Corporate Income Tax
By: Jahanbaksh Nouraei( Esq. )
Barrister and Solicitor
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January 2016–In February of 1988, the Iranian parliament passed the Direct Taxation Act and amended the said law in 1992, 2002 and 2015, as well as through other specific laws 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.
What are the various areas of direct taxation?
According to the Direct Taxation Act, there is, in principle, a direct tax on real property, undeveloped land, inherited wealth, income earned from agricultural activities, salary, professions, corporations, and incidental income acquired through various sources. However, depending on specific cases, exemptions and reliefs are also available.
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 and technical assistance, and royalties on movies and films.
Are tax facilities provided to non-Iranians investing in Iran as well?
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 can 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 declared income resulting from industrial and mining activities of non-governmental entities for which an exploitation license has been issued by related ministries or for which extraction and sale contracts have been concluded, as well as the income of hospitals, hotels and tourism lodgings, shall be taxed at a rate of zero as of the beginning of their operations for five years.
In less-developed regions the said duration shall be 10 years. Increasing the number of employees will also bring certain tax relief. Information technology companies can benefit from such exemptions as well upon the approval of the government. 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 take advantage of this tax concession.
One hundred percent of the income earned through export of services, non-oil goods and agricultural products (including farm and orchard produce, livestock and poultry, fisheries, apiarian production , forest and pasture products), goods entered in Iran for transit to other countries, revenues of the touristic bureaus earned from attraction of foreign tourists and pilgrims and the dispatch of pilgrims to certain countries as well as 20% of the income earned through the export of raw materials shall be calculated at a tax rate of zero.
Tax exemptions shall also apply to the revenues generated by workshops engaged in the production of hand-woven carpets and handicrafts.
Ten percent of the tax applicable to the goods sold on the mercantile exchange and 10% of the tax fixed for companies whose stock is traded on the Stock Exchange shall be exempted as well.
Additional tax reliefs and extension of the exemption duration have also been foreseen in the law for a number of activities and services.
To qualify for the zero tax rate exemption, submission of one’s tax declaration in a timely fashion is a must in the mainland Iran and its free zones.
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. The tax declaration shall be the basis of tax assessment while the Tax Affairs Organization is authorized to accept a tax declaration without examination, check some of them at random or examine the same on the basis of certain pre-determined criteria and rules.
What are the tax rates applicable to the revenues of natural persons?
According to Article 131 of the Direct Taxation Act, the tax rates applicable to the income of natural persons, except those for whom different rates have been determined, are:
Annual taxable income up to 500,000,000 Rls. = 15%.
Annual taxable income in excess of 500,000,000 Rls. up to 1,000,000,000 Rls. = 20%.
Annual taxable income in excess of 1,000,000,000 Rls. = 25%.
The incidental revenues, such as donations and prizes, shall be also subject to the above rates. Notwithstanding, prizes and rewards given to the exporters for their good performance, donation for charity purposes and public welfare, aid supplied to the victims of natural disasters and the like shall not be taxable.
Is there VAT in Iran?
Yes. The Law on Value Added Tax (VAT) was passed on 29 January 2008 with subsequent amendments. According to Article 1 of the law, the offering of goods and services in Iran as well as exports and imports are subject to the VAT law.
VAT does not apply to immovable assets. Other exemptions are foreseen in the law and sale and import of certain products and service such as agricultural goods, husbandry, poultry, fisheries, beekeeping, flour, bread, meat, rice, sugar, printed material, traveler’s items, agricultural fertilizers and pesticides, drugs and medicines, domestic public and passenger transport, banking services etc. VAT of exports shall be refundable. The rate of VAT was 3% in the first year of implementation of the law. Nine percent is the assessed amount for the Iranian year 1394 (21 March 2015- 20 March 2016). For certain goods higher rates have been set. Taxpayers 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 and remit that to the account of the Tax Affairs Organization.
What is the taxation regime of foreign companies operating in Iran?
As stipulated in Article 105 of the Direct Taxation Act, foreign legal entities must pay taxes at the flat rate of 25% on all taxable income earned through investments in Iran in the form of an Iranian company / firm or from direct or indirect activities (through branch offices, agencies etc.), assignment of their royalties and any other rights, transfer of technical know-how, rendering training and technical assistance or ceding of movie rights.
Depending on the case, the foreign natural and juridical persons residing abroad shall be taxed on the basis of 10% to 40% of the total sums acquired by them within one fiscal year in Iran or from Iran with respect to designing plans for construction and installations, topographical surveying, cartography, supervision and technical calculations, training and technical assistance, transfer of technical know-how, other services and assignment of concessions and other rights as well ceding of movie profit rights (earned as box office receipts, screening rights, or otherwise).
Foreign insurance companies which earn profits 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 flat tax rate applicable to foreign air and shipping lines engaged in transport of passenger and freight and the like from Iran shall be 5% of their income for such activities. In the event that Iranian air and shipping lines are taxed for more than 5% in the states of the aforesaid foreign entities, the tax rate applying to them in Iran shall increase accordingly.
The tax law in parts of Article 132 has set tax incentives for foreign companies which let Iranian factories produce goods under their famous brands. The joint ventures of Iranian and foreign nationals, allowed by the Iranian foreign investment organization to set up production enterprises, shall enjoy additional tax incentives as well.
Are the activities of branches and agents of foreign companies in Iran also taxable?
Branches and representatives of foreign companies and banks which are not engaged in concluding deals and transactions and merely do marketing and collection of economic information for the mother company and receive sums from the mother company for meeting their expenses shall not be subject to taxation for such tasks.
However, if it is proven that the said branches and agencies are engaged in profitable activities in Iran and are acquiring an income therefrom the sums earned shall be subject to taxation according to the respective rules.
Are foreigners working in Iran subject to salary tax?
According to the Direct Taxation Act, every natural person, whether Iranian or a foreign national residing in Iran shall, with certain exceptions, be liable to taxation with respect to the income earned as salary and fringe benefits in Iran or abroad. The tax applicable to the 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 either a period of time or on a piece-work basis, must be regularly paid to the related tax office after deduction of the amount of salary tax exemption. The National Budget law shall define the amount of exemption every year.
Are there punishments for tax evasion?
Yes, there are. The managers of indebted companies or the directors who have violated the tax rules and requirements may not be allowed to register their re-election or set up new companies for three years. Banning the perpetrators of tax offenses from engagement in certain professions and issuing of certain commercial instruments is also foreseen in the law. Acts such as concealing actual revenues, creating untrue and falsified documents, blocking access of tax officers to the related tax and economic information of the tax payer, doing business under the name of other people and using their commercial cards and economic code for evading payment of tax etc. shall be considered tax offenses which can result in imprisonment and fines for the culprits.
What would be the penalty for foreign nationals having outstanding tax debts?
Besides the measures that the Tax Affairs Organization may adopt for collection of its claims, the Iranian government may prohibit the exit of tax debtors from the country. By virtue of Article 202 of the Direct Taxation Act, persons owing more than 100,000,000 Rls. in tax arrears are subject to travel restriction outside Iran. Higher figures of arrears, up to five billion rials are required for prohibiting the managers of production and manufacturing companies from exiting Iranian territory.
Iranian or foreign managers and liquidators of companies are held liable for outstanding tax debts of the related entity created during their term of office. They may also be barred from leaving the country, unless the payment is made or an acceptable guarantee is placed.
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 Iranian law.
What type of tax incentives are there for investments 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 20 years, from the date of operation as stated in their license. Such foreign entities may establish branches in mainland Iran, but the revenue made there could be taxable as defined in Article 105 of the Direct Taxation Act.
After payment of the corporate tax, are the dividends subject to taxation too?
As stipulated in Note 4 of Article 105 of the Direct Taxation Act, no tax shall apply to the dividends extended to the natural or juridical shareholders / partners.