World  Business and Economic Analysis 


The Direct Taxes Act imposes a tax on the income of "legal entities", a term which encompasses companies, partnerships, cooperatives and other bodies of similar nature.


Type of tax system

The Iranian system of corporate taxation is a two-tier system, a combination of both the classical and the imputation systems. On one hand, the profits are first taxed at the corporate level and no credit is granted at the shareholder level and on the other hand, dividends distributed by the companies among the shareholders are exempt from taxation.


Taxable persons

Iranian entities are subject to tax on all their income wherever earned. Non-Iranian entities are subject to tax on income earned in or received from Iran through the granting of licenses and other rights or through the provision of training and technical assistance, and/or the supply of films.


Only government organizations and municipalities are exempt from tax.



The term resident means any person who under the laws of the Islamic Republic of Iran is liable to tax therein by reason of his residence, domicile, and place of registration, place of management or any other criterion of a similar nature.  


Taxable income


The aggregate income of companies, and also the income gained from the profit-making activities of other legal persons 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 for the cases for which separate rates are provided under the Direct Taxes regulations.


With regard to the Iranian noncommercial legal persons that are not established for distribution of profits, should they engage in profit-making operations, the total taxable income derived from such activities shall be taxed at the rate of 25%?


Foreign legal persons and 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 like branches, representatives, agents, and the like, in Iran, and also the income received by such persons and entities from Iran for granting of licenses and other rights, transferring technology and/or providing training services, technical assistance and cinematographic films. The representatives of such foreign persons and enterprises in Iran shall be subject to taxation with respect to the income they may earn under any titles in their own account. There are two exceptions in this regard:


    Foreign insurance enterprises earning income by accepting reinsurance from Iranian insurance institutions shall be taxed at the rate of 2% on their premium income and on interest on their deposits in Iran. Where the Iranian insurance institutions are engaged in insurance business in the country of their foreign reinsures, and enjoy tax exemption in that country on their own reinsurance operations; the said foreign reinsures shall also be exempted from taxation in Iran.
    The tax charged on foreign airline and shipping concerns shall be 5% of all amounts received by them for the carriage of passengers, freight, etc. from Iran, whether such amounts are received in Iran, at the destination or en route. Where the tax applicable to Iranian airline or shipping concerns in a foreign country is more than 5% of the fairs received by them, and the situation is declared by the respective Iranian organization, the Ministry of Economic Affairs and Finance shall increase the tax of the airline and shipping concerns of such country on par with the rates so applied to the Iranian concerns.


At the time of computation of the income tax of legal persons, whether Iranian or foreign, the pre-paid taxes shall be deducted from the applicable tax according to the pertinent regulations, and any overpaid amounts shall be refundable.


The legal persons shall not be subject to any other taxes on the dividends or partnership profits they may receive from the capital recipient companies.


In cases where some payments other than income tax are to be collected on the basis of taxable income, the tax of relevant taxpayers shall be computed after deduction of such non-tax charges.


Exempt income

Eighty percent of the income of manufacturing and mining units that have production licenses issued after 27 April 1992 and are situated outside a radius of 120 km from the centre of Tehran, 50 km from the centre of Isfahan or 30 km from the centre of any administrative centre or city with a population of more than 300,000 in any region will be tax exempt for 4 years. For units situated in a deprived area, the exemption is for 100% of income for a period of 10 years.


Amounts set aside from the declared profits of industrial and mining concerns for renovation, development and completion reserves are tax exempt provided that prior permission for each case is obtained from the relevant Ministry.


A hundred percent of income derived from export of industrial finished products and 50% of income derived from export of other items will be tax exempt provided they are included in an approved list.


Income generated from the educational activities of non-profit universities, schools or vocational institutions is exempt from taxation.


Income from publishing, journalistic, cultural and art activities that have received the appropriate permits from the Ministry of Culture and Islamic Guidance will not be taxed.


Income of workshops, cooperatives and guilds engaged in production of handmade carpets and handicrafts are exempt from taxation.


