A Review of the Iranian Tax System 1. Tax Bases and Rates The Iranian tax system is divided into two general categories of direct and indirect taxes. The share of direct taxes from the total tax revenues is almost 68% currently. There are two major types of direct taxes including income taxes and property taxes. Each category of direct taxes, in turn, is divided into sub-parts. Indirect taxes include taxes on imports and Value Added Tax (VAT). Taxes on imports are currently collected by the Iranian Customs and are not within the jurisdiction of INTA. Table 1 briefly shows various types of taxes in the Iranian taxation system
Table (1): The Iranian Tax System
Tax Category
Tax Type
Tax Base
Act/
Chapter/Article
Taxable Income
Taxable Persons
Tax Rates
Direct Taxes
Income Taxes
Real Estate Income Tax
DTA - C/I/52-58
Income of persons derived from transfer of rights in immovable properties situated in Iran, less the exemptions: total rent, less a deduction of 25% for expenses, depreciations, and commitments of the owner in regard to the property.
Owners who have rented their immoveable properties to others
15%-35%
Employment Income Tax
DTA -C/III/82-92
Salaries, wages or any other remuneration received by individuals in respect of their employment services. Payments for works conducted out of Iran, shall be subject to the tax, provided that the payer is an Iranian resident.
Individuals
10% for public sector employees and the others 10-35%
Individual Business Income Tax
DTA -C/IV/ 93-104
Unincorporated business activities (aggregate sale of goods and services) less the exemptions provided in the DTA
Individuals
15-35%
Corporate Income Tax
DTA -C/V/105-118
Aggregate profits of companies, and the profits from the profit-making activities of other legal persons, derived from sources in Iran or abroad, less the losses from nonexempt sources and minus the provisioned exemptions
Legal Persons
25%
Tax on Incidental Income
DTA -C/VI/11119-131
Income earned ex gratia or through favoritism or as an award.
Real or legal person
15-35%
Property Taxes
Tax on Transfer of Real Properties
DTA -C/I/59-80
Final transfer of real estates & goodwill shall be subject to taxation at the date of transfer.
Real or legal person
5% & 2%
Tax on Transfer of Shares
DTA -D/I/143
Nominal value of transfer of shares
Joint Stock Companies and other Companies
0.5% & 4%
Inheritance Tax
DTA -B/IV/17-43
Any estate left from the deceased individual.
Real person
5-65%
Stamp Duties
DTA -B/5/44-51
Each sheet of check printed by banks (Rls. 200), bill of exchange, promissory notes (0.3%), and other documents and negotiable papers with specified amounts.
As provisioned in Articles 44-51
Indirect Taxes
VAT
Value Added
VATA
Value added resulting from the sale of all goods and services and their imports, except 17 items listed in Article 12 of the VAT Act (VATA) as the exempted ones
Real and Legal Persons
6% currently, to be annually increased for 1% up to 8% by the end of the 5thDevelopment Plan
Taxes on Imports
Currently collectible by the Iranian Customs Organization.
Some of the most important tax rates are as follows:
Table (2): Most Important Tax Rates
Tax bases
Tax rates
Company Income Tax
25%
Real Persons Income Tax
Rates of the Article 131
Up to IRR 30,000,000
15%
30,000,000 to 100,000,000
20%
100,000,000 to 250,000,000
25%
250,000,000 to 1,000,000,000
30%
Over 1,000,000,000
35%
Public Sector Salaries Income Tax
10% on annual income
Private Sector Salaries Income Tax
Up to IRR 42,000,000
10% on annual income
Over IRR 42,000,000
Rates of Article 131
Rental Income Tax
Rates of Article 131
Transfer Tax
Goodwill
2%
Real properties
5%
Shares
0.5% (listed companies' shares)
4% (other companies)
Value Added Tax
6%
2. Taxation from foreign investors in Iran Direct Taxes All non-Iranian real or legal entities for the income earned in Iran and also for the income gained through granting of license or other rights, technical and educational assistance or movie contracts in the territory of Iran are subject to taxation. Depending on the type of activity of the foreign investor, various taxes and exemptions are applicable, including profit tax, income tax, property tax, etc. Foreign investors in Iran enjoy the same supports and privileges that are offered to the Iranian investors. This means both Iranian and foreign investors pay the same amount of taxes. Tax exemptions and discounts are also equally granted to domestic and foreign investors. Since foreign investments are usually active as legal entities, we will hereunder focus on rules and regulations for Corporate Income Tax.
