Corporate Income Tax

By: Jahanbaksh Nouraei( Esq. )
Barrister and Solicitor
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August 2008 - In February of 1988, the Iranian Parliament passed the Direct Taxation Act and it amended the said law in 1992 and 2002 primarily to bring it into harmony with the requirements of more recent economic policies. Foreigners interested in investing or working in the Islamic Republic of Iran, should be informed of the highlights of this Legislation and its subsequent amendments.

What are the various types of direct taxation?
According to the Direct Taxation Act, there is, in principle, a direct tax on real property, undeveloped land,inheritance, income earned from agricultural activities,salary, professions, corporations, incidental income, andaggregate income acquired through various sources. However,depending on specific cases, exemptions and discounts are alsoavailable.

Who is liable to pay taxes in Iran?
1. Companies and all legal entities of Iranian nationality with respect to all income earned in Iran or abroad.
2. Every natural person of Iranian nationality residing in Iran, with respect to income earned in Iran or abroad.
3. Every natural person of Iranian nationality residing abroad, with respect to all income earned in Iran.
4. Any non-Iranian natural person or legal entity with respect to income earned in Iran, as well as income accrued through the transfer of a license or right, provision of training andtechnical assistance, and royalties on movie films.

What type of tax facilities are provided to non-Iraniansinvesting in Iran?
According to the Foreign Investment Promotion and Protection Act (FIPPA) of 2002 and its Implementing Regulations, all capital invested in Iran and the profits that accrue therefrom, shall be subject to government protection. All rights, tax exemptions, and facilities accorded to domestic capital and private productive enterprises, are also available to foreign capital and corporations. Foreigners may also enjoy the advantages and facilities provided in the agreements concluded on avoiding double taxation between Iran and their respective country.

What are the most important tax exemptions?
Articles 132 to 146 of the Direct Taxation Act specify the major tax exemptions. Some of them are as follows:
The taxable income resulting from industrial and mining activities of industrial and mining production units in the private and cooperative sectors for which an exploitation license has been issued or extraction and sale contracts have been concluded, as of the beginning of the Iranian year 1381 (21 March 2002), by the ministries concerned, shall be tax exempt at the amount of 80% for a period of four (4) years, and in less-developed regions 100% of the tax prescribed shall be exempted for a period of ten (10) years.The list of the less-developed regions shall be prepared and declared by the Council of  Ministers. However, for environmental reasons, the industrial and mining units located in close proximity to Tehran or other major urban areas may not enjoy such tax exemptions.One hundred percent of the income earned through export of finished industrial products and agricultural products (including farm and orchard produce, livestock and poultry, fisheries, forest and pasture products) as well as 50% of the income earned through the export of other commodities whose export shall contribute to the achievement of national objectives relating to the promotion of non-oil exports shall be exempt from taxation. The list of such commodities shall be prepared by the government. However, according to Article 33 of the Fourth Development Plan, exportation of all non-oil goods and services during the time frame of the Plan (1384-1388 /2005-2009) shall be totally exempt from taxation. Tax exemptions shall also apply to the revenues generated by workshops engaged in the production of hand-woven carpets and handicrafts.Companies whose stock is traded on the Tehran Stock Exchange shall enjoy an exemption equal to 10% of the tax fixed for them

How are corporate taxes calculated?
According to Article 105 of the Law, the total income of companies and other legal entities, earned from their profitable activities in Iran or abroad,
shall be subject to a flat rate of 25% after deduction of losses and exemptions.

What are the tax rates applicable to the revenues of natural persons?
The tax rates of the income of natural persons, except those for whom different rates have been determined in the law, are:
Up to Rls. 30,000,000 annual taxable income: 15%,Up to Rls. 100,000,000 annual taxable income on sums in excess of Rls. 30,000,000: 20%,Up to Rls. 250,000,000 annual taxable income on sums in excess of Rls. 100,000,000: 25%,Up to Rls. 1,000,000,000 annual taxable income on sums in excess of Rls. 250,000,0000: 30%,On sums in excess of Rls.1,000,000,00 annual taxable income: 35%.