The following kinds of income are all tax exempt:


    Profit or bonuses accruing on fixed deposit, savings or current accounts with Iranian banks or non-bank credit institutions, but not where the deposit is made by another bank;
    Bonuses accruing on government and treasury bonds;
    Interest paid on overdrafts and fixed deposits by Iranian banks to foreign banks provided that reciprocal treatment is given;
    Interest payable on land reform bonds;
    Endowments and donations received by sanctuaries, mosques, hosainiyehs, takyehs[1] and similar religious institutions;
    Cash and non-cash donations received by the Red Crescent Society of Iran;
    Cash and non-cash donations or payments received by pension saving funds, the Organization of Health Services Insurance and the Social Security Organization as well as insurance premiums and pension contributions;
    Cash and non-cash donations received by Islamic schools;
    Cash and non-cash donations received by foundations of the Islamic Republic of Iran;
    Amounts paid out of the State Fund for Development Endowments;
    Income of persons arising from benevolent contributions;
    Amounts paid out of public endowment funds and used for religious, educational or scientific purposes or for the alleviation of suffering as a result of a natural catastrophe;
    Cash and non-cash donations received by charitable organizations provided the amounts received are used for charitable purposes;
    Cash, non-cash donations and membership fees received by professional associations, parties and non-government organizations that are appropriately licensed;
    Endowments of donations to societies and missions of religious minorities, provided these are approved by the Ministry of Interior;
    Publishing, journalistic, cultural and art activities performed on the basis of a permit of the Ministry of Culture and Islamic Guidance;
    All income from agriculture and horticulture; and
    Income from the export of goods that enter the country on transit basis and are re-exported unchanged.



Expenses which are deductible in arriving at taxable income are listed in Art. 148 of Direct Taxes Act.. No other expenses may be deducted, except that the Ministry of Economic Affairs and Finance may propose other categories of expenditure which, if approved by the Council of Ministers, will be deductible. Conversely, not all expenditure incurred in the listed categories is necessarily deductible. From time to time, the Ministry of Economic Affairs and Finance prescribes limits on deductible amounts in certain categories.


Expenditure must be supported to a reasonable degree by documentary evidence and be exclusively connected with the earning of income during the fiscal year in question. Specific provisions allow the deduction of reserves for deductible expenses related to the current year and of deductible expenses related to previous years, payment of which becomes due in the current year.


The categories of deductible expenditure listed in the Act are as follows:


    The cost of goods and raw materials sold or used to produce goods sold or to provide services;

2) Personnel costs including:

    Basic salaries, wages and regularly recurring benefits in cash and in kind (the deductible amount for benefits in kind is the cost to the employer);
    Payments which do not recur regularly such as New Year bonuses, overtime payments and traveling expenses;
    Health and safety expenditure and medical, accident and life insurance premiums of personnel;
    Retirement pensions and payments made in connection with termination of employment;
    Social security contributions;
    Funds reserved for financing the retirement pensions, supervisors pensions, termination of employment payments, dismissal compensation and payments for buying-out of services of the enterprise s employees up to the amount of the latest monthly salaries and wages and the balance resulted from the adjustment of the previous years salaries. This rule shall apply to the reserves already deposited in bank accounts, as well;

3) Rental of enterprise s premises in case of being rented. The amount of rental shall be determined on basis of the official deed (if any), otherwise within the normal range;

4) Rent of machinery and equipment;

5) Costs of fuel, electricity, lighting, water and communication;

6) Business insurance;

    Royalties, duties and taxes paid. Income tax, withholding tax imposed by the Direct Taxes Act and fines paid to government bodies are not, however, deductible;
    Research and development (R & D) and training expenditure;
    Compensation paid for damages resulting from the operations or assets of the business provided that the extent of the liability is established and provided that no other party can be held responsible and provided that the damages in question cannot otherwise be recovered;

10) Cultural, sports and welfare expenditures paid in respect of workers to the Cooperatives, Labor and Social Welfare up to a maximum amount of IRR 10,000 per each worker;

11) Reserves against doubtful claims (in the event that the claims are connected with the business) are unlikely to be recovered and the reserve is administered under a special heading in the company accounts until the claim is either recovered or becomes a definite loss;

12) Losses of legal persons, if established according to their statutory books of accounts and in conformity with the regulations. Such losses can be carried forward and be offset against the income of subsequent year or years;

13) Small expenses incurred in connection with the premises of the enterprise that are customarily born by the tenant, in case the place of business is rented;

14) Expenses incurred in the maintenance and upkeep of the premises;

15) Transportation expenses;

16) Expenses related to the services of transportation of employees, enterprise s teahouse and warehousing costs;

17) Fees paid in proportion to the services rendered such as commission, brokerage, legal fees, consultation fees, conference fees, auditors fees and fees for administrative and financial services;

18) Fees paid or allocated to banks, cooperative funds and authorized non-bank credit institutions for the carrying out of the enterprise’s operations;

19) Price of office supplies and office equipment that are usually consumed within one year;

20) Cost of repair and maintenance of machinery and equipment and also the cost of replacement of spare parts, provided it would not be considered as a basic repair;

21) Abortive mine exploration expenditure;

22) Membership and subscription fees in connection with the business activities of the enterprise;

23) Bad debts in excess of the reserve for doubtful receivables, if it is proved by the taxpayer to be unrecoverable;

24) Currency exchange losses computed in accordance with accepted accountancy practice, provided it is applied consistently from year to year by the taxpayer;

25) Normal wastage of production;

26) Reserve of payable acceptable expenses related to the assessment period;

27) Acceptable expenses related to previous years, the payment or allocation of which is realized in the tax year under examination; and

28) Expenses for purchasing of books and other cultural and art goods for employees and their dependents, up to a maximum amount equal to 5% of the annual exemption threshold in respect of each individual.


