Ali Najm of business advisory Eurofast reports on the latest tax developments in Iran.
Since the lifting of the international nuclear sanctions under the Joint Comprehensive Plan of Action and following the 'Implementation Day' on January 16 2016, Iran has started to reconnect with the international market despite evident obstacles.
The 10-year-long economic sanctions against Iran have caused a major gap between the Iranian economic system and international markets. Perhaps the biggest blow to Iran's relations with the global community has been caused by the US's unilateral sanctions, which have undoubtedly resulted in fear of doing business with Iran for European entities.
Despite the challenges mentioned above, Iranian diplomacy evidently has the power to attract global market players to return to Iran even though the financial sector's cooperation is still lacking. It is notable that Airbus and Boeing have recently signed contracts with Iran after 30 years.
In addition, SWIFT has reconnected the Central Bank of Iran and many Iranian banks; thus more than 200 small and medium-sized international banks have started correspondent relationships with Iranian banks.
Iran is an attractive destination for many businesses and the tax incentives available only add to that attractiveness. We try to briefly outline some aspects of the Iranian tax regime below.
The fiscal year in Iran ends on March 21 and tax returns must be filed by Tir 31 (July 22) following the end of the accounting year. Companies are required to pay a provisional tax. There is a fixed penalty of 2.5% per month imposed for late filing.
Resident companies in Iran are taxed on all types of worldwide incomes. Branches are also taxed in the same manner as domestic companies. Corporation tax is imposed on business profits, interest and discounts, rents, royalties, remunerations or other profits from property and net consideration in respect of trade goodwill. Expenses incurred for the production of income are tax deductible.
Dividends received from companies located in Iran are exempt from corporation tax but dividends received from companies abroad are subject to corporation tax. Losses carried forward can be offset against taxable profits.
The corporation tax is imposed at a fixed rate of 25%. Certain types of income (i.e. dividends, interest and rent) for foreigners residing abroad are subject to a special defence contribution at the rate of 5% and 7.5% respectively. There is no corporate income tax for foreign investors who invest in certain industries including mining or services related to the construction of hospitals or hotels, as well as tourism-related services. More specifically, investors can use a 100% tax exemption during the first five years, a period which can be extended up to 20 years if the investment is located in an industrial park, special economic zone, less developed area or a free trade zone in Iran.
Relief for taxes paid abroad is granted against Iranian tax due in the form of a tax credit. The relief is given unilaterally regardless of the existence of a tax treaty. When a treaty applies, the treaty provisions apply if more beneficial.
Dividends paid to resident or nonresident (individuals and companies) are not subject to withholding tax in Iran.
There is no withholding tax on interest and fees paid made to Iranian banking, cooperative funds and authorised non-bank credit institutions but interest paid or nonresidents. Interest of more than 2.5% plus labour paid to nonresidents is subject to a 5% special defence contribution deducted at source.
Royalties paid to non-residents for the use of rights in Iran are subject to a final withholding tax of 5% for manufacturing and governmental section, and 7.5% on all other royalties. These rates may be reduced under a tax treaty. There is no withholding tax on the payment of royalties by a resident company to another resident company.
Iran has concluded more than 40 tax treaties with countries from all over the world.
Finally, it should be mentioned that VAT in Iran is currently 9% for all local and foreign entities.
Iran undoubtedly is one of today's most attractive emerging markets. This, coupled with the relatively low total tax burden on companies and low repatriation costs, make it particularly interesting for foreign investors.
|Corporate Income Tax||25%||A|
|Capital Gains Tax||25%||B|
|Net Operating Losses (years)|
|Royalties from, for example, patents, know-how||0%||5-7.5||D|
|Branch Remittance Tax||0%||N/A|
A) The corporate income tax rate for companies listed on the stock exchange is 22.5%
B) No capital gains tax on sale of shares of resident companies (transfer tax is applicable). Capital gains from transfer or real property are taxed with 5% of value of the property per regional value tables.
C) No withholding tax on interest paid on government bonds.
D) Royalties paid to non-residents for use of rights in Iran are subject to 5% for manufacturing and government sector and 7.5% for all other royalties. May be reduced under a tax treaty.