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Tax on Branches and Representative Offices Based on Iranian Law

Guiding Principle
According to the “Tax Act of Iran”, foreign companies’ branches and representative offices, which are only dealing with marketing affairs and collecting commercial information for their parent companies, are exempted from paying any taxes, however, there are some exceptions in this respect.

I. Introduction
The Tax system of Iran is based on the Direct Taxation Act dated May 11, 1988 (as amended) (abbrev. IR-DTA) and the Value Added Tax Law, enacted on June 08, 2008.
All foreign investors, doing business in Iran or deriving income from sources in Iran are subject to tax. Depending on the type of activity, in which the foreign investor is engaged, different taxes and exemptions are applicable, including profit tax, income tax, corporate tax, property tax, and VAT.

II. Tax on Foreign Companies’ Branches and Representative Offices
Based on IR-DTA, the foreign companies’ branches and representative offices, which are only dealing with marketing affairs and collecting commercial information for their parent companies, are exempted from paying any taxes. Note (3) of Art. 107 IR-DTA states that:

Branches and agents of foreign companies and banks in Iran that are engaged in gathering information or finding markets in Iran for their parent entities, without having the right to make transactions, and receive remuneration from their parent entities against their expenditures, shall not be subject to taxation in respect of such remuneration.

The above Note is the general rule for branch and representative offices; however, there are some exceptions on it based on Directive No. 18921/1623/232 dated 20.08.2006 of Tax Affairs Organization of Iran:
a) If the Branch’s and Rep. Office’s marketing activities, apart from its parent company, are conducted for other foreign companies, in such a case, the income derived from such activities are subject to tax.
b) In case the Branch or Rep. office offers after-sale services and any income is derived from such services and/or any commission fee is received, Iranian tax prevails.
c) It is probable that branch and Rep. offices are considered active in Iran through concluding agreements or issuance of proforma invoices on behalf of their parent companies even if the Branch or Rep. office is not engaged in any commercial activity; based on the notice of its establishment in the Iranian official gazette. In such event, the activity of Branch office or Rep. office is subject to corporate tax.
d) Also if the parent company sells directly its products and services in Iran, in such a case the activities of Branch or Rep. office may be regarded as commercial by the Tax Department, unless the Branch or Rep. office introduces to Tax Department the name of individual or legal entity, which conducts the direct sale on behalf of parent company.

It is required by IR-DTA that the Branch or Rep. offices submit tax declaration each year, even if they do not engage in commercial activities. The Tax Department will study the tax declaration to see if the Branch or Rep. office generates any income. In case of deriving any income, the Branch or Rep. offices should pay tax like other Iranian companies. 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 Act. The taxation is based on the declared accounting profit in annual tax declaration.

Furthermore, a VAT tax system exists in Iran. 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 current Iranian Year 1395 (March 20, 2016 – March 19, 2016) shall be 9%.

October, 2016 Zahra Tahsili
Meyer-Reumann & Partners, Tehran Office
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