    Note: Other expenses that are not mentioned in Art. 148 of Direct Taxes Act, but are considered to be related to the earning of the enterprise s income, shall be accepted as deductible expenses based on the proposal of the Iranian National Tax Administration and approval of the Ministry of Economic Affairs and Finance.


Valuation of inventory

The cost price method is used for the valuation of inventory. To calculate the cost price, the companies are allowed to choose among the specific identification method, FIFO, or weighted average.


Depreciation and amortization

Depreciation of assets is deducted in computing taxable income. Fixed assets may be depreciated if their value is subject to a decrease arising from wear and tear or obsolescence. An asset may not be depreciated because of a decrease in the value simply arising from a price fluctuation.


Depreciation is computed on the basis of the cost of the asset (to which expenditure on a total overhaul or refurbishment may be added) and is calculated in a usable condition from the time when the asset is first at the disposal of the business. Assets fall into one of two categories for depreciation purposes – those depreciated according to fixed percentage rates and those depreciated over a set number of years. Assets falling into the first category are to be depreciated using the declining balance method. For assets falling in the second category the straight-line method is to be used. When an asset is sold or becomes unusable, the undepreciated balance, less any sale proceeds, may be debited to the profit and loss account in the year of disposal. Depreciation rates range from 5% to 100% and the period over which assets may be depreciated from 2 to 15 years. The following table represents a small sample from the schedule of depreciation rates and depreciation periods:




Table (1): Depreciation Rates










Power generators and power generating stations




cooling towers, water treatment equipment, fuel pumps and storage tanks



Machinery used for metal working, processing, forging and moulding operations



Trucks, lorries and trailers with a capacity up to 20 tons



Production machinery used in spinning and weaving industries




Machinery used for producing and packing of pharmaceutical materials




Machinery used for processing and producing  acidic materials in chemical industries




Machinery used for processing and refining oil and its derivatives



Machinery used for steel melting and moulding operations




Accelerated depreciation rates are also available where fixed assets are purchased as a part of a renovation of production lines or as a tool to develop enterprises.


Reserves and provisions

Provisions which are set aside as equal to depreciation costs are deductible.


Reserves against doubtful claims are deductible in computing the taxable income, provided that they are connected with the business, they are unlikely to be recovered and the reserve is administered under a special heading in the company accounts until the claim is either recovered or becomes a definite loss.


Reserves against replacement of assets and self-insurance are not deductible.


One per thousand of the sale of factories and workshops shall be reserved and consumed for controlling or compensating for pollutions and/or in creating green spaces. The costs thereof are deductible.


Capital gains

There is no explicit separate regulation about capital gains taxation in Iran but in accordance with Article 105 of the Direct Taxes Act in which the aggregate income of companies is subject to the corporate tax, all gains derived from selling fixed assets, except for immovable properties and real estates, and shares, are subject to taxation as a part of the taxable income of the corporate tax.



Ordinary losses

Losses of legal persons, if established according to their statutory books of accounts in conformity with relevant regulations, can be carried forward and be offset against the income of subsequent year or years. Losses may be carried forward and set off against the income of subsequent years. There is no limit for the number of years for which losses may be carried forward. Ownership change has no impact on carrying losses forward.


Losses, however, may not be carried backward.


Capital losses

If a depreciable asset is sold or machineries become unusable and, as a result, a loss is sustained by the enterprise, then the loss, equal to that part of the value of the asset that has not been depreciated minus the sale proceeds (if the asset is sold) shall entirely be taken into account in the computation of the profit and loss account of the same year.



Income and capital gains

According to the Art 105 of Direct Taxes Act, entities are subject to a corporate income tax at a rate of 25% of net income except where the Act provides for different rates.


Foreign entities which derive income from Iran from for the granting of licenses or other rights, the transfer of cinematographic films or the granting of concessions are deemed to realize a profit of 20% to 40% of receipts. Foreign entities engaged as contractors in construction work of any type are deemed to realize a profit of 12% of annual receipts.


