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 5th
Development 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 5th Development 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
● 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.
● 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
France
|
Turkmenistan
|
Algeria
|
Azerbaijan Republic
|
Kyrgyzstan
|
Turkey
|
Indonesia
|
South Africa
|
Kazakhstan
|
Tunisia
|
Ukraine
|
Germany
|
Qatar
|
China
|
Bahrain
|
Austria
|
Georgia
|
Russia
|
Belorussia
|
Jordan
|
Lebanon
|
Sri Lanka
|
Bulgaria
|
Armenia
|
Poland
|
Switzerland
|
Venezuela
|
Uzbekistan
|
Kuwait
|
Syria
|
Pakistan
|
Spain
|
Serbia
|
Sudan
|
Romania
|
Tajikistan
|
Malaysia
|
Croatia
|
South Korea
|
Oman
|