an ‘eligible individual’ under §5.02: someone who is compliant (or comes into compliance) with U.S. income-tax filing and has reported the plan’s contributions, earnings, and distributions as income to the extent U.S. law requires; a participant who never reported plan earnings cannot rely on it until they do.

Many Pakistani employers maintain provident funds (recognized provident funds under the Income Tax Ordinance 2001). Employer and employee contribute, and the accumulated balance is paid out upon retirement, resignation, or death. These funds hold segregated assets in trust for the benefit of members, managed by a board of trustees: they are likely foreign trusts under §301.7701-7.

Rev. Proc. 2020-17 analysis: Rev. Proc. 2020-17 does not require a treaty: any foreign retirement trust can qualify if it meets all Section 5.03 conditions (tax-favored, annual reporting, earned income contributions, contribution caps, withdrawal restrictions, nondiscriminatory employer plans). Large employer provident funds are potential candidates; smaller single-employer funds need closer scrutiny. If Rev. Proc. 2020-17 does not apply, a fund an employer contributes to is reported as the note at the end of this section explains.

Gratuity funds and superannuation funds (less common employer-sponsored retirement benefits) follow the same analysis.

For a plan an employer contributes to, a trust holding it is generally a nonexempt employees’ trust described in §402(b). §6048(a)(3)(B)(ii) excepts transfers to §402(b), §404(a)(4), and §404A trusts from Part I, the participant’s own contributions included, and §679 does not make the participant the owner (see the Reporting Guide’s employer-plan section). Payouts the participant reports as compensation income are excepted from Part III. If the participant’s own contributions ever exceed the employer’s, the participant is treated as the owner of the part those contributions fund (Treas. Reg. §1.402(b)-1(b)(6)), reports it on Part II and Form 3520-A each year it is owned, and is taxed on its income each year. In that count, what the participant chose to put in, salary sacrifice included, is the participant’s, and anything the plan’s rules required taken from pay is the employer’s, as the IRS chief counsel read a national retirement fund in 1997. The rest is taxed when it vests and, after that, when paid out (§402(b)(1), (2)).

Tax-deferred individual plans

Pakistan introduced the Voluntary Pension System (VPS) in 2005, modeled on defined contribution pension plans. VPS funds are managed by licensed asset management companies and hold segregated assets in individual accounts. Under Treas. Reg. §301.7701-7, VPS accounts are likely foreign trusts.

Rev. Proc. 2020-17 analysis: VPS is an individual plan; §5.03(6) (the employer-plan nondiscrimination condition) does not apply. Whether VPS meets §5.03(1)–(5) requires plan-specific analysis.

The VPS market is still relatively small but growing. The 3520-A should report contributions, investment returns, fees, and opening/closing balances.

Gifts and inheritances

Pakistan is a very common source country for gifts and inheritances received by U.S. persons, given the large Pakistani-American diaspora community.

If a U.S. person receives more than $100,000 in gifts or bequests in a year from one nonresident alien individual or foreign estate (adding together gifts from donors related to each other), Form 3520 Part IV reporting is required. Gifts from foreign corporations or foreign partnerships exceeding $20,573 (for 2026, indexed for inflation) are also reportable. Common scenarios include:

- Cash gifts from parents or family members in Pakistan - Inheritance of Pakistani real property (land, houses, agricultural property) - Gifts for weddings or other family occasions - Inheritance of Pakistani bank accounts, gold, or business interests

Pakistan does not impose a separate gift tax or inheritance tax (income tax may apply to certain capital gains on inherited property when sold). The U.S. obligation is purely informational.

Pakistani real property should be reported at fair market value in U.S. dollars. Given the difference between official DC rates (the value declared in government documents) and actual market values, fair market value should reflect the true market price.

Convert Pakistani rupees at the rate prevailing when each amount is received, paid, or accrued; the IRS has no official exchange rate and generally accepts any posted rate used consistently, so its published yearly average rate is a common choice for amounts arising evenly across the year.

Penalties and practical notes

Failure to file Forms 3520/3520-A carries penalties under §6677: the greater of $10,000 or 35% of the gross reportable amount for certain Form 3520 failures (§6677(a)); 5% or $10,000 for Part II and 3520-A (§6677(b)).

The Pakistani tax year runs July 1 – June 30, so calendar-year conversion is needed for Form 3520-A reporting.

Employer provident fund trustees provide annual statements showing contributions, interest, and balances. VPS fund managers provide account statements through online portals.

If a plan is a foreign trust, the timing depends on who funds it. In an employer provident fund, employer contributions are taxed when they vest (§402(b)(1)) and returns when paid out, under §72 (§402(b)(2)). The exceptions are a part the member owns (contributions the member chose to make above the employer’s) and the highly compensated rule (§402(b)(4)(A)). In a VPS account the member funds, returns are taxable each year. The 1957 treaty does not help: Article X exempts certain pension payments at source but expressly does not apply to pensions from Pakistan-recognized superannuation funds, and it has no accrual-deferral rule.

Pakistan has foreign exchange regulations under the Foreign Exchange Regulation Act. These may affect the ability to remit funds internationally but do not affect the U.S. reporting obligation.