Iranian entities of a non-commercial nature which nonetheless make taxable profits and foreign entities are liable to tax on their taxable profits at the above rates.




Withholding taxes

Three 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 supply element of contracts (imported machinery, tools, equipment, etc.) is specifically exempted from such a withholding tax.


In the investor-agent partnerships, the agent (mozareb[2]) is required to withhold the tax applicable to the share of the owner of capital without applying any exemptions, and to remit the same, as an on account payment of the investor s tax, to the relevant tax account. He should present the receipt of his payment to the respective tax affairs office  and to the owner of capital. Should the owner of capital be a bank, the agent or "mozareb" shall be relieved from the task of withholding the relevant tax of the investor.


Ministries, government institutions and companies, establishments whose budgets are wholly or partially financed by the government, foundations of the Islamic Revolution, municipalities and their affiliated companies and firms, as well as the other legal persons are required to withhold the "real estate income taxes" thereof from any rental payments they make and to pay it, within a period of ten days, to the tax affairs office within the jurisdiction of which the leased property is situated, and to hand over the receipt of the same to the relevant landlord.


The payers of salaries are obliged, when paying or allocating the same, to compute and withhold there from the applicable taxes thereof, i.e. the "tax on salary income", 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 relevant local tax affairs office.


In case of payments made by persons other than the payers of the fixed emoluments, wages and basic salary, those making such payments are required to calculate and deduct, at the time of each payment, the applicable salary tax, without taking into account the exemptions thereof, 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 affairs office.


The ministries, government institutions, state companies, municipalities and enterprises affiliated with the government or municipalities are required to withhold 3% of the fees they pay to attorneys and to remit the same, as an on account payment of the attorney s tax, to the tax affairs office of the relevant district up to the end of the next subsequent month.


Prepaid income tax shall be deducted from the income tax liability computed. Tax withheld and paid by the payer of dividends or partnership profits is deductible from the total income tax liability by the recipient company. Where prepaid income tax exceeds the income tax due or where the recipient company’s liability is less than the tax already paid on the dividends or partnership profits, the excess tax shall be refundable. Taxpayers are also entitled to receive interest at a rate of 1.5% per month on amounts which should be but have not yet been refunded.



80% of the income gained through producing and mining activities, which is derived and declared by producing and mining enterprises of cooperative or private sectors for whom exploitation licenses are issued, or with whom extraction and sale contracts are concluded by relevant ministries shall be exempt from the corporate tax for a term of 4 years beginning from the date of exploitation or extraction. In regard to less developed regions, the exemption shall apply to 100% of the income for a term of 10 years (This exemption shall not apply to the income of producing and mining units established within a 120-kilometer radius from the center of Tehran or within 50-kilometer radius from the center of Isfahan and also within 30-kilometers radius from the administrative centers of provinces and cities with population of more than 300,000, except for industrial townships established within the same 30-kilometers radius from such province centers and cities).


Any part of the declared profit of private and cooperative companies that is used in the same year for the development, reconstruction, renovation or completion of existing industrial and mining units of those companies, or for the set-up of new industrial or mining units shall be exempt from 50% of the applicable corporate tax, provided that the permission for development or completion or for the establishment of new industrial and mining units is obtained from relevant ministries beforehand. If the expenses incurred in each year for the implementation of the said project or projects exceed the declared profit of the same year, or if they are less than the cost of the investing project, the company can benefit from the said exemption, up to the aforesaid excess or the balance of the cost of the full implementation of the project for the subsequent three years at maximum.


100% of the income derived from the exportation of industrial finished products and products of agricultural sector (including farming, horticulture, husbandry, poultry, fishery, and forest and pasture products) and the relevant processing or complementary industries, and also 50% of the income earned from exportation of other goods that are exported shall be exempt from taxation.


100% of the income derived from the exportation of different goods that have been, or are, imported to Iran on transit, and are exported without making any changes in the substance thereof, or doing any works on them, shall be exempt from taxation.


The loss incurred from the export of tax-exempted goods sustained by the persons engaged in other non-export activities shall not be taken into account in the computation of the tax applicable to such other activities.


The income of hand-woven carpet workshops and handicrafts and the income of their respective cooperatives and production unions shall be exempt from taxation.


Companies whose shares are accepted, according to the relevant law, by the Acceptance Board for negotiation in Tehran Stock Exchange shall be exempt from 10% of the corporate tax thereof as from the year of acceptance and as long as such shares are not removed from the rate list of Tehran Stock Exchange, provided that all transfers of the shares are made through the stock market agents and are registered in the relevant accounting books.