Is there VAT in Iran?
Yes. The Law on the Value Added Tax was passed on 29 January 2008 to be implemented for five years on a temporary basis. According to Article 1 of the law, offer of goods and services in Iran as well as export and import are subject to the VAT law. The exemptions are foreseen in the Law. The rate of the VAT is 1.5%. For certain goods higher rates have been set. Tax payers are obliged to calculate the tax subject to the VAT law at the time of applicability of the tax and receive the same from the other transacting party. Another 1.5% for municipality is added to the 1.5% VAT,increasing the figure to 3%.


What is the taxation regime of foreign companies operating in Iran?
Foreign legal entities must pay taxes on all taxable income earned through investments in Iran or from direct or indirect activities (through branch offices, agencies etc.) in Iran, at the flat rate of 25% as mentioned in Article 105 of the Direct Taxation Act. As for the assessment of taxable revenues of foreign legal entities earned by the assignment of their royalties and license and their other rights and ceding of movie films (earned as price, screening rights, or otherwise), depending on the case, the taxable income shall be 20 to 40% of the total sum acquired by the entity within one tax year. The assessment basis for each case shall be determined and approved by the Council of Ministers. Direct tax on the income earned by foreign airlines and shipping companies through transporting passengers and cargo from Iran, is a flat rate of 5% on all sums received from these activities in Iran, en route, or at the final destination. Foreign insurance companies which earn their profit through reinsurance, shall be subject to a tax at the rate of 2% of the premium collected and the interest accrued from their deposits in Iran. In cases where Iranian insurance companies acting in the country of origin of the foreign reinsurance company, are exempt from payment of taxes on reinsurance activities, the foreign establishments shall also be exempted from payment of taxes to the Iranian government. The tax for foreign contractors in Iran, active in such areas as construction and installation works and the related
commissioning, transportation, designing plans for buildings and installations, topographical surveying, drawing, supervision and technical calculations, training and technical assistance, transfer of technology and other services, shall be calculated on the basis of 12% of their total annual receipts in all instances.

What type of tax incentives are there for investments and activities in the Free Trade-Industrial Zones in Iran?
According to Article 13 of the Law Concerning the Manner of Administering the Free Trade-Industrial Zones of the Islamic Republic of Iran, natural persons and legal entities economically active in such areas, are exempt from payment of direct income tax for a period of 15 years, from the date of operation as stated in their license.

Are there safeguards against being re-taxed in the Direct Taxation Act?
Iran has concluded agreements on avoidance of double taxation and tax evasion with a large number of states. The tax arrangements made in such pacts are applicable and binding under the Iranian law.

Are the activities of agents of foreign companies in Iran also taxable?
Branches and agencies of foreign companies which have been registered according to the relevant regulations in Iran, and by virtue of their articles of association are not authorized to engage in profitable activities but can do marketing and collect economic information, are not liable to any taxation
on the sums received from the mother company as a revolving fund. However, if it is proven that the said branches and agencies are engaged in profitable activities in Iran and are acquiring an income there-from, the sums earned shall be subject to taxation according to the respective rules.

What regulations define taxes on salaries of foreigners working in Iran subject to?
According to the Direct Taxation Act, every natural person residing in Iran, shall be, with certain exceptions, liable to taxation with respect to the income earned as salary in Iran or abroad. Salary of the employee (whether Iranian or foreign national) received for working in Iran, as well as the fringe benefits related to the job are liable to taxation on the basis of the progressive rates foreseen in Article 131 of the Act. Income earned in cash or in kind by any natural person in the service of another person (natural or juridical) against his working power for employment in Iran on either a period of time or piece-work basis shall be liable to salary tax. According to Article 57 of the Direct Taxation Act, the total annual income of the employee shall be subject to taxation, and after deduction of the amount equal to the salary tax exemption (mentioned in Article 84 of the Act), a 10% tax rate shall apply up to the amount of Rls.42,000,000 (forty two million rials), and for the amounts exceeding the said sum, the tax rates prescribed in Article 131 of the Act shall apply. The Iranian government may prohibit exit of the tax debtors from country. By virtue of Article 202 of the Direct Taxation Act, the persons owing more that 10,000,000 rials as tax debts are subject to such leave restriction. The Iranian or foreign managers of companies are held liable for outstanding tax debts of the related entity created during their term of office. They may also be disallowed to leave the country, unless the payment is made or an acceptable guarantee is placed.