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Income Tax Concession

Corporate Income Tax Concession

A new flat rate corporation tax of 25 per cent payable on the profits of corporate commercial entities has been introduced. This rate replaces the old corporation tax of 10 per cent and progressive rates of income tax (12-54 per cent) on reserves and distributable income. Apart from the 25 per cent corporation tax and the 0.3 per cent Chamber of Commerce tax no more taxes will be payable by the corporate entity or the shareholders.

The new rate of corporation tax will also apply to joint venture corporate entities registered in Iran. The tax incidence will therefore be on the corporate entity and not on the shareholder. The calculation of the tax has been simplified.

All contracting work performed by foreign contractors, whether or not the company is registered in Iran, is taxed. For contracts signed before March 21, 2003, gross taxable income is calculated as gross contract receipts less the cost of imported material. Income is then taxed at 12% of gross taxable income less contract retention. For contracts signed after March 21, 2003, taxable income is the gross contract receipts less contract expenses. Income is taxed at 25 per cent less 5 per cent taxes withheld at source.


Taxation of foreign companies

Taxation in Iran generates particular unease among foreign firms because they appear to be arbitrarily enforced– tax bills are initially based on 'assumed earnings' calculated by the Finance and Economy Ministry according to the size of the company and the sector in which it operates. Factors such as the quality and location of a company's offices are also widely believed to affect tax assessment.

All foreign investors doing business in Iran or deriving income from sources in Iran are subject to taxation. Depending on the type of activity the foreign investor is engaged in, various taxes and exemptions are applicable, including profit tax, income tax, property tax, etc.

Generally speaking, Iran has two types of laws concerning foreign companies. The first are laws that address issues concerning foreign companies directly such as the Foreign Investment Promotion and Protection Act (FIPPA) and the second are general laws of which certain articles or by-laws address foreign companies, for instance the Taxation Law and the Labor Law. The Tax Act had divided the source of income earned by foreign companies either direct or through their branches in Iran into three main categories:

  • Income earned in Iran by way of contracting operations

  • Income earned from Iran by way of royalties and licensing fees

  • Other activities - trading operations, etc.

[Note: The Amendment has introduced certain changes in the tax treatment of the above activities.]

Foreign legal entities must pay taxes on all taxable income earned through investments in mainland Iran or from direct or indirect (through agents, branch offices, etc.) activities in mainland Iran, at the flat rate of 25% as mentioned in Article 47 of the Amendment law.

Income from royalty and licensing fees received from industrial and mining companies, government ministries and municipalities, and income from film-screening rights are subject to a deemed taxable coefficient on income of 20 per cent. All other income from royalties and licences from foreign companies is subject to a deemed taxable coefficient on income of 30 per cent. The coefficients are based on the standard corporate tax rate of 25 per cent, so that the effective tax rate is either 5 per cent or 7.5 per cent.

[Note: The Amendment has removed the confusion surrounding 'technical assistance contracting' by including 'technical assistance' and 'transfer of technology' in contracting operations subject to tax on the basis of 12 per cent of annual fees.]


Tax on liaison, representative and branch Offices

The same corporate and profit taxes will be applied to the taxable income of branches of foreign companies (contractors, consultant engineers, et al.)

Other income earning activities of foreign branches will be subject to taxation on an actual basis, i.e. based on their income tax return as filed and supported by their statutory accounting books.

Expenses incurred in Iran by Iranian registered branches and representative offices of foreign companies that are not authorized by their head offices to engage in any trading activity but are only authorized to conduct marketing and market research in Iran are tax deductible upon presentation of receipts from their head office.


Tax advantages & exemptions

  • Income tax exemptions are available to new factories established in "special areas", and last from four to eight years, from the first day of operations. In addition, 80% of the reported profit of all manufacturing, mining, assembly plant and related engineering companies are exempt from income taxes. Tax incentives, meanwhile, are available to manufacturing, mining, agricultural activities, exports and investment in special areas.

  • In the agricultural sector, by virtue of Article 81 of the revenues of activities in the fields of agriculture, animal husbandry and livestock, pisciculture, apiculture, raising poultry, hunting, fisheries, sericulture, and restoration of forests, pasturage, orchards, trees and palms of whatever kind are exempted from taxation.

  • The income of rural, tribal, and agricultural cooperative societies and those of fishermen, laborers, employees, students and their unions are 100% tax exempt.

  • The revenues from hand woven carpets and handicrafts and the related production cooperative companies and unions are exempt from taxation.

  • The revenues of inventors or discoverers from their innovations and discoveries are exempt from taxation. Also revenues of research and development activities of institutes which have obtained licenses for such activities from the relevant ministries will be exempt from taxation for 10 years as of the entry into force of the Amendment, according to the provisions of the relevant circular of the Council of Ministers.

  • Profit and awards accrued to participation papers are tax exempt.

  • All housing production projects for the low-income groups and housing production in the dilapidated urban fabrics will enjoy a discount of around 50% on construction tariffs and construction density fees. The remaining amount can be paid in installments and will not be subject to any commission fees.

  • Starting in 2014, foreign investors, who establish production lines in Iran and export 30 percent of their products, will be entitled to tax exemptions.

Foreign Investment Promotion and Protection Act (FIPPA)


Tax holidays through enactment of FIPPA
Activity Level of Exemption Duration of Exemption
Agriculture 100% No Time Limit
Industry and Mining 80% 4 Years
Industry and Mining in Less-Developed Areas 100% 10 Years
Tourism 50% No Time Limit
Exports 100% No Time Limit

Location requirement for tax-exemption:

  1. If investment located out of a 120-kilometer radius from the center of Tehran,

  2. If investment located out of a 50-kilometer radius from the center of Isfahan,

  3. If investment located out of a 30-kilometers radius from the centers of provinces (except for the Industrial Estates within this radius)

Tax exemption - major changes

The exemptions on exports of manufactured and agricultural goods remain in force, but an ambiguity has occurred in the amendment regarding exemptions extended to the public sector (Iranian Government owned entities). Government owned enterprises and their shares in the private sector entities were excluded from all exemptions granted under the Tax Act.

This exclusion has been removed from the relevant texts in the amendment. Until clarification is provided, it is not certain whether or not the government minority shares in the private sector manufacturing, mining and exports activities would enjoy the exemptions granted.

The 50 per cent tax exemption previously granted to tourism enterprises has been extended to include five-star hotels.[34] Since 2014, foreign companies who set up business in Iran will receive corporate tax breaks of up to 50%, if they export at least 30% of their products.


Losses

Losses sustained by all taxpayers engaged in trading and other activities, who are required to keep proper books of account, provided they are accepted by the tax authorities; will be carried forward and written off against future profits for a period of three years.