In respect of depreciable fixed assets purchased for the purpose of reconstruction, substitution of production line, development or completion, the relevant enterprises are allowed to calculate the depreciation of such assets at a rate twice as much as the applicable rate of depreciation scheduled envisaged under the Direct Taxes Act or for the half of the relevant period prescribed by the same schedule, as the case may be.


All income earned from activities carried out in Free Trade Zone Areas is exempted from tax for a period of 20 years.



Taxable period

The tax year is a solar year beginning at the first day of Farvardin (21 March) of each year and ending at the last day of Esfand of the same year (19-20 March of the next year). However, in case of taxable legal persons, whose fiscal year does not coincide with the tax year stipulated in the Direct Taxes Act, the income of their fiscal year shall be taken as the basis for assessment of their taxable income. The time limit for the submission of tax return, balance sheet, and “profit and loss” account of such persons shall be 4 solar months after the end of their fiscal year.


Tax returns and assessment

Tax returns supported by the balance sheet, profit and loss account, other statutory books of account and shareholders’ details must be submitted to the relevant Tax Affairs Office (in the case of foreign companies this is either located in the town in which their registered office is situated or, where there is no registered office, in Tehran) within 4 months from the end of the fiscal year. Companies enjoying tax exemptions are not excused from the obligation to file returns and failure to do so results in the cancellation of the exemption for the tax year concerned. A penalty equal to 5% of the tax due is payable for the late submission of returns. Failure to submit the tax return or the statutory books carries a penalty of 20% of the tax due, for each instance, and if the statutory books are rejected for tax audit purposes, the penalty is 10%.


The taxpayer may object to an assessment within 30 days of service of the notice of assessment. Objections must be supported by documentary evidence and must be made direct to the chief assessor. If the matter cannot be resolved by the "chief assessor", it is referred to the Board of Settlement of Tax Disputes (BSTD). Any appeal against the decision of the BSTD must be made in writing within 1 month. Further appeal may be made against the decision of the BSTD to the Supreme Tax Council within 1 month of the service of the BSTD’s decision.


Finalized taxes which cannot be referred to any other court of appeal may still be contested to if sufficient grounds exist to prove that the rulings received hitherto have been inequitable. The Minister of Economic Affairs and Finance can refer the case to a three-member committee whose verdict shall be final and binding.


If the complaint against the verdict of the Board of Settlement of Tax Disputes is filed by the taxpayer, and he deposits a cash amount or a bank guarantee equal to the amount of the tax computed under the verdict, or introduces a creditable guarantor, whose creditability is accepted by the assessor general, then the enforcement of the verdict shall be suspended till the Supreme Tax Council delivers its opinion about the case.


Payment of tax

Legal persons are obligated to submit to the tax affairs office of the district where they reside their tax return, and to pay the applicable taxes, not later than four months after the expiry of each fiscal year. The place for the submission of tax return and payment of taxes for the foreign legal persons and enterprises residing abroad without having residence or agency in Iran shall be Tehran.


In the case the taxpayer fails to pay his finalized tax within 10 days from the service of the final notice, the tax affairs office shall notify him by a writ of enforcement to pay, or arrange for the payment of, all his tax dues to the said office within one month from the date of service.


The Ministry of Economic Affairs and Finance or the Iranian National Tax Administration may agree with the taxpayers unable to settle their tax liability, including the principal tax and the fines, at once, to pay their liabilities in installments, but not later than three years from the date of notification of their tax liability.


If the balance sheet, profit and loss account, statutory books of account and documents of the taxpayers who are required to keep such legal books are accepted during three consecutive years and if their tax liability for each year is paid in the year of filing of the tax return without applying to the Board of Settlement of Tax Disputes, then a sum equal to 5% of the principal amount of their taxes for the said three years shall be paid to them out of the current collected funds, or the same will be credited to their tax account of subsequent years, as a reward for being an upright pay. This reward shall be granted to such taxpayers in addition to the benefits mentioned in the next paragraph and it shall be exempt from taxation.


On account payment of the tax applicable to the turnover of each fiscal year, before the deadline set forth in the Direct Taxes Act, will result in the accrual of a reward equal to 1% of the prepaid amount per each month till the prescribed deadline.


[1] Hosainiyehs and takyehs are two religious institutions for Shiite Muslims in which they mourn for those imams who have been martyred at the beginning of the Islamic era.

[2] Mozareb = Commanditaires (Mozarebe = commandite; a type of partnership under Islamic law in which partner Aor ‘mozareb’ gives a sum of money to Partner B to manage on his or her behalf)

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کتاب عملیات بانکی در عرصه بین الملل -سرفصل ها،ضمائم ،توصیه صاحب‏نظران ارزی و مدیران ارشد بانکی

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