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, different taxes and exemptions are applicable, including profit tax, income tax, property tax, etc.
Corporate and Profit Tax
Prior to the distribution of profits, a company must pay a flat 10% of its taxable profit as corporate tax. Additionally, the company must calculate each shareholders tax liability (25%) plus 3% municipality tax. [Note: public companies listed on the Tehran Stock Exchange are exempt from the 10% corporate tax].
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, etc.).
Personal Income Tax of Local Employees
Taxable income consists of salary and benefits. As presented in the following table, income is taxed at 0-35%. Employers are required to make the necessary tax deductions from their employees’ payroll and submit them to the tax authorities. However, when calculating taxable income, exemptions and deductions are allowed. In addition to income tax, employers are required to contribute to the State Social Security Fund and the Employment Fund. The table below contains the different local and foreign income categories and their relative tax rates:
Personal Income Tax of Foreign Employees
Foreign nationals working in Iran are also subject to income tax based on their salary. The government assumes a certain salary for employees depending on their position and country of origin. The following table presents assumed monthly salaries and benefits of foreign nationals. The latest tax circular, issued in 1999, drastically increased the tax liability of foreign nationals working in Iran. As indicated, the assumed minimum monthly salaries range from US$2,500 for unskilled European workers to US$7,000 for European managing directors. The income of foreign nationals are subject the tax rate of 35%. The table below contains the income tax rate of the employees of two main group of the countries:
Withholding Tax on Dividend
Additional taxes are imposed on shareholders for dividends received. Taxes withheld by the investment company are final. Normally, the investor’s record dividend received at the net amount and deducts it in calculation of taxable income as exemptions.
There are withholding taxes on salaries and wages based on the relevant rates.
There are withholding taxes on fees for certain services equal to 5 percent of the fees in addition to other withholding taxes mentioned above.
There are taxation treaties with certain foreign governments to avoid double taxation. Scope of such treaties may differ.
Earnings of an industrial or mineral company, which is apportioned for development or renovation of the existing plants or for construction of new plants, are exempted from 50 percent of the taxes thereon, given certain condition, are met.
In the special case of foreign contractors sub-contracting part of their project to Iranian sub-contractors, the foreign contractor is only required to make a tax withholding of 2.5% from payments to the Iranian contractor.
Article 105 indeed provides that the aggregate income earned by companies and the income earned from various sources in Iran or abroad, through profit making activities by other juridical entities shall, after levying the damages resulting from non-exempt sources and after having deducted tile exemptions as prescribed, excluding the cases subject to different rates under the provisions made in the present Act, be liable to 25% tax rate.
Note 4: The natural persons and legal entities shall not be liable to any other taxes in respect of the dividend or the contribution they may collect from the companies requesting investment.
Taxation on Foreign Comapanies’ Branch
Representatives and branches of foreign companies in Iran that are working for parent company to gather economical information and data as well as marketing, without right to carry out transaction, and receive money from the parent company to compensate for their expenses shall not be subject to income tax.
Note 3 of the Article 107 of the Direct Tax Act illustrate this more clearly:
Note 3: The branches and representative offices of foreign companies and banks in Iran which shall proceed to render activities for marketing and gathering of economic data and information in Iran for the holding company, without having the right to enter into a transaction in Iran, and which shall collect amounts from the holding company in order to meet the expenses and its financial requirements, shall not be liable to income tax.
Taxation on Foreign Income of Foreign nationals Working in Iran
Would foreign nationals working in Iran be subject to tax disclosures on their world-wide income or only on their income generated in the Iran?
Any non Iranian citizen (legal or real entity) will be subject to tax payment in proportion to incomes earned in Iran and also in proportion to incomes earned in Iran for transferring rights or other rights and privileges and/ or rendering instruction and technical assistance and / or assigning Movies (earned as price or show right or under any other title).