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Tax System in the Islamic Republic of Iran

Guiding Principle

The principal taxes in Iran are corporate and personal taxes on income and VAT. The Iranian tax law is formulated in a way that encourages investments in production activities, mainly in industry and mining. This is done by means of providing low tax rates and quality facilities and other exemptions.

A.  Introduction

The Tax system of Iran is based on the Direct Taxation Law dated May 11, 1988 (as amended) (abbrev. IR-DTL) and the Value Added Tax Law, enacted on June 08, 2008 (abbrev. IR-VATL). The Ministry of Finance and Economic Affairs is the authority empowered to levy and collect taxes.

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

B.  Types of Taxes based on Direct Tax Law

Based on the Direct Taxation Law the following types of taxes are applicable in Iran:

I.  Property Income Tax:
All income earned by any natural person or legal entity derived from the transfer of rights in property in Iran, shall be subject to the property income tax. The property income tax is divided into inheritance tax and stamp duty.

  1. Inheritance Tax:
  2. The provisions related to inheritance tax has been set out in Art. 17 through Art. 43 IR-DTL.

  1. Stamp Duty:
  2. Stamp duty is a type of tax levied on some documents such as checks, bills of exchange, promissory notes, negotiable instruments, stocks and shares, etc. according to Art. 44 – Art. 51 IR-DTL.

II.  Income Tax
According to Art. 52 through to Art. 131 IR-DTL, the income tax is grouped into the following seven categories. In this Article, each of these categories is briefly explained.

  1. Real Estate Income Tax:
  2. The income earned by any natural person or legal entity derived from the transfer of rights in real estate in Iran, shall be subject to the real estate income tax under the provisions of Art. 53 – Art. 80 IR-DTL.

  1. Agriculture Income Tax:
  2. The income derived from all activities in the field of agriculture; animal rearing; stockbreeding, fish farming, bee-keeping, poultry husbandry, hunting and fishing; sericulture, revival of pastures and forests, horticulture of any type and palm trees, is exempted from the payment of taxes.

  1. Salary Income Tax:
  2. According to Art. 82 – Art. 92 IR-DTL, the income of a natural person employed by another natural person or legal entity, that is derived against services rendered by that employee with regard to the occupation of employee in Iran whether on basis of time spent or work done, and whether paid in cash or otherwise, shall be subject to tax on salary income. Employers are required to make the necessary tax deductions from their employees’ payroll and submit them directly to the tax authorities.

    Taxable salary income consists of the salary (fixed emolument or wage, or basic salary) and benefits paid in connection with the employment. Salary income is taxed at 0-20% (maximum) according to Art. 85 and Art. 131 IR-DTL. As a quick reference, please find the following table on Local Employees Salary Tax Rates based on the above Articles in Iranian year 1394 (March 21, 2015 – March 19, 2016):

    Annual Salary/Profit (in IRR) Annual Salary/Profit (in USD on 17.08,2015) Tax Rate
    Up to 138,000,000 4,6405 (Exemption) 0%
    138,000,000 to 966,000,000 4,6405 to 32,4837 10%
    In excess of 966,000,000 In excess of 32,4837 20%

    approx. IRR 29738= 1 US dollar

  1. Tax on Business Income (Self-Employment Tax)
  2. Self-employment tax is a type of income a person earns in Iran through self-employment. Such income derived in Iran by natural persons through engagement in one of the thirty-one businesses, provided in Art. 96 IR-DTL, shall be subject to the tax on business income.

    Any natural person who is involved in one of these thirty-one businesses should maintain sufficient demonstrative records and documents for assessment of their taxable income.

    Hence, they are obligated to maintain the relevant books of accounts, records and documents in conformity with the accepted auditing principles, and they should register their business activities in the books of journal and ledger prescribed in the Commercial Law of Iran.

    This group of taxpayers’ income shall be exempt from taxation up to the exemption threshold and the income in excess of that, shall be taxed at the progressive tax rate based on Art. 131 (Table below).

    Annual Taxable Income (in IRR) Annual Taxable Income (in USD) Rate
    Up to 30,000,000 Up to 1.009 15%
    30,000,001 to 100,000,000 1.009 to 3,3627 20%
    100,000,001 to 250,000,000 3,3627 to 8,4068 25%
    250,000,001 to 1,000,000,000 8,4068 to 33,627 30%
    Over 1,000,000,000 Over 33,627 35%
  1. Corporate Income Tax
  2. The aggregate income of companies derived from different sources in Iran or abroad, less the losses resulting from non-exempt sources and minus the prescribed exemptions, shall be taxed at the flat rate of 25%, except the cases for which separate rates are provided under the Direct Taxation Law. The taxation is based on the declared accounting profit.

C.  Tax Holidays

All taxpayers are obligated to, even within the exemption period; submit tax declaration and profit and loss balance sheets, provided from their official statutory books. If they do not submit the documents within the stipulated time span, the tax exemption will be invalid.

The current tax exemption in Iran applies as follow:

Activity Level of Exemption Duration of Exemption
Agriculture 100% Perpetual
Industry and Mining 80% 4 Years
Industry and Mining in Less- Developed Areas 100% 20 Years
Tourism 50% Perpetual
Export of services & non-oil goods 100% During 5th development Plan
Educational & sport services 100% Perpetual
Cultural activities 100% Perpetual
Handicraft 100% Perpetual
Salary in Less-Developed Areas 50% Perpetual
All Economic Activities in Free Zones 100% 20 Years

D.  Value Added Tax (VAT)

All companies engaged in the supply of goods and services, or in imports or exports, are regarded as taxpayers and subject to the provisions of the VAT Law. The supply of commodities and services in Iran, as well as imports and exports, is subject to the provisions of the VAT Law. Based on the Law all taxable companies must register themselves for VAT and account for VAT on a quarterly basis by filing a quarterly VAT return. The overall VAT rate for the year (current Iranian Year) 1394 shall be 9%.

The basis for calculating the tax is the price of the goods or services indicated on the invoice. In cases where (i) no invoice is available, (ii) no invoice is presented, or (iii) it is established according to supporting proof, documents and evidence that the price on the invoice is not real, the basis for calculating the tax is the prevailing prices of the commodities or services on the date of application of the tax.

July, 2015 Zahra Tahsili
Meyer-Reumann & Partners, Tehran Office
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