Corporate Income Tax a) General Issues Foreign legal entities residing abroad shall be taxed at the flat rate of 25% in respect of the aggregate taxable income derived from the operation of their investment in Iran or from the activities performed by them, directly or through the agencies in Iran. The legal entities shall not be subject to any other taxes on the dividends or partnership profits they may receive from the capital recipient companies. Legal entities are obligated to, even within the exemption period, submit declaration and profit and loss balance sheets, provided from their official statutory books, maximum four months after the tax year (March 21 each year until March 20 next year) along with the list of partners and shareholders, their shares and addresses to the tax department within the area of the activity of the legal entity. If these legal entities do not submit the documents within the stipulated time span, the tax exemption will be null and void
b) Exemptions
The Direct Taxation Law and other pertinent legislations have considered certain exemptions for the legal entities as table (3):
Table (3): Highlights of Tax Exemptions
Activity
Level of Tax Exemption
Duration of Exemption
Legal Basis
(Act- Article)
Incentive Type
Agriculture
100%
Perpetual
IDTA- Article 81
Permanent Exemption
Industry and Mining
80%
4 Years
IDTA- Article 132
Tax Holiday
Industry and Mining in Less-Developed Areas
100%
20 Years
IDTA- Article 132; Paragraph B of Article 159 of the 5th Year Development Plan
Tax Holiday
Tourism
50%
Perpetual
IDTA- Article 132- Note 3
Tax Credit
Export of Services & Non-oil Goods
100%
During 5th Development Plan
IDTA- Article 141
Tax Holiday
Handicrafts
100%
Perpetual
IDTA- Article 142
Permanent Exemption
Educational & Sport Services
100%
Perpetual
IDTA- Article 134
Permanent Exemption
Cultural Activities
100%
Perpetual
IDTA- Article 139- Paragraph L
Permanent Exemption
Salary in Less-Developed Areas
50%
Perpetual
IDTA- Article 92
Tax Credit
All Economic Activities in Free Zones
100%
20 Years
Article 13- the Free Zones Act
Tax Holiday
Profits of Private and Cooperative Companies used for development, reconstruction and renovation of existing industrial and mining units
50%
Perpetual
Paragraph A of Article 159 of the 5thDevelopment Plan, 15% was added to the exemption as of 2010
Tax Credit
c) Deductions Expenses which are deductible in the assessment of taxable income are listed in the Direct Taxes Act. These expenditures must be supported to a reasonable degree by documentary evidence and are exclusively connected with the earning of income during the year in question. The categories of deductible expenditure are as follows: Table (4): Deductible Expenses
The cost of goods and raw materials
Expenses incurred in the maintenance and upkeep of the premises owned by the enterprise
Personnel costs
Transportation expenses
Rental of enterprise's premises in case of being rented
Expenses related to transportation and entertainment for employees, and warehousing costs
Rent of machinery and equipment
Fees paid in proportion to the services rendered
Costs of fuel, electricity, lighting, water and communication
Interest and fees paid for the carrying out of the enterprise operation
Business insurance
Cost of repair and maintenance of machineries and business equipments
Royalties, duties, rights and taxes paid
Abortive exploration expenditures for deemed mines
Research, development and training expenditure
Membership and subscription fees connected with the business operations
Compensation paid for damages resulted from the business operations
Bad debts, if proved
Cultural, sports and welfare expenditures paid to the Ministry of Labour and Social Affairs in respect of workers
Currency exchange losses computed in accordance with accepted accountancy practice
Reserves against doubtful claims
Normal wastage of production
Losses of legal persons
The reserve related to acceptable expenses of the assessment period
Minor expenses incurred in connection with the rented premises of the enterprise
Expenses for purchasing of books and other cultural and art goods for employees and their dependents
Other expenses that are not referred to in the above Table, but are related to the earning of the enterprise's income, shall be accepted as deductible expenses on basis of the proposal of the INTA and approval of Ministry of Economic Affairs and Finance.
d) Losses Losses sustained by all taxpayers engaged in trading and other activities are accepted by the tax authorities; will be carried forward and written off against future profits for a period of three years.
e) Withholding taxes โ Five percent of every contract payment may be withheld by the payer and accounted for to tax authorities. Such a withheld tax constitutes an advance payment of the final tax due. โ The payers of salaries are obliged, when paying or allocating the same, to compete and withhold therefrom the applicable taxes and to remit, within thirty days, the deducted amounts together with a list containing the names and addresses of recipients and the amount of the payments, to the local tax assessment office.
f) Depreciation Depreciation of assets is deductible in the assessment of taxable income. Depreciation rates range from 5% to 100% and the period over which assets may be depreciated ranges from 2 to 15 years.
3. Value Added Tax (VAT) in Iran The VAT in Iran is levied on the sale of all goods and services and their imports, except 17 items listed in Article 12 of the VAT Act (VATA) as the exempted ones. The VATA, however, does not include the export of goods and services through official Customs gates. Therefore, the taxes paid for the export of goods and services will be refundable by submitting the Customs clearance sheets and valid documents. Currently, the VAT rate stands at 6% (VAT rate for two special goods of cigarettes and jet fuel is relatively higher). To reduce the country’s dependency on oil revenue, the Law on the Fifth Five-Year Development Plan provisioned an annual one-percent increase in the VAT rate to put it at 8% at the end of the Plan, i.e. 2016. Economic activities in free trade and industrial zones are exempted from the VAT.
4. Agreements for the Avoidance of Double Taxation To facilitate cooperation between Iranian and foreign residents and to promote trade and economic exchanges with foreign countries, the Government of the Islamic Republic of Iran has applicable mutual Agreements for the Avoidance of Double Taxation:
Table (5): List of Iran's Applicable Agreements for the Avoidance of Double